Bank of England (Economic Affairs Committee Report)

Lord Blackwell Excerpts

Thursday 2nd May 2024 Lords Chamber

[Lord Blackwell (Con)]

My Lords, I welcome the opportunity to contribute to this debate on the report from the committee of which I am honoured to be a member. I am also very honoured to follow the speech by the noble Lord, Lord King, who has a very distinguished record, and the excellent maiden speech by the noble Lord, Lord Moynihan.

Although much in the report is critical of the Bank of England, I will start, as others have, by recognising that the Bank is staffed by public servants who endeavour to do their best in the role that we have given them. The problem is ours, in that we have delegated responsibilities to them with expectations that are beyond what unelected officials can properly deliver.

The actions of the Bank in its control of monetary policy have huge implications for the state of the economy and the welfare of British citizens. Monetary policy has been given the sole target of controlling inflation, but it is an illusion to think that it can just act on inflation in isolation. By acting on interest rates and aggregate demand, the decisions of the Bank can create economic booms or recessions, can inflate or deflate asset prices with resultant changes in the distribution of wealth, and has a huge impact on the daily mortgage costs, interest payments and living standards of everyone in the country. Since independence, those critical decisions have been entrusted to a small group of unelected officials, who, because they are independent, are not subject to significant challenge or accountability from government or Parliament. It is the issue of accountability on which I will focus.

Putting such important economic decisions in the hands of expert officials might make sense if economics were a precise science. Unlike science, where the variables are inert agents that can be reliably modelled, the movement of the economy reflects the decisions and interactions of human beings and their expectations and state of mind, as the noble Lord, Lord Lamont, said. There is no equation that can reliably predict the kinetics of how an economy in disequilibrium will respond to specific policy initiatives or anticipate the impact of unknown world events. The search for a perfect forecasting model is doomed to failure.

In the absence of a perfect forecast, the decisions of the Bank of England require judgments about not just the forecasts but the potential risks and benefits of alternative actions on the population and its standard of living. One would think that such important trade-offs are properly the preserve of democratic institutions that are answerable to the public for their political choices. What is more, it is fanciful to suggest that monetary policy can operate completely independently of government fiscal policy, because, in the short term, the two economic policy levers impact on the same economic variables, either stimulating or contracting the real economy. The Bank of England’s actions can work either with or to counteract the fiscal policy of the Government. If the two are not co-ordinated, we will not get the optimal outcome.

The Bank of England’s decisions are therefore in many respects ultimately political rather than just technocratic judgments. It is not fair to ask unelected officials to take responsibility for political judgments, nor right or proper in a democracy with an elected Government. Government and Parliament exercise power over many other important policy areas, including national defence and the ability to declare war, so it is not clear to me why we entrust our elected Government with those decisions but feel it uniquely necessary to exclude them from this one component of economic policy.

Nevertheless, I accept that the doctrine of central bank independence is now hard to row back from, and I recognise that the idea that independence protects the economy from irresponsible government policies has been welcomed and is baked into the bond markets. Even so, it is not sensible or necessary for the two economic levers of monetary and fiscal policy to be decided at arm’s length. We heard evidence in the committee that working-level engagement between the Bank and the Treasury is carefully controlled to avoid any impression that the Government and the Treasury are seeking to influence the Bank. That is an unnecessary constraint.

During the 1990s, before Bank of England independence, I was fortunate to have been the Prime Minister’s representative in the regular working meetings between the Bank of England and Treasury officials in the office of the then Permanent Secretary to the Treasury, now the noble Lord, Lord Burns. These allowed all the economic issues to be debated openly between the Bank and the Treasury, with all the relevant information. Although, as the noble Lord, Lord Burns, described, the final decision on monetary policy then rested on agreement between the governor and the Chancellor, any attempt to push the then governor, Eddie George, into going along with something he thought was improper would have been halted in its tracks by the threat of resignation, and I am sure the same would have been true of his successor, the noble Lord, Lord King. One step we can take is to break down the unnecessary Chinese walls and recreate sensible, open engagement between the Bank and the Treasury. I hope that my noble friend the Minister will take this on board.

I remind the House that, as the noble Baroness, Lady Noakes, pointed out, the era of low inflation was initiated during this period before Bank of England independence rather than being a consequence of independence. If we are unable to unwind the Bank of England’s independence, we should consider how we can make the appointed officials more accountable to Parliament for their decisions.

As others have set out, the Bank has not had a glorious record in recent years, underlining the need for greater scrutiny and accountability. I argue that, based on the previous governor’s theory of excess global savings, interest rates were kept too low for too long in the years before the pandemic, which, together with a huge increase in money supply through QE, led to unsustainable increases in asset prices. The messaging that low interest rates were the new norm also led individuals to take on borrowings that left them cruelly exposed. As a result, it is arguable that the delayed high-scale increase in rates that the Bank then had to adopt was also more damaging than it needed to be. Like any system, the reaction of the economy to a sudden, large shock is more violent and damaging than a gradual change that gives people time to adjust their finances.

Since the trigger for inflation was the massive increase in external prices from the pandemic and the war in Ukraine, real incomes and aggregate demand had already been depressed. If the inflation was not initially caused by excess demand, although facilitated by the money supply, the conventional theory that a further squeeze on living standards was required is itself open to debate. We no longer include mortgage costs in the favoured consumer prices index, but the rapid, steep rise in interest rates, by contributing to pressures on household incomes, may itself have been a factor in increasing pressure for higher wage increases. In short, the Bank of England’s actions may well have been responsible for a larger, longer and more painful drag on the economy and living standards than could have been achieved with different policies and different judgments.

Since the Government cannot be the judge for the actions of an independent Bank, that task must fall to Parliament. As set out in the report, there is a strong case for more effective parliamentary scrutiny, including a five-yearly review and perhaps a Standing Committee of both Houses, with permanent technical support that can engage in a more timely way and satisfy itself that the full range of options and implications have been properly considered. I would go further and suggest that in holding the Bank to account for its actions, such a committee could have the remit to report to Parliament if it no longer has confidence in the Governor of the Bank of England. The structure of parliamentary accountability may not be within the control of my noble friend the Minister, but I hope the Government will lend their support to such proposals.

In conclusion, I accept that these suggestions may not be welcomed by those who hold Bank of England independence as an act of faith, but the extent of the delegated powers now exercised by unelected officials without proper accountability cannot be right. If we cannot reverse that decision, we must take action to enable it to operate with a framework that provides better democratic control.