Technocrats are firmly in charge of Britain

Sunak’s about-turn on plans to overrule the Bank of England suggests real power resides in Threadneedle Street – not No10

It was Andrew Bailey wot did it. In the aftermath of Liz Truss’s short-lived premiership, senior ministers and backbench Tories sought to pin the blame for the prime minister’s downfall on – of all people – the Governor of the Bank of England.

A prominent ex-central banker weighed in as well, emboldening the critics. The Bank forced Truss to quit with its failure to regulate pension funds properly and the decision to pull the plug on emergency support for bond markets, said Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis.

Others went further, suggesting the Bank’s intervention in financial markets was effectively a coup after tensions between Threadneedle Street and ministers escalated over the summer.

Conspiracy theorists might even have spotted a veiled threat in Bailey’s warning, weeks earlier, that Truss should not challenge the Bank’s rule-making powers or change its mandate.

Bailey has adamantly denied these suggestions. “That, I’m afraid, is wrong,” he told Bloomberg television. Then a week later on Sky News, the Governor hit back again: “I did not depose Liz Truss. I would never do anything like that.”

The Governor can expect similar questions about the power wielded by the Bank of England after Rishi Sunak was forced to abandon plans that would have enabled the Government to override the decisions of City regulators. The about-turn is a massive climbdown for the Prime Minister, as well as another setback for Brexit.

Some regarded the changes as the only way to salvage Brexit reforms in the Square Mile. Proposed relaxations of Solvency 2, the Brussels rulebook requiring insurers to build vast capital buffers on their balance sheets, have been singled out by ministers as an area where intransigent technocrats have stood in the way.

By the same token, it is a huge victory for Bailey – as well as Sam Woods, head of the Bank’s Prudential Regulation Authority, and Nikhil Rathi, boss of the Financial Conduct Authority, who had resisted the move. Sunak had proposed a controversial new “intervention power” when he was chancellor that would allow No10 to step in and overrule regulatory decisions in extraordinary circumstances. Both Sunak and Truss had argued this “call-in” power was needed to ensure politicians are responsible for major regulatory changes, rather than “faceless regulators”.

It was an attempt to reassert political control and quell growing unease among some elements of the Tory party that believed the Bank was in danger of becoming unaccountable – a fear largely stemmed from its failure to tame inflation.

During the leadership contest, Truss had also pledged to review Threadneedle Street’s mandate if she became prime minister, and she questioned the Bank’s use of quantitative easing.

The regulators, not unreasonably, saw this as an attempt by senior Tories to undermine their authority and weaken their independence on the basis of little more than ideology.

Bailey wrote to the Treasury select committee, warning that such steps could damage the City’s “international standing” and competitiveness. Again, this is not an unfair assertion.

Woods intervened too, arguing that any new powers which allowed ministers to overrule regulatory decisions on the basis of a different point of view would be a major shift away from the model of independent regulation introduced by Gordon Brown 25 years ago. It risked creating a system “in which financial regulation blew much more with the political wind,” Woods said.

Regulatory criticism was initially fairly muted but it became much more strident after the mini-budget, and for obvious reasons: the pension meltdown proved that markets and regulators were mightier than politicians.

When New Labour removed the Bank of England from the political arena, it was seeking to emulate the US Federal Reserve and Germany’s Bundesbank, both renowned for being immovable in the fight against rising prices. Independence is critical to its inflationfighting credentials. Nevertheless, that shouldn’t mean Threadneedle Street is immune from criticism or proper scrutiny. It is not wrong to say that the Bank has failed fairly spectacularly in its primary mandate. Its target inflation rate is 2pc, yet a peak of more than 13pc is forecast.

Part of the problem has been that Bailey’s poor communication of where interest rates are heading has left markets in a muddle. Meanwhile, the impact of soaring inflation is reverberating through the economy with severe consequences.

There are concerns too – also justified – that with several former Treasury insiders on the Monetary Policy Committee, there is too little diversity of thought and opinion at the Bank, which leads to dangerous group-think.

Nor can the Government’s proposals be dismissed as entirely without merit. The sensible argument for a call-in power is that it would at least help to make the Treasury’s influence more public. It is naive to think the Bank of England and the Chancellor don’t discuss its financial rules. Meetings happen behind closed doors in an anonymous Treasury building without proper scrutiny. Forcing those conversations out into the open would strengthen transparency.

Still, whether the idea was a good one or not is largely a moot point now. The upshot is Sunak’s defeat means Bank of England orthodoxy has won and Bailey is more powerful than ever, perhaps even more than our own Prime Minister. With the Government unable to make reforms, the technocrats are back in charge of Britain.

‘There is too little diversity of thought at the Bank, leading to group-think’