Bank of England (Economic Affairs Committee Report)

Lord Gadhia Excerpts

Thursday 2nd May 2024 Lords Chamber

[Lord Gadhia (Non-Afl)]

My Lords, I declare my interest as a member of the Court of Directors of the Bank of England but speak today in a personal capacity.

First, I offer my compliments to the noble Lord, Lord Bridges of Headley, and his committee for the thoroughness of their evidence sessions, attracting a star cast of witnesses, to provide a timely review of the Bank’s 25 years of operational independence. Together with the review of economic forecasting commissioned by the court from Professor Ben Bernanke, the Bank now has a substantial body of independent input on which to propose forward-looking reforms. I know the governor and his colleagues are taking this process seriously and will provide a further update by the end of the year.

As someone who has experienced the Bank in close proximity for the past 18 months, I am pleased to share some observations and hope that I can dispel a few myths and add some nuance to this debate. At the outset, it is worth noting that in my brief time serving on the court, I have not come across anything remotely resembling the deep state, but instead a group of truly committed public servants who are faithfully seeking to fulfil their statutory remits.

The Bank takes accountability to Parliament incredibly seriously and devotes substantial time preparing for and participating in evidence sessions. In fact, if anything, the scope for improvement in scrutiny lies less with the Bank and more through enhancing the capabilities, attitude and co-ordination within Parliament. The decision to appoint separate committees of each House to review post-Brexit financial regulation is a case in point. If there is a democratic deficit of accountability, it is often a self-inflicted one. With due respect to the House of Commons, it should be especially mindful of the behavioural consequences of seeking “gotcha” moments which might generate media headlines but do little to gain deeper insight into the trade-offs which often lie at the heart of key policy issues. This makes our institutions more risk averse and contributes to a culture which incentivises overregulation and suppresses innovation.

The core conclusion of the report on the effectiveness of independence is not only reassuring but a timely reminder of the underlying rationale for removing political involvement from day-to-day monetary policy decisions. During this election year, we can be confident that, if and when interest rates start to come down, they will do so for economic and not political reasons.

The benefits of this policy credibility in anchoring expectations should not be underestimated. It is often difficult to prove a counterfactual or attribute cause and effect, but we saw the disastrous consequences when market confidence evaporated in autumn 2022. The emergence of the unfortunately named “moron premium” in UK gilts is a proxy for the type of cost that citizens would incur if political decision-making trumped economic reality.

Among the other key conclusions of the report were concerns about groupthink, mission creep and boundaries between fiscal and monetary policy. I shall touch on each. The Bernanke review demonstrated that the process of challenge is as much about the analytical tools available as the individuals. The court meets regularly with external members of the policy committees, who are a diverse and engaged group. They contribute positively to challenging the executive and each other, with little evidence of groupthink, as demonstrated by the historic voting record of the MPC. However, they require the necessary support and input. One significant gap in recent years has been deciphering post-pandemic changes in the labour market. That has probably been more significant in our understanding of inflation than monetary aggregates.

On the remit, the Bank is a rule taker, not a rule maker. The post-financial-crisis structure of the Bank, determined by Parliament and further embellished by the recent Financial Services and Markets Act, is a complex web of committees and mandates that hangs together and works largely as intended. In turn, it shapes the organisational structure of the Bank, which feels proportionate to the scale and responsibilities that it holds, but it places an almost superhuman requirement on the governor to be across a vast span of policy and organisation.

For the MPC specifically, given the limited policy instruments at its disposal, it is not clear how adding multiple secondary objectives achieves much more than a feelgood factor for politicians. Streamlining the remit letters would be welcome but remains a matter for the Chancellor of the day, subject of course to scrutiny from Parliament. I concur with my colleague David Roberts, chair of the court, that organisations work best when they have clarity and simplicity of objectives and goals.

It is entirely appropriate for fiscal policy to be asymmetric—namely, the MPC takes the Government’s fiscal policy as a given, and the onus is on the Chancellor to make tax-and-spend decisions that do not undermine price stability. It is right that this modus operandi is underpinned by close dialogue between the Bank and the Treasury but not by explicit co-ordination.

With regard to quantitative easing, I have sympathy with concerns about swapping out longer-duration gilts with short-term deposits. That makes the cost of servicing government debt more volatile, but it is something that the Treasury was fully aware of when it granted the deed of indemnity to the Bank to facilitate QE. In the context of quantitative tightening, as long as the Bank and the Debt Management Office are in appropriate dialogue, which they are, a memorandum, as suggested, would add very little.

The role of the court has evolved over time. It has modernised into a unitary corporate board responsible for everything up to, but not including, policy decisions. That includes resource allocation and budgets, investments, culture, capabilities, technology and delivery for a 5,000-strong organisation with an £800 billion balance sheet, which processes a similar amount in payments every day. The court is very much part of the accountability chain, as acknowledged in the committee’s report. Our ability to shape the organisational agenda and provide internal challenge is significant, and the current court is certainly up for shouldering that responsibility, as demonstrated by our commissioning of the Bernanke review.

However, there are limitations. Like a conventional private sector board, we do not possess hire-and-fire powers over senior management, unfettered rights to determine strategy, or absolute oversight. At times this is frustrating, but it is equally unrealistic to expect an elected Government to cede complete control. Instead, we exercise our mandate through influence, with much depending on the receptivity of the serving governor and deputies to receive the court’s input, as well as through collaboration with the Treasury. To make the court more effective and better use our expertise, I believe that closer involvement in making appointments and in setting budgets, especially with the introduction of the bank levy, would help to strengthen overall governance and accountability.

The Bank is a unique organisation that plays a crucial role in our nation’s economic life. We should certainly seek to improve its operations and hold it to proper account, something that I am personally committed to as a member of the court, but equally we shoot ourselves in the foot if we undermine the Bank’s credibility, standing and independence, which has largely served us well over the past 25 years and more.