Viewers of the Treasury Select Committee’s evidence session yesterday were treated to the uncomfortable spectacle of MPs trying to persuade officials from the Bank of England that the imminent arrival of double-digit inflation and a global economic slump was somehow their fault.
The Conservative MP Mel Stride, chairman of the committee, repeated accusations made by other Conservative MPs and ministers that the Bank’s governor, Andrew Bailey, and his team had been “asleep at the wheel” and that the current spike in inflation “could have been avoided, had you been smarter”. His colleague Harriett Baldwin refused to accept what she characterised as officials’ attempts to “blame hindsight, and the war, for missing the [inflation] target”, while Kevin Hollinrake asked if a Conservative peer was right to call the Bank “ostrich-like” in its approach to inflation. These comments echoed those made last week by Liam Fox, who asked for “an investigation into why the Bank of England so comprehensively underestimated the inflationary threat”, and earlier today by the Tory peer Michael Forsyth, who accused the Bank of “unleashing inflation in our country through failing to meet its proper mandate”.
Bailey and his officials patiently explained that the steep rise in inflation is due to factors far beyond their control. Of the inflation above the 2 per cent target set by the Bank’s Monetary Policy Committee (MPC), four fifths is created by the rising prices of energy and tradeable goods. It is not that the Bank failed to spot that the economy was bouncing back from the pandemic too quickly — the UK’s GDP is 0.7 per cent higher than in the last quarter before the pandemic, and growth has stalled in the last few months — but that globalisation is on hold and there is a global crisis in the price of energy, which is caused by a war between two countries neither the UK government nor the MPC have much influence on.
Bailey’s colleague Dave Ramsden explained that the difference made by raising interest rates sooner to combat this external inflation would have been “only at the margin, if it made a difference at all”. Michael Saunders, an external member of the MPC who has argued for higher interest rate rises, agreed that there was “no sensible monetary policy that could have been put in place a year or two ago that could have kept inflation at the 2 per cent target this year”.
There are measures that might have helped. For example, if the UK had better energy infrastructure and better-insulated homes it would be less exposed to the price of imported gas. Or if the NHS and social care weren’t in a state of permanent crisis, hundreds of thousands more people might be in work rather than at home with long-term conditions, and the labour market wouldn’t be so tight. But these are the objects of government policy, not monetary policy.
“People in the Conservative Party are looking for a scapegoat,” explains Simon French, chief economist at the investment bank Panmure Gordon. Partly this is just how politics goes. When French was a senior economist in the Cabinet Office, David Cameron was describing the 2008 global recession as “Labour’s debt crisis”. Keir Starmer now refers to “the Conservatives’ cost-of-living crisis”.
[See also: Keir Starmer is under pressure – New Statesman]
“There’s a rich history of global factors being blamed on the incumbent domestic government,” says French. “But then there are also ministers who think, actually, we could also lump it on Andrew Bailey.”
The average annual inflation from 1997 to 2021 was 1.96 per cent. “The politics are easy when prices are rising 2 per cent,” says French. “They’re hard when they’re rising 10 per cent.”
The politics are made harder still by the right wing of the Conservative Party, which defines itself by its war on institutions and doesn’t see why civil servants should get to decide anything so important as interest rates. As the Covid-19 pandemic arrived in the UK in March 2020, Dominic Cummings — who is said to have pressured Sajid Javid to switch to a “funkier alternative” when he picked Bailey as governor in 2019 — saw an opportunity to implement “emergency powers” that would be deployed if the Bank didn’t follow the financial expertise of, well, Dominic Cummings, who has never worked in finance but does have a really top-notch history degree.
In fact, the problem the Bank faced in 2020 was that Conservative ideology had already had too much influence on monetary policy. In 2011, when the British economy was struggling to recover from the global financial crisis, George Osborne raised VAT and brought in austerity measures, reducing both private and public spending and stunting economic growth. The Bank was forced to keep debt as cheap as possible, interest rates remained historically low for a decade, and when the pandemic arrived, the Bank’s powers were limited by the fact that the basic rate was already 0.75 per cent. The UK might not have had to lean so heavily on quantitative easing — the “money printing” that so horrifies Forsyth — had the Cameron years focused on economic growth rather than its obsession with public debt.
But do the Tories really want to take control of monetary policy from the Bank? Given that the Bank’s role is often to make things more expensive, it’s hard to think of a sane MP who would take the job. If they complain about it loudly enough, however — as they have with the courts, the BBC, the civil service, the NHS and universities — they might persuade a few voters that the failure to prepare our economy and our society for the sharpest rise in the cost of living for half a century can be blamed on someone else.
[See also: The Conservative Party is lost – New Statesman]