Labor sees sweeping changes in the way the Bank of England’s Monetary Policy Committee sets interest rates if it wins the next election.
The party said it was fully committed to the bank’s independence, an initiative launched by former Chancellor Gordon Brown within days of Tony Blair moving to Downing Street in 1997.
But Shadow Chancellor Rachel Reeves is said to be in favor of reforming the MPC after its lamentable performance in controlling inflation.
Reeves, a former Bank of England economist, is widely expected to endorse the two percent target for consumer price inflation and maintain the bank’s independent mandate.
It is also recognized that Andrew Bailey, who will serve four years into an eight-year term as governor at the next election, cannot be moved.
Plans: Shadow Chancellor Rachel Reeves would favor reforms of the Bank of England’s Monetary Policy Committee
Despite the disappointing response to the cost-of-living crisis, Bailey is seen as a safe pair of hands by Labor.
He has gained international confidence as a result of the UK’s so far careful navigation of recent banking instability.
He also received credit for his prompt response to the trauma of the October 2022 Truss-Kwarteng gilts market.
The Bank had to step in to protect UK pension systems after it was overexposed to risky derivatives known as ‘Liability Driven Investments’ (LDIs).
But the nine-member MPC is dominated by groupthink, with like-minded individuals transferred from the Treasury, lacking diversity in gender, race and economic views.
There is no one quite like Dame Kate Barker, the former chief economist of the CBI, who was a strong proponent of manufacturing when she served on the MPC between 2001 and 2010.
Reeves is believed to be a great admirer of the US Federal Reserve System with its strong network of votes from regional Fed presidents.
They are senior bankers, economists and industrialists who are deeply entrenched in local communities, from Philadelphia in the Northeast and San Francisco in California.
This is seen as much better than the Bank’s web of regional agents. Agents’ reports to the MPC are regarded as lacking in intellectual rigor and agents’ roles are filled by Bank of England officials who have fallen short of grade in Threadneedle Street.
Criticism: The Bank’s Monetary Policy Committee is dominated by groupthink and lacks diversity in terms of gender, race and economic views
The Tories will have a chance to steal Labor’s clothes this year with the expected retirements of Sir Jon Cunliffe, the deputy governor responsible for financial stability, and Ben Broadbent, the deputy governor for monetary policy. Both are former Treasury insiders.
Reeves believes the bank’s data-driven and highly statistical approach, which sets rates and quantitative easing, is too formal.
And far too much time is spent in MPC sessions interpreting the charts and there is a lack of open discussion about behavioral economics, forward-looking studies and manufacturing and industry trends on the ground, including regional voices.
Also lacking is the kind of outsider financial market wisdom once offered by economist and hedge fund guru Sushil Wadhwani.
Labor finds the bank’s communication appalling. Bailey, for all his merits, has been unable to explain why the Bank was so wrong in its forecasts and clumsy in the way it spoke on the wage-price spiral and other issues.
Huw Pill, the chief economist, has also admitted that the bank’s economic model is not working well, which is not exactly reassuring with headline inflation at 8.7 percent, core inflation at 6.8 percent and food inflation at 19 percent.
Both the US authorities and the larger Eurozone economies, such as France, have been more successful in containing inflation.
Labor recognizes that when it comes to the Bank of England it has limited room for maneuver without being accused of tampering with the independence it has earned from Brown and disrupting financial markets.
More diversity of opinion and sharpened input from the regions, by updating the current moribund system of agents, could potentially make a real difference, insiders say.
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