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The Bank of England is not independent

Thursday, October 6, 2016 22:48
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Constitutionally the Bank is the creature of Parliament. In recent years Parliament stripped the Bank of major powers in the late 1990s, whilst giving it more independence over settling interest rates. After the 2010 election Parliament gave back important regulatory powers to the Bank. Any so called independent power the Bank enjoys it does so only for as long as it pleases Parliament.

In practice the Bank has to accept the instructions and judgements of the government. All the time the government commands a reliable Parliamentary majority the Bank accepts the guidance and views of the Chancellor. Sometimes these are formal and published. For example Mr Brown changed the role and powers of the Bank by Statute, and he altered the inflation remit which controls the MPC during his tenure. Mr Darling overrode the MPC rightly during the banking crash and forced them to cut interest rates more quickly than they were planning. Sometimes the influence is behind the scenes. There is often a happy conjunction of incorrect forecasts between the Bank and the Treasury. The Bank took a similar line to Mr Osborne over the short term consequences of a Leave vote. It appears that the Treasury,OBR and Bank work closely together and often share the same judgements. Were there to be big divergences it would become a matter of controversy.

The government and therefore Parliament has kept to itself the power to approve Quantitative Easing programmes. This is a crucial power to reserve at a time of near zero interest rates. It means that even the devolved independence of the Bank on interest rate setting is constitutionally very constrained, as QE is clearly the major feature of current monetary policy. The latest burst of QE was formally approved by published letter from the Chancellor. Parliament could at any point debate and vote on these matters, but so far has been happy to approve what successive Chancellors have agreed on QE. I am pleased to see the PM is of the view that we do not need more QE, something I have urged here.

A lot of outside commentators misunderstand the powers of Parliament. Leaving aside current EU obligations which do constrain Parliament, Parliament is free to debate and vote on whatever it likes, and to change the law affecting any institution or policy it wishes. This includes whatever the Bank does. So it must be in a democracy. Ultimately the Chancellor should get the credit for economic policy success, or the blame for failure. The electorate can dismiss him at an election, not the Governor of the Bank. The fact that Parliament has chosen in recent years to allow the Bank to set interest rates, and has on the whole not been critical of what it has done does not mean the Bank is independent. It is accountable directly to Parliament, but more importantly it is mainly accountable through the government to Parliament. On two crucial occasions in the past Chancellors have intervened directly in the interest rate setting process itself, and those are the ones we know about. Maybe now it is time for Parliament to be more critical of its Bank, as its present policy of QE and ultra low rates is driving the pound down too much and undermining savers.


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