An “independent Bank” is not necessarily a wise Bank

The myth of Bank of England independence is not just wrong, but it is also damaging.

By calling the Bank independent, people want to endow it with an authority and wisdom that it often does not possess. The false narrative implies that all politicians and the Treasury some of them lead is by definition biased, foolish, unable to make good judgements. In contrast the politics free Bank as an independent can make accurate and uncluttered judgements for the greater good.
The underlying assumption is the Bank employs special experts who are uniquely qualified to predict the future course of the economy and to make well informed and well intentioned judgements about it. Every one of these assumptions should be subject to challenge, as they are all wrong.

The Bank has been “independent” since 1997. Over that time period its economic forecasting record has been no better than the typical private sector average, which it often sticks close to. Like most professional forecasters the Bank completely missed the banking crash and great recession until it was in full swing. The Bank on the way to “independence” in the later 1980s was similarly unable to forecast the devastating consequences of joining the European Exchange Rate Mechanism, a policy it actively promoted.

It is difficult to see the Bank is politics free. It shares many of the assumptions of the governing elite and the general economics profession. It plays politics all the time, operating day to day with regular exchanges with the Treasury and wider government. It holds news conferences and intervenes in the political debate, as it did notably in the run up to the EU referendum when it decided to support the losing side. The Bank relies heavily on a concept of capacity utilisation influencing inflation and expectations in a way which is difficult to measure. It is tortured by trying to define the cycle in an age of huge technical changes to products and buying patterns.

I find it difficult to distinguish most of the time between the Treasury view and the Bank view. They usually forecast similar outcomes, and usually agree about the direction of policy. That is a good thing when they get it right, but a bad thing when they make one of their periodic large collective errors of judgement. Where the Treasury and the Bank have disagreed, as over rate cuts during the banking crash, the Treasury was on the right side of the argument.

The truth is there is no magic expertise held by the Bank that makes them uniquely able to set interest rates well. It is a judgement. It helps to study what has happened, and to have some knowledge and experience of what is likely to happen for given changes of policy. The Treasury is as able to do that as the Bank. A private sector forecaster or economically literate business can do it as well. Better policy making results from a clash of views and from open minded study of what a range of experts are saying.

Bank “independence” has coincided with the worst banking crash since the 1930s, with a great recession, and a long period of depressed rates and slowish growth. Is that the best we can settle for?

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19 Comments

  1. Lifelogic
    Posted October 8, 2016 at 5:30 am | Permalink

    Exactly right the Banks record is just dire but then so it the governments in general for the past twenty years of so.

    Of course the slowish growth comes largely as a result of bloated and incompetent government, the expensive green crap energy policy, damaging wars on a lie, absurd red tape everywhere you look, the countless bonkers policies of the EU, over taxation and over complex taxation, a lack of decent roads, a lack of available housing (due main to OTT planning restrictions, over taxation and greencrap building regs), the go ahead on absurdly pointless projects like HS2 and Hinkley C, centrally dictated pay controls, a lack of a properly functioning & competitive banking sector and a lack of SE runways.

    But of course Cameron and now May both seem to approve of this bonkers approach. Theresa even wants to force workers and customers onto company boards and force them to publish gender pay statistics and the numbers of immigrant workers. I assume she also likes the sugar tax, the 3% extra stamp duty the pushed up housing and developers costs further, Osborne’s ratting on IHT, the 45% income tax, 28% CGT on non real gains and all the rest of the other Osborne lunacies.

  2. Lifelogic
    Posted October 8, 2016 at 5:37 am | Permalink

    I notice you have not really commented much on all dire sense of direction of May’s left wing speech. She was at least fairly clear on Brexit, but almost everything else she said or has approved is dire. She sounded like Ed Milliband for much of it.

    Is she going for a snap election and trying to sound as left wing as possible? Or is she really that deluded?

  3. Notanumber
    Posted October 8, 2016 at 5:39 am | Permalink

    This is so clearly written and informative. A joy to read.

  4. am
    Posted October 8, 2016 at 5:42 am | Permalink

    Very true but I am going off thread.
    http://www.oxfordeconomics.com/my-oxford/publications/345667
    These bright folks suggest yesterday’s poor trade and industrial output figures – the first poor data since the leave vote – are to be laid at the door of UK businesses. Specifically they identify that UK exporters have not used the pound drop to become competitive and sell greater volume overseas but rather to increase their sterling prices: Basically sell at the same dollar or euro price abroad and increase their pound sterling profits. So there is no increase in volume and value just value. Even with increase in cost of input prices there should still be ability to be internationally competitive.
    Liam Fox did use unparliamentary language but he may have had a point. Do they simply wish to carry on as before, milk the pound depreciation profit, not increase gdp, then pay chief execs bumper bonuses at the end of the year. Then when the pound goes up say they have to lay people off because they are now uncompetitive due to higher pound.
    A chief benefit of leave was exporting but it seems UK Businesses are not on board. The letters they write, if the link is true, are quite two faced and need a firm riposte.

  5. Lifelogic
    Posted October 8, 2016 at 5:45 am | Permalink

    I have finally found a green policy and indeed a health policy that I thoroughly approve of:- far more public water fountains. When I was young they were in all the schools, universities, parks and many public building. So much more sensible than Osborne’s absurd sugar tax. It cuts out all those nasty plastic bottles and their transportation, cuts litter and makes people thinner, richer and healthier.

    Why did the government ever get rid of them all? Can they never get anything right?

    http://www.drinkingfountains.org/

    • Lifelogic
      Posted October 8, 2016 at 5:59 am | Permalink

      If government only did a few more sensible things like this, with all the taxes they endlessly grab off everyone.

  6. Prigger
    Posted October 8, 2016 at 5:47 am | Permalink

    4th main paragraph….” It… (the BoE ) is tortured by trying to define the cycle in an age of huge technical changes to products and buying patterns.”

    We have faith in certain brands of “expert”. We are all indoctrinated from toddler-age with the view that big people know best. That big people’s opinions should be trusted. That they as individuals and groups are our elders and betters.

    If you had listened and read all the “market advice” just prior to the Referendum even from North American Billion dollar Fund Managers, you would have spotted simplistic flaws. They did not have a clue about the minds of we British. But their professional position meant they had to pretend they understood each and every one of us.

    It is a pity we do not have a fly on the wall of every Financial institution throughout the world. It is said the financial world actually does have “flies” on walls in the shape of hi-tech bugging devices. But like a sat nav finding the quickest, shortest, most economical route then broadcasting its findings to so many, it invalidates the advice creating crashes, log-jams and BoE-like investigations to figure out what could possibly have gone wrong.
    You cannot drive car or the economy fixated on “expert advice from technology” and “models”. The Observer in such investigative analyses, contaminates the result.

    The helplessness is shown in this article http://www.telegraph.co.uk/business/2016/10/07/carney-calls-for-inquiry-into-sterling-flash-crash/

  7. Lifelogic
    Posted October 8, 2016 at 6:03 am | Permalink

    It also seem increasing clear that government dietary advice has been profoundly wrong for many years and they are still wrong. The “experts” have been pushing the wrong line and hugely contributing to obesity and diabetes type II. Most people just need to reduce carbs, pasta, potatoes, root veg, bread, flour, sweet fruits & sugars and fast occasionally it seems.

    Why are government experts so often totally misguided in so very many areas? Just like the ones advocation the ERM/EURO and the exaggeration of climate alarmism.

  8. Lifelogic
    Posted October 8, 2016 at 6:08 am | Permalink

    Matt Ridley has a good chapter on banks & money in his excellent:- The Evolution of Everything book.

  9. Ralph Musgrave
    Posted October 8, 2016 at 6:35 am | Permalink

    JR omits to mention the absolutely basic argument for central bank independence, which I thought everyone knew: it’s that politicians have a motive for excessive money printing, especially just before elections, whereas independent central banks don’t.

    As for the fact (referred to by JR) that the BoE and Treasury often share similar views about the economy, well that’s hardly surprising: if a patient has obvious symptoms of lung cancer, there’s a good chance that two doctors will come to the same conclusion, namely that lung cancer is the problem.

    But I’m not suggesting that NON-INDEPENDENT central banks are a disaster: clearly they’re not.

  10. Nig l
    Posted October 8, 2016 at 6:47 am | Permalink

    Central bank independence is an oxymoron, devised by Politicians so they have someone to blame when it goes wrong. You ask is that the best we can settle for? What an excellent question. A pity you do not use it looking at your own tribe and the Public Sector. Rudd, Carney, Hammond etc going back umpteen years with people appointed for gender, reward, loyalty, race, etc reasons. Are they the best we can settle for? No wonder the person on the Clapham Omnibus, to be polite, has a very dismissive view of the whole lot, with, of course, notable and honourable exceptions.

  11. David Cockburn
    Posted October 8, 2016 at 7:10 am | Permalink

    Clearly it was always a political move on the part Brown to make the Bank ‘independent’. It did indeed help to give Labour the financial credibility they lacked. We should recognise now that independence is an illusion and aim for transparent and open discussions before arriving at financial decisions.

    • Ralph Musgrave
      Posted October 8, 2016 at 9:33 am | Permalink

      The problem with complete openness BEFORE decisions are taken, is that that sort of information is market sensitive. The BoE does the next best thing: publish minutes of MPC meetings a few weeks AFTER relevant decisions are taken.

  12. Antisthenes
    Posted October 8, 2016 at 8:20 am | Permalink

    Government and it’s agencies; BoE, quangos and the like have roles they should not have. Planning and forecasting are not something that can be done adequately by bureaucrats and experts. The only roles they should be given is policing even though some of them are not very good at that because their other roles can blind them and political bias and interventions can have harmful influences.

    It is our propensity to state that we know best and that is what government bases it’s whole raison d’etre. An assumption that is in most cases is erroneous. The only ones who know best are those it affects. They can make the best choices for themselves based on knowledge and experience gained from published accurate information and countless numbers of interactions between large numbers of people that happen day in and day out.

    We evolved a system for doing just that (a never ending evolution). It is called free market capitalism which drives human progress, through entrepreneurship and innovation. There is no substitute for it as other methods have and are being tried. All failed or failing. Government being one of them when it comes to anything but the security of the society it has been set up to govern. Our security is something a government can be good at but only if ditches most of the other roles it engages in. Stops trying to drive society but let society drive itself.

  13. Kevin
    Posted October 8, 2016 at 11:12 am | Permalink

    There appears to be, or to have been, another dimension to the plight of savers, illustrated by the following extract from a Daily Mail article of 2 July 2013 with the headline, “‘Bank of England policy is transferring wealth from savers to fund the banks'”:
    “A major factor in the last 12 months for plunging rates is the Government’s Funding for Lending scheme, which is eroding the value of savings. Banks are being offered cheap money by the Government under the scheme, so there is less incentive to offer high interest rates to attract deposits. And it has recently committed to continue the scheme. UHY Hacker Young says before the Funding for Lending scheme was introduced, banks kept interest rates attractive to reel in savers”.

    I do not know the current status or impact of this scheme, but there was a noticeable collapse in rates at that time.

  14. Denis Cooper
    Posted October 8, 2016 at 1:20 pm | Permalink

    Brown gave the Bank of England independence as part of the preparations for joining the euro, as described here:

    https://books.google.co.uk/books?id=MgKTcI0bBcgC&pg=PA69&lpg=PA69&dq=brown+%22prepare+and+decide%22+euro+%22bank+of+england%22+independen&source=bl&ots=ux_zHepHBa&sig=rpYk2V6bXwVOFraAfSXZxC1TAXU&hl=en&sa=X&ved=0ahUKEwj2rKX7ncvPAhVKJ8AKHfO0CpoQ6AEINTAD#v=onepage&q=brown%20%22prepare%20and%20decide%22%20euro%20%22bank%20of%20england%22%20independen&f=false

    “In the context of preparing for EMU the Labour government of Tony Blair adopted major reforms … The first such reform consisted in granting operational independence to the Bank of England … ”

    https://www.ecb.europa.eu/ecb/orga/independence/html/index.en.html

    “Neither the ECB nor the national central banks (NCBs), nor any member of their decision-making bodies, are allowed to seek or take instructions from EU institutions or bodies, from any government of an EU Member State or from any other body.”

    That is why much of the language in the relevant provisions of the Bank of England Act 1998 closely paralleled that in the EU treaties. There were a couple of departures: the Treasury would give the Bank its inflation target, whereas the ECB decides that for itself, and under “extreme economic circumstances” the Treasury may invoke reserve powers to suspend the independence of the Bank, subject to approval by Parliament – although that has never been done, not even in the financial crisis.

    As we are not going to join the euro and we are going to release ourselves from the EU treaties Parliament will then have the freedom to revoke the independence of the Bank without any breach of the EU treaties, if that seems the right thing to do.

    It would effect the legalities and the practical mechanics of Quantitative Easing if the Bank reverted to being just a sub-department or agency of the Treasury, but let’s not go into that because once it starts it never ends.

  15. Jack
    Posted October 8, 2016 at 2:32 pm | Permalink

    I support ending the BoE’s independence, but the key part is to relegate monetary policy to backdoor operations where it belongs with a permanent 0% interest rate policy.

    We have to remember that pre-BoE “independence” was also a disaster. Double-digit base interest rates caused unnecessary double-digit inflation rates. I can tell you’re thinking “but high rates slow inflation, right?”, so I’ll quote Warren Mosler:

    The spot and forward price for a non-perishable commodity imply all storage costs, including interest expense. Therefore, with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery any time in the future is the same. However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualized) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation! It is the term structure of risk free rates itself that mirrors a term structure of prices which feeds into both the costs of production as well as the ability to pre-sell at higher prices, thereby establishing, by definition, inflation.

    Once you know this, JR, everything becomes crystal clear. Paying interest on the national debt is not just a political choice, it’s actively causing unnecessary inflation, too! Get the BoE to set the base interest rate at 0% permanently, replace all government bonds with reserves, and then get the government to stop issuing bonds in the future. Then the budget deficit can truly be the policy tool to regulate output, employment, and inflation, that it was always meant to be.

    • Denis Cooper
      Posted October 9, 2016 at 6:20 am | Permalink

      Historically I don’t think the budget deficit was ever meant to be a policy tool; it was just a recurrent problem for the kings and queens who ran out of the money needed to pursue their policies, horrendously expensive wars in particular.

  16. Bert Young
    Posted October 8, 2016 at 5:53 pm | Permalink

    I do not accept that the Bank of England is entirely independent ; the link with Government may be diverted somewhat , but , the tie- up is indisputable . Carney can be sacked on instructions from Whitehall and that is the bottom line of the truth .

    The recent change from Osborne to Hammond has already shown that the BofE will have to fall in line with Government policy ; the instability of the £ – invoked by Carney , has to be overcome and this will be initiated by the Government not by the BofE . Power and control is with the Government .

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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