ALEX BRUMMER: Time for a Bank of England rethink

There is a view that governments play at their own risk with central bank independence. But with the current disruption in financial markets looking dangerous, it may be time for a rethink.

What if the central bank itself is the cause of the instability and the institution admits it has “great lessons to learn” and its forecasting model doesn’t work? The Bank of England has confessed to both.

The volatility in the government bond market, which is driving up the cost of homeownership, is the result of a failure by Bank Governor Andrew Bailey and the rate-setting Monetary Policy Committee to get a handle on inflation.

When a Tory government feels the need to hark back to Ted Heath, the 1970s and “voluntary” pricing policies for food supplies, they know something serious is afoot.

It is equally concerning when the bank’s chief economist, Huw Pill, a veteran monetary official, says the bank’s forecasting model is not working. That’s no surprise.

You don’t have to be a sage to recognize that the Bank’s projections have been idiosyncratic. As recently as November it predicted the longest recession in British history and we are still waiting.

It is negligent not to cut core prices and get even close to the inflation target of 2 percent. One of the questions I am often asked is why Bailey cannot be removed from office.

After all, CEOs are being replaced by careless surrender. The answer is that monetary policy is a long-term exercise, which is why, three years into his current term, Bailey has five years to go.

Nevertheless, there are historical precedents for changing the captain.

Faced with rampant inflation and a declining dollar in July 1979, then-President Jimmy Carter convened his cabinet, moved Federal Reserve Chairman G William Miller to the U.S. Treasury, and appointed Paul Volcker to the Fed. The rest is history.

Such drastic measures may be counterproductive at the moment, but there may be an alternative route for change.

Bailey assumes all duties as governor and heads the nine-member Monetary Policy Committee. What is apparent from the decisions on quantitative easing and interest rates is the degree of groupthink.

With rates raised to the current 4.5 percent, the disagreement has been largely confined to outside members. It is not surprising. The core of the MPC is made from Treasury retreads.

The latest insider to disagree was Andy Haldane who voted against the latest dose of quantitative easing and warned against the inflationary spirit when Bailey made speeches insisting that inflation was “transient.”

Shaking up the MPC would be a good place to start reforms. Haldane is to be installed as deputy governor in view of Bailey’s takeover.

Other strong outside voices need to be convinced that it is their public duty to serve. New faces and alternative views are needed, beyond the Treasury’s consensus.

The independent Bank of England was the best invention of the last Labor government, which wanted the Bank to become as respected an economic institution as the German Bundesbank (before it was exhausted by the European Central Bank).

Without fresh ambition and creative thinking, the Bank’s independence is in acute danger.