Bank of England (Economic Affairs Committee Report)

Viscount Chandos Excerpts

Thursday 2nd May 2024 Lords Chamber

[Viscount Chandos (Lab)]

My Lords, I am very grateful to the noble Lord, Lord Bridges of Headley, for introducing this debate, and for the exemplary work that he and other members of the Economic Affairs Committee have done to produce this report. I was privileged to be a member of the committee previously, when it conducted inquiries into both quantitative easing and the case for a central bank digital currency. This report revisits those subjects, at the same time as taking a broader view of the Bank’s working. The result is a powerful endorsement of Select Committees generally sticking with subjects and themes over a longer period of time, rather than allowing an inquiry to be seen as a one-off.

There is not a single conclusion or recommendation in this report with which I disagree, which prompts me, like the noble Lord, Lord Bridges, to ask myself whether the unanimity of the committee and the wide support for its findings represent an example of the very groupthink that the committee questioned the Bank of England and other witnesses on. So perhaps I should express my disappointment that the title of the report is blander than some in the past, even if the Governor of the Bank of England was critical of the committee suggesting that the Bank’s use of QE might equate to “addiction”.

As a young banker—so a very long time ago—I developed admiration and respect for the Bank and its culture. As a market participant, it had a profound understanding of the financial markets without generally being captured by them. Of course, even in those halcyon days, there were problems and failings, from BCCI to Barings, but there was widespread confidence in the integrity and competence of the Bank, even though it did not enjoy formally the independence that was granted to it by the Labour Government in 1997.

The structure and remit of the Bank has, as the noble Lord, Lord Bridges, already said, changed considerably—massively—even since then: from one deputy governor to four and from eight executive directors to 21. The multiplicity of additional objectives and “have regards to” was also highlighted by the noble Lord. Has the culture of the Bank remained fundamentally unchanged as a result of this process and evolution? I believe that at the core, the best aspects of this culture remain, but that the recommendations of the report are important and necessary steps for protecting and reinforcing it.

I will focus on two issues: transparency and governance. In doing so I will comment on more specific policy issues and performance. I profoundly believe that transparency should be at the heart of public bodes generally; even the intelligence services are now significantly more open, if in a limited and carefully controlled way. Rather nostalgically, this made me think of my maiden speech, a frightening 42 years ago, on the subject of a European directive on bank accounting. Back then, although the clearing banks did report their true profits, merchant banks still disclosed profits only after transfer to or from a hidden reserve. As a middle-rank employee of one such bank, I questioned whether this really added to the stability of the financial system, faced by innumerable chairmen of banks in the same debate—I think the management of banks has become a little more diverse—arguing for the maintenance of the status quo.

Transparency should be at the core of the financial markets, and of the Bank of England’s role in them. For that reason, I regret that, in the otherwise sensible review of the Bank’s forecasting, Ben Bernanke did not advocate the adoption of forward guidance or the use of a so-called dot plot to provide markets with more data on which to base their interest rate expectations. The central bank is not there to provide the framework for traders to maximise the opportunity for trading games; it is there to create a stable and predictable environment for the benefit of the economy as a whole.

Likewise, as the noble Lord has already touched on, I am baffled by the Treasury’s refusal to publish in full the indemnity under which the Bank of England makes whole any losses from the QE and QT programme. The reasons given by the Government are as opaque as the policy itself. In what way would the publication of the deed of indemnity jeopardise the Government’s cash management operations? Would the Minister be kind enough to answer that when she comes to wind up, and explain why the protection of the Debt Management Office’s operation is not unfairly at the expense of other market participants?

After the nearly three years since the committee’s report on QE was published, it is still hard to come to any definitive conclusions, but this latest report provides an important update. I believe that the QE programme, in its three phases, was right in principle but wrong in degree. Its efficacy in bringing stability to the financial markets at times of maximum stress was clear, but it was of indeterminate impact in more general macroeconomic management. As a result, the scale of the purchases was almost certainly too great, and the speed of subsequent sales too slow. This has arguably exacerbated the problems of responding to a rising interest rate environment, and increased the cost to the Exchequer of the intervention. Can the Minister say what the net realised gain or loss currently is since the start of the programme, and what the mark to market unrealised loss is on the assets still held by the Bank, all of which are for the Treasury’s account under the deed of indemnity, as -far as we know?

Very briefly, on governance and appointments there are serious doubts about, among other factors, intellectual diversity and political independence in relation to the court, the MPC and senior management. Some of this is visible; more lurks below the surface. I very much hope that the next Government—no complacency, on today of all days, but I hope a Labour one—will conduct a thorough review of the governance arrangements and appointment rules for every part of the Bank of England, and in addition look at the whistleblowing and independent process for resolving problems as and when they occur.

I very much hope that the Economic Affairs Committee will continue to bring its laser-like focus on the workings of the Bank of England, with many aspects of its operations not covered in this report. As the noble Lord, Lord Bridges, has also advocated, I hope that your Lordships’ House will have much more time than in the past to debate these issues.