The Old Lady needs a shake-up
The conclusions of a review of the Bank of England’s performance are unlikely to be radical enough
A review of the performance of the Bank of England was always going to happen at some point. At its peak last year, inflation was running at more than 8%, one of the highest rates in the developed world, and more than four times the Bank’s legally mandated target. Questions needed to be asked and Ben Bernanke was a natural person to lead the enquiry. A respected academic economist, and a former chairman of the Federal Reserve, Bernanke knows as much about central banking as anyone in the world.
It remains to be seen what is included in his final report, but it is expected to suggest that the Bank follows the Fed with its “dot path”, essentially a form of forward guidance on interest rates, plus some minor upgrades to its forecasting operation. There may even be some useful tips on management and monetary policy. The report will be solid, consensual and mainstream, and will probably be welcomed by the Bank’s governor, Andrew Bailey, and the chancellor, Jeremy Hunt, as making a useful contribution to the debate. Perhaps one or two of the ideas will actually be implemented, and even marginally improve the way the Bank operates.
Money printers went brrrr too long
But that is not good enough. In an ideal world, the review would deliver a blistering verdict on the Bank that would be the trigger for Bailey to step down. Over the last ten years, three major problems have emerged. First, quantitative easing went too far, especially under the governorship of the wildly over promoted Mark Carney. Printing money might well have been justified in the immediate wake of the banking crisis of 2008-2009. There was a real risk of a re-run of the Great Depression of the 1930s, with liquidity drying up and businesses being destroyed. It is a complete mystery, however, why it was restarted after the Brexit referendum, given that leaving the EU had no discernible impact on the economy, and even if it did there was no immediate liquidity crunch. It was even more extraordinary to crank up the money printing presses all over again during the Covid pandemic, given that we were making less stuff – and so needed less money in circulation – while we were all forced to stay at home. Those were major policy mistakes that led directly to the upsurge in inflation of the last two years. We need to see an honest reckoning as to how that was allowed to happen, and what the consequences were.
There are also major problems with the Bank’s economic modelling. It dismissed the rise in prices as nothing more than a transitory blip for far too long. It blamed inflation on the war in Ukraine when there were clearly many other factors behind it. It tried to pin responsibility on workers or companies for being “greedy”. And right now, it looks like it is about to make an even worse mess of the situation by holding rates too high for too long and pushing the economy into a recession. The Monetary Policy Committee has fallen victim to groupthink, with too few voices able to challenge the orthodoxy.
Finally, the Bank has been hopeless on regulation. We saw that with the liabilitydriven investment (LDI) crisis in the autumn of 2022, when a series of pension funds were caught out by the sudden rise in interest rates in the wake of Liz Truss’s mini-budget. The Bank should have been controlling what were clearly high-risk financial instruments far more closely. We have also seen the painful decline of the London stockmarket, weighed down by rules and regulations. The Bank should have been leading the fight for reforms to keep the market competitive.
A technocratic monster
The reality is that the Bank of England has become a technocratic monster. It is accountable to no one for its dismal performance, and its blundering has turned into a drag on growth. Bailey, a lifelong Bank staffer incapable of fresh thinking, personifies the problem. A few methodological tweaks aren’t enough – the Bank needs to change far more radically if it is to help the economy start growing again.