Is it time to revisit Bank of England independence?

Within days of Labour’s dramatic 1997 election victory, Gordon Brown announced that the Bank of England was to be given independent powers to set interest rates. By buying into one of the sacred cows of the so-called ‘Washington consensus’ the government cemented its credibility; ‘at a stroke’, claimed the Economist, ‘Labour has laid a historic clam to the high ground of economic virtue.’ However, we now live in a very different world. In the wake of 2008 that ‘high ground of economic virtue’ no longer looks as virtuous, so is time to revisit this issue?

The ‘accepted’ narrative is that independent central banks increase the credibility of monetary policy and, thus, have a positive effect on price stability. Technocrats, free from interference by short-sighted politicians, are able to make objective decisions based on a widely-accepted version of how economies work, what Tony Blair describes in his autobiography as separating ‘economics’ from ‘politics’.

However, the recent financial crisis has severely undermined the credibility of this argument. Not only did the Bank, despite keeping inflation within the promised window, fail to prevent a series of incredibly-damaging assets bubbles, its underlying assumptions were revealed to be based not on an objective reality, but rather a discredited theory that fetishized price stability.

This obsession with inflation — the independent Bank’s first governor even considered being called an ‘inflation nutter’ a compliment—can be dangerous under the wrong circumstances, demonstrated by the European Central Bank’s disastrous decision to increase interest rates in 2011, a move that precipitated the Eurozone crisis.

Former chancellor Norman Lamont famously argued rising unemployment was a ‘price worth paying’ to keep inflation low. That narrow doctrine has now, to an extent, become enshrined within the Bank’s stated goals, restricting the ability of governments to use monetary policy to improve the long-term performance of our economy. Yes, inflation remained low during the 2000s, but unemployment—the experience of which is a lot more damaging for individuals, families and communities—remained stubbornly above its pre-Thatcher levels. Were we just too worried about inflation?

This is neither the time nor the place to discuss such issues at length. But surely the financial crisis should encourage us in the party to, as part of Ed Miliband’s desire to challenge the economic orthodoxy of the last thirty years, revisit some of the assumptions upon which the Bank’s decisions are made?

There is another issue at play here, however. There remain some fundamental questions about the democratic accountability of our monetary policymaking. It is often argued that independent central banks are not really undemocratic, because they enjoy mere ‘operational independence’, while the goals of monetary policy are set down by parliament.

The extent to which it is possible to draw such a sharp distinction between goal and operational decisions is disputed. However, even if you accept the argument, it still ignores the fact that a lot of modern political debate is not about objectives, but methods. Just look at the debate over energy prices, for example.

The bottom line is that the Bank of England is an immensely-powerful government institution that makes decisions that affect ordinary people up and down the country. It is not omnipotent, its decisions not free from controversy, politics and economics can’t be separated. Indeed, it has made some serious mistakes, and yet our central bankers are not accountable to those who their mistakes affect, us.

The next Labour government should think about going someway to redressing this situation, possibly by introducing parliamentary-appointed individuals to the monetary policy committee, after all isn’t the ‘democratic’ in ‘democratic socialism’ supposed to be the uncontroversial bit?