Bank must answer for inflation failure
The last time UK government bond yields reached this level, during the brief premiership of Liz Truss, pundits savaged her administration for its supposed irresponsibility, claiming that it was paying a “moron premium” for its “reckless” fiscal policy. The Bank of England posed as a knight in shining armour, intervening to stabilise markets and to prevent poorly regulated pension funds from collapse.
Now, the Bank has nobody it can blame but itself. Bond yields rose following the release of the latest inflation figures yesterday. Although the headline rate fell, it constituted a significant overshoot on expectations, and core inflation increased to its highest rate since 1992. Markets are anticipating that the Bank will have to raise interest rates even higher than they had previously thought.
It is a further rebuke of the Bank of England’s pitiful record. Whenever inflation moves more than one percentage point away from target, there is an exchange of letters between Threadneedle Street and the Treasury; the volume of correspondence generated since mid-2021 may be single-handedly keeping Royal Mail in business.
During this period, the Bank has attempted to pin the blame for inflationary failures on anyone and anything other than its own actions, including at various points the post-lockdown reopening, the war in Ukraine and workers getting pay-rises. It should look closer to home. The Bank was embarrassingly slow to react to rising prices and allowed inflationary expectations to take hold.
Governor Andrew Bailey has finally conceded that the Bank has “very big lessons to learn”. This goes nowhere near far enough; he should commit to making the results of these lessons public. If the Bank is to restore its credibility, it must come clean about how it got things so wrong, and how it will avoid repeating its mistakes. This will include uncomfortable questions around its policies during lockdown, which flooded a frozen economy with cash and looked suspiciously like monetising government debt.
Supporters of the Bank claim that its operational independence has resulted in significantly better monetary policy decisions. But too often, politicians and the broadcast media have been afraid to question its conduct, or criticise its obsession with issues such as net zero. That is not sustainable. The Bank and Mr Bailey should be held accountable for their failings.