One of the most important words in central banking is “transparency”. Everything important that a bank does, from the arguments it makes to the outcomes it achieves, should be visible to the public. In the UK we have a fair degree of transparency. And it clearly shows that Bank of England has failed in its role.
The central charge against the Bank is simple. It has one main task: to make sure that UK inflation is on target, remaining at 2 per cent. It has not done that. Today, inflation remains more than four times where it should be. Only a few months ago it was sitting above 10 per cent – the first time it breached that limit in forty years.
The failure is systematic. Each time the Bank misses that target by more than one percentage point it must write a letter to the Chancellor explaining why. These explanatory notes were meant to be extraordinary events. Over the last few years they have become run-of-the-mill: Andrew Bailey, the current governor of the Bank, has been forced to write seven consecutive mea culpae and, given the likely path of inflation, will write several more in the months to come.
The Bank’s defenders might claim that inflation is out of Bailey’s control: rising fuel and food prices, for instance, are due to the war in Ukraine. But this is deeply unconvincing. To begin with, other countries have handled the same inflationary shock more effectively than the UK. In the US, for instance, inflation sits at 4 per cent; in the Euro area 6 per cent; in Spain in particular less than 3 per cent. These are unforgivable differences in performance.
What’s more, there is a problem with a defence based on the impotence of the Bank. For if this is right, it raises existential questions: what is the point of an independent Bank if it is powerless to control inflation? We live in a globalised world, where many economic shocks come from beyond our shores. This not a new nor a transient problem. Those who make this argument of helplessness are unlikely to want to follow it through to its natural conclusion.
Vitally, the charge sheet does not end at the Bank’s failure to control inflation. There is also a sense in which it has failed in a particularly damaging way. “Our ambition at the Bank of England,” the former governor, Mervyn King, once said, “is to be boring.” His point was that monetary policy should not take people by surprise. Yet there is nothing boring about what has happened over the last few months. Inflation forecasts have been repeatedly wrong. Interest rate rises have been unexpected as a result. Contrary to King’s ambition, all this has come as something of a surprise.
It is immensely difficult to balance institutional and personal failures. For those on the outside, it is almost impossible to know all the details of how any specific decision is made. But in the case of the Bank, it seems that Bailey must now step down. That is the regrettable conclusion which leadership demands.
Would this make the governor a scapegoat for the failings of others? Perhaps. In part he is covering for the economists who developed the models that have done a poor job of predicting the path of inflation. In part he is the fall guy for those around him who shared his analysis and reached similar conclusions. And in part he is drawing heat from politicians who recognise there is no way out of this unfolding inflationary tragedy other than through higher interest rates.
But Bailey also made personal mistakes – in some cases by his own admission. It was an error, for instance, not to act earlier with stronger rate rises, relying too much on predictions from formal models that were untested at times of such high inflation. And it was a mistake to deviate so markedly from the central banking playbook and make peculiar demands, such as asking workers to “think and reflect” before requesting pay rises and businesses to “bear in mind” inflation forecasts when setting prices.
There is another important word in central banking: “trust”. If people trust that a central bank will do whatever it can to keep inflation low then, the argument goes, inflation will remain low. It is a self-fulfilling prophecy: “well-anchored inflation expectations”, in the words of economists, mean that workers don’t demand higher pay, businesses don’t set higher prices, and inflation stays under wraps. And with that in mind, the fact that trust in the Bank of England is now at a record low – surveys have found that only one in five people are satisfied with its performance – is almost as troubling as the current rate of inflation.
As Bailey has rightly recognised, inflation is a social disaster. It is a tax on the poorest among us: food and fuel, where price rises are concentrated, make up a bigger chunk of their spending, and it is the value of their wages that is hammered the most. The best thing the Bank could now do to bring this calamity to an end is to change its leadership – and start to rebuild that trust once again.