Bank of England needs ‘pruning’ to deliver: Influential Lords Committee
The Bank of England needs to face more Parliamentary scrutiny and have its remit “pruned” to ensure that independence works as effectively as possible, a new report argues.
The report, published by the House of Lords’ Economic Affairs Committee, highlighted concerns that the Bank’s role had expanded without a “commensurate increase” in scrutiny.
“We are concerned that a democratic deficit has emerged, which risks undermining confidence in the Bank and its operational independence,” the report said.
Lord George Bridges, chair of the Committee, told Morning Wire that “Parliamentarians do a good job scrutinising the Bank, but we think it needs to go up a gear…Confidence in the Bank’s independence comes from thorough accountability and scrutiny.”
The report argued that Parliament should undertake a review of the Bank of England’s remit and operations every five years.
It also suggested that the Bank’s key objectives need to be simplified. Since being granted operational independence in 1997, the Bank’s remit has expanded rapidly to include a range of factors.
Now the Bank must ‘have regards’ or ‘consider’ 31 different factors, including climate change and international competitiveness.
“We recommend that the number of matters the Bank should ‘have regard to’ or ‘consider’…be pruned by HM Treasury to ensure the Bank can focus on its primary objectives of maintaining price and financial stability,” the report said.
Despite criticising the Bank’s recent failures in countering inflation, the peers argued that operational independence has been effective in maintaining stable inflation.
Between 1997 and 2021 inflation stayed within one percentage point of the Monetary Policy Committee’s target 87 per cent of the time. “Recent errors need to be put in that context,” Bridges said.
However, the report highlighted a perceived lack of intellectual diversity in the Bank of England – and the central banking community more broadly – which has hampered efforts to get to grips with inflation in the recent past.
In particular, the report highlighted the Bank’s “apparent disregard” for growth in the money supply. A school of economists, known as monetarists, argue that changes to the money supply are by far the single most important factor driving inflation.
From 2020 – when the annual growth in the M4 money supply reached double digits – until August 2022, the Bank of England’s Monetary Policy Reports failed to discuss measures of the money supply.
Peers also criticised the Bank’s “over-reliance on inadequate forecasting models,” although they welcomed the ongoing review led by former Fed chair Ben Bernanke.
The Bank of England said: “We’d like to thank the Lords EAC for this report and will be giving the recommendations careful consideration. We’ll respond formally in due course.”