The headlines of May 1997 were all about a landslide Election victory and central bank independence. Fast forward 20 years, and May 2017 doesn’t look too dissimilar; a General Election next month, and a continued debate on central bank independence.
For some, central bank independence will always be an anathema. But the fact the Bank of England’s independence is not part of 2017’s electoral debate, for any party – including Labour’s John McDonnell – gives a sound endorsement that it is an accepted part of our financial infrastructure.
It was not always thus. If there is a big tick on the Bank’s scorecard, it is the transparency and clarity of its monetary process. Interest rate policy has moved on leaps and bounds over the past 25 years, from electoral expedient, to a clear, transparent process, with accountable Monetary Policy Committee (MPC) members.
More challenging is the appointment of its governor. We’ve had fewer governors than Prime Ministers since May 1997. But George Osborne’s wooing of Mark Carney in 2012-2013 shows political issues remain. It has none of the transparency of the chair of the Federal Reserve, where only existing Fed governors are appointed to the role.
More broadly, unelected central bankers have become part of the G7 economic landscape. Two per cent inflation with small variations captures the mandate for the Bank, the Fed and the European Central Bank (ECB). Generally, they have a done a good job aspiring to this; former governor Mervyn King wrote recently that “inflation has been removed as a major source of concern” since 1997.
From 2008, the debate has moved on dramatically from inflation targeting to failure to actually achieve it via all the monetary tools available.
So has independence been more effective than any other way of managing monetary policy? In 2007-2008, we saw that it wasn’t as up to speed with events as it might have been.
The tripartite system of governance of the Bank, The Financial Conduct Authority and the Treasury proved ineffective in dealing with Northern Rock’s collapse. Sterling’s precipitous collapse in 2008, along with the UK government’s ongoing and ballooning deficit as bank tax receipts dried up, were instrumental in seeing the UK through the crisis.
There was a reluctance from the Bank to embrace quantitative easing (QE), but when King and the MPC finally did, there is no doubt it was done with gusto. The Bank quickly became the largest owner of gilts, at one stage owning the largest per cent of domestic government debt of any G7 central bank.
Fast forward to 2016, and it had learnt its lesson. There was none of the procrastination that dogged it in 2008 – quite the opposite, in fact. Swift action saw rates cut, further QE, including corporate bond QE (again, showing that the Bank had moved on from its previous concerns of 2009 over credit exposure). What did dog Carney during this period, however, was its perceived anti-Brexit bias through Project Fear.
The decision not to join the euro, taken by Gordon Brown in 1997, had clearly given the Bank significant flexibility.
Up until 2008, the Bank imported lower inflation as imports cheapened from globalisation (think China) and the currency steadily appreciated. The reverse has been the case since 2008: currency depreciation has been seen as a flexible tool, alongside rates and QE.
What of the governors who have served so far? Here’s our scorecard.
Eddie George kicked off the first six years of independence. Given just seven hours’ warning of New Labour’s intention to make it independent and split regulatory oversight from policy setting, cigar-smoking George made a good fist of his freedoms. Later claiming he delivered inflation at 2.9 per cent against the then target of 2.5 per cent, he certainly set the Bank on a credible course.
King’s decade ended in 2013 with the decision to stay for a second term salvaging the reputation of a bookish governor embattled by the financial crisis, along with accusations of being asleep at the wheel. The nadir of the 2008 crisis proved the making of King’s term, as he changed tack, embraced rescue mechanisms, cut rates and ultimately embraced QE. While never having the more avuncular touch of George, King’s intellect gave credence to Bank policy.
Carney’s succession in 2013 was a breath of fresh air – not least because he was the first non-British governor, but also because he had the halo effect: he was Canada’s central bank governor, and Canada had had a good crisis.
Outwardly more pro-European than his predecessors, Carney was embroiled in the Remain/Leave debate ahead of last year’s Brexit referendum. And groupthink around when to raise rates also saw Carney miscue Bank rate guidance in 2014. But the ex-Goldman banker delivered authority and openness – even if forward guidance on rates proved less convincing as he, along with other governors, dealt with the protracted effects of the global financial crisis.
We think that the last 20 years demonstrates very strongly that the Bank of England’s independence is far from illusionary: it’s real, the Bank is going from strength to strength because of it, and we anticipate writing the next 20-year update of its success in 2037.