Is Threadneedle Street too much in thrall to Treasury mandarins?

Decision not to raise interest rates prompts call for greater diversity at upper echelon of Bank

Questions about the tendrils of Whitehall stretching into Threadneedle Street resurfaced this week after the Bank of England shocked financial markets by holding interest rates.

The Bank is constantly at pains to stress its operational independence. But the Government is a key beneficiary of the low rates that were maintained by Andrew Bailey and his colleagues, as almost £895bn of quantitative easing – debt bought, albeit indirectly, from the Treasury – swells its balance sheet.

Silvana Tenreyro, a member of the Monetary Policy Committee (MPC), the interest rate decision makers, was the latest to defend the Bank against the claims of monetary financing – the funnelling of money directly from Threadneedle to Whitehall to spend.

At an IMF event yesterday the economist insisted that in a crisis like Covid it was “natural” that both fiscal policy and monetary policy would act in tandem on the economy, while she argued the actions of the Bank had been sometimes “misunderstood or misinterpreted”.

But some critics are uncomfortable over the close links between the Bank and the Treasury more than two decades on from independence. As Rishi Sunak, the Chancellor, emphasises the vulnerability of the public finances to higher interest rates, decisions over when to unwind stimulus inevitably take a political hue.

Gerard Lyons, Boris Johnson’s former economics adviser, highlights the “Whitehall, Oxbridge backgrounds” of much of the Bank’s senior leadership.

He said: “There should be consistency between monetary and fiscal policy, but there is probably too cosy a relationship between the Treasury and the Bank of England.

“The Treasury dominates the decision making in terms of all senior positions at the Bank. That should be questioned and possibly changed.”

Formally, the Bank has been operationally independent since Gordon Brown let a Monetary Policy Committee set rates instead of the chancellor in 1997. However any chancellor still has huge sway, setting the Bank’s mandate – including its 2pc inflation target – and appointing the Governor, deputies and external MPC members. Even the chief economist, largely seen as an internal appointment, must get the nod from 11 Downing Street. Every meeting has a Treasury observer. Andrew Bailey, the current Governor, has spent most of his career at the Bank, but there are increasingly more Treasury veterans at the top.

Deputy Governors Sir Dave Ramsden and Sir Jon Cunliffe were senior Treasury mandarins. The third deputy, Ben Broadbent, also served at the Treasury until 1996 when he left for New York and then Goldman Sachs.

While Sir Dave broke with the majority to vote for a rate rise, concerns over a Whitehall groupthink abound, centred around a lack of intellectual diversity on a committee where members appear to share similar economic views.

Andrew Sentance, a former rate-setter, says it is “high time” the Treasury select committee took an independent look at how the MPC operates.

He objects to the lack of “a serious alternative view about what the MPC should be doing”, particularly as long-term Bank staff take their lead from the Governor’s office.

“That groupthink has been there for a long time,” says Sentance.

Sentance’s old sparring partner on the MPC, Danny Blanchflower, says there is too little diversity of background: “When I went to the Bank at one point I was the only person who didn’t live in the home counties, hadn’t been to a public school and hadn’t been to Oxbridge. Literally every single person lived within 25 miles of the Bank.” Initially the MPC was made up largely of long-serving Bank officials, alongside academics and business veterans to provide some fresh thinking. The result was fierce debate.

In 1998, its first full year in independent operation, policymakers routinely dissented in every direction. Sometimes the committee was split down the middle. On other occasions there were three-way splits between hiking, cutting or holding rates. By contrast, dissent has been rare in the past decade.

Since the financial crisis, interest rates have barely budged, hovering around the 0.5pc level, which was a record low when it was first introduced in 2009.

Investment banking experience among the decision makers is increasingly common, prompting calls for a more varied perspective.

There remains a contingent of academics – Jonathan Haskel and Tenreyro are both professors – but non-financial voices on the committee are decidedly fewer than in the 1990s.

A Treasury spokesman said: “The Government is committed to appointing a diverse range of people to public appointments, including at the Bank of England, and doing so in a transparent way.

“Treasury-led appointments to the Monetary Policy Committee are made on the basis of merit, and the committee consists of both internal and external members to add a variety of backgrounds and experiences to the policy-making process.”