The real rot at the heart of the Bank of England - by Juliet Samuel for the Telegraph - 05.08.22
With inflation set to rise to nearly 14% later this year, we can now add the Bank of England to the list of UK institutions in urgent need of reform, according to Juliet Samuels in an article for the Telegraph.
“The Bank cannot control gas prices but it did create an economy primed for inflation by printing so much money during the lockdowns (when supply, not demand, was being constrained) and then failing to wind up the stimulus and raise rates when the warning signs appeared.”
Britain has experienced inflationary spikes in the past but
“The difference this time is that setting monetary policy is now nominally an independent process. No one can tell Mr Bailey what to do. And yet, somehow, markets have developed the funny idea that the Bank is not truly independent but is being driven by political imperatives.”
In particular there is a growing suspicion that
“the Bank has been openly used to finance record deficit spending during the pandemic by printing money, and that its reluctance to wind up quantitative easing and raise rates is related to fears for the public finances.
The Office for Budget Responsibility has estimated that for every 1 percentage point rise in market interest rates, government borrowing costs rise by £20 billion. And when the Bank starts selling all the gilts it bought, as it has now promised to do in September, who is going to buy them – and at what sort of discount? Is this the real underlying reason for Rishi Sunak’s extreme caution on fiscal policy?”
The operational wall which separates the Bank of England from the Treasury appears to have been eroded over the past ten years:
“The rot began with Mark Carney. Senior economists are divided on whether Mr Carney was simply a PR man or a great brain, but they all agree that, unlike his predecessors, he was a man determined to go places. Previous governors and their deputies tended to be owlish academic economists content to live out their post-Bank days in book-lined studies, digging into obscure databanks and writing long, turgid books. This was often true even before Bank independence. Their sense of worth came from their intellectual work and the esteem of other economists. Not so Mr Carney.
He was already a Davos man and he seemingly wanted to be prime minister of Canada, or else some sort of celebrity, or, failing that, a paid-up member of the save-the-world, UN climate crew (the role he’s doing now). George Osborne, a fellow worshipper of Davos celebrity, was naturally wowed by the fellow. Anyway, the perception was that monetary policy had been solved. Inflation had been controlled by cheap, globalised production in China. It wasn’t rocket science.
What followed was a steady shift in the Bank’s culture. As it took over some of the old Financial Services Authority’s functions, it gained an influx of staff used to an entirely different culture (Mr Bailey himself spent some time at the FSA). The Bank never managed to make them its own. Instead, turnover increased and quality declined. The new chiefs no longer paid the usual respects to their bespectacled predecessors and forged their own path.”
If the Bank had stuck to its principal goal of controlling inflation this would not have mattered. But it has failed in that regard, and we will all end up paying the price very soon.
The full article can be read below with a link to the original here: