The biggest overhaul of the Bank of England in 25 years may be needed to ensure “it is fit for purpose,” Tory leadership front-runner Liz Truss’s campaign told City A.M. today.
The comments represent an escalation in Truss’s drive to shake up the regime overseeing the Bank’s performance.
She has promised to review Threadneedle Street’s mandate of keeping inflation at two per cent, arguing that after being in place for a quarter of a century, the review is necessary to ensure the target “works for the current economic context,” a Truss campaign source said.
The remarks come as Andrew Bailey snapped back Truss’s threats to shake up the monetary authority.
In a letter to the treasury select committee written by Bailey on 27 July but published today, he warned “anything that would weaken the independence of regulators would undermine” a root and branch post-Brexit remodelling of the City.
The government last month tabled its highly anticipated financial services and markets bill, its manifesto to scrape off legacy EU regulation governing the Square Mile.
The bill left out the controversial “call-in” power, which would have allowed lawmakers to have final say on the regulatory regime, effectively wiping out the Financial Conduct Authority and Prudential Regulatory Authority’s sovereignty.
“Regulatory independence is important, not least because our international standing, and therefore the competitiveness of the UK financial sector which the reforms are aimed at enhancing, depends on it,” Bailey said.
Truss has backed giving the government “call-in” powers if she wins the race to Number 10. The measure was initially tabled by her rival Rishi Sunak while he was chancellor.
Bailey’s retort comes as economists fret over the possible damage scaling back Threadneedle Street’s independence would do to the economy.
“Should the Bank’s independence come under question, this could risk undermining inflation expectations and price stability altogether,” analysts at Deustche Bank said.
The Bank’s performance has come under tough scrutiny over the last year due to inflation surging to levels not seen in generations. Prices are up 9.4 per cent annually, the quickest acceleration since the early 1980s.
But, the Bank expects inflation to top 13 per cent in October, more than six times its target.
Former Labour chancellor Gordan Brown granted the Bank full control of interest rates and monetary policy in 1997.
Under existing law, the chancellor can tweak the Bank’s inflation target “with a stroke of a pen,” Deustsche Bank said, but inserting new targets would require new legislation.
Former chancellor George Osborne led the last review of the Bank’s mandate in 2013. He left the target unchanged.
Brown changed the target to two per cent CPI inflation from 2.5 per cent RPI inflation in 2003. The latter typically overstates the rate of price rises.
Rishi Sunak’s campaign has been approached for comment.