Tomorrow (6 May) is a major anniversary for the Bank of England: 25 years ago, Gordon Brown gave the Bank its independence, allowing it to control monetary policy free from political incentives. To exert this control the Bank formed its Monetary Policy Committee (MPC), a group of economists who could use the financial weapons of interest rates and bond purchases to keep the economy stable. To focus the MPC’s agenda, the government sets it a target: to keep inflation as close as possible to 2 per cent. It is the MPC that has voted to raise interest rates to 1 per cent, the highest rate since February 2009, today.
Since 1997, a revolving cast of internal Bank of England executives and external advisers has, more or less peacefully, met each month to vote on interest rates and quantitative easing. But a quarter of a century on, the MPC faces the highest inflation in its history and the sharpest decline in real incomes for half a century. Has the institution itself been fast enough to react to these crises? Is the MPC in need of a shake-up?
The Bank itself has admitted it expects inflation (as measured by the Consumer Price Index) to hit 8 per cent “or even higher” this year – its highest since 1991, and four times the target set by the Treasury. In a Times article last week, the former MPC member Andrew Sentance said one reason the MPC had failed to control inflation was that it is “prone to ‘groupthink’ and dissenting voices have either not been appointed to the MPC or suppressed when they were there,” he said.
Sentance is not the only economist to voice these concerns. In June 2017, as the economist Kristin Forbes was preparing to step down from the MPC following a three-year tenure, she gave her final speech to an audience at the London Business School. The title of the speech was “Failure to Launch”, and in it, Forbes noted a concerning new trend on the MPC: the evaporation of dissent.
Forbes’ analysis of MPC voting records showed that during the first 16 years of its existence, about 10 per cent of votes went against the majority. Of those dissenting votes, a third came from “internal” members of the committee – those on the Bank of England’s full-time staff. This, she said, reflected a “healthy range of views”.
But then something changed. From 2014 onwards, just 3 per cent of votes dissented – and “not a single dissent since 2013 has come from an internal member”. Forbes made it clear she didn’t believe anything untoward was going on – but that doesn’t mean the MPC doesn’t have a problem.
“If I were a benign dictator, I would redesign the MPC,” says Tony Yates, an economist who spent two decades at the Bank of England, including as its head of monetary policy strategy. Yates says more external economists are needed. “The internal appointments act like a block vote,” he says. “Internal votes are much more highly correlated with each other than they are with the external vote – so I don’t think the internal vote should have a majority, because the block vote can then be used to effectively nullify the external MPC.”
Yates also suggests external members should be prevented from taking jobs at the Bank of England once they have served on the MPC. In 2014, Ben Broadbent crossed the divide, which Yates says was a concerning move. “The deputy governor salary is huge… so there’s an incentive there to ‘behave well’ and use your external vote to beef up the block votes with the internals, so it swells the potential internal vote even more.” Just as the payroll vote guarantees aspiring ministers will vote with the government in the Commons, aspiring central bankers now have an incentive to follow the Bank’s prevailing internal opinions.
Dissenting can be a lonely existence. James Smith, research director at the Resolution Foundation, says the former MPC members Danny Blanchflower and Sentance sat at opposite ends of the scale when it came to moving interest rates – Blanchflower was doveish, voting to cut rates, while Sentance was a hawk, in favour of hikes – but “both took quite extreme positions relative to the rest of the committee, and they ended up being isolated. [They] constantly had to justify their position relative to what everyone else was doing. That just made their life a lot harder.”
A glance at the MPC’s membership reveals another issue: although there are usually one or two women on it, the committee is generally populated by men of a certain age and background. At the moment, it’s seven men and two women; there are no people of colour. A lack of diversity means “you’re unlikely to get the kind of policy grenade thrown into the table that makes you think differently,” says Cary Cooper, a professor of organisational psychology at the Manchester Business School.
Sentance has pointed out that many MPC members also have very similar CVs: “The fact that the majority of the present MPC are ex-Treasury officials or have Treasury connections undermines the independence of the Bank,” he told the Times. “The pipeline is the important bit,” agrees Cooper. He suggests now is the time for the Bank of England to expand its hiring horizons. “[If you hire] similar people who have been trained the same way, you’re not going to get diverse, creative thinking.” More diverse backgrounds may also help the bank to avoid gaffes such as the governor Andrew Bailey’s comment earlier this year that companies should “show restraint” when giving pay rises.
Other central banks do it differently, points out Smith. Appointments to the Federal Reserve, America’s central bank, “are not really made by the Fed, even to quite a junior level. It’s not like [Fed chair] Jay Powell can choose all the people around him. He doesn’t have that option, whereas Andrew Bailey will, and some of the other executives will have more say in hiring the people below them,” he says. “I think there are things that you can do to increase accountability and reduce internal consensus.”
Smith and Yates agree that, particularly since the start of the pandemic, the MPC has done the best it could with the information it had available. But, faced with one of its toughest periods yet, now may be the time for the organisation once accused of being the UK’s “unreliable boyfriend” to take a long, hard look at itself, and adjust accordingly.