The Bank of England received some stinging criticism from a new report published by an influential House of Lords Committee on Monday.
The report, published by the Economic Affairs Committee, suggested that the Bank had been over-reliant on “inadequate” forecasts, suffered from ‘groupthink’ and argued that its remit needed “pruning”.
While it argued that the Bank of England should remain independent, it said Parliament needed to take a much more proactive role in holding it to account.
But what do economists think?
Jagjit Chadha, director of the National Institute of Economic and Social Research
Operational central bank independence to pursue a remit for price stability has served us, and many countries with a similar model, well. But there are lessons to learn from the past few years. For example, the Bank is perhaps being asked to do too much. Scrutiny could also be bolstered. If we believe that the OBR is a way of marking the Treasury’s homework, we might want to think of different institutions or processes whereby the Bank is prepared to be examined by external bodies more obviously than it currently is. A commitment to a review every five years might be a good start.
Douglas McWilliams, deputy chair of the Centre for Economics and Business Research
The report has two key recommendations. The first is that the Bank should focus on it’s day job of monetary and financial stability. The second is that there should be less groupthink and that appointments to the MPC especially should reflect a wider range of economic views. Both are very much in line with our views about what has gone wrong.
Although – given the behaviour of other central banks – there is a limit to what the BoE could have done to escape the consequences of inflationary policies in the US, they could certainly have reduced the extent to which inflation got out of control and made the problem of bringing inflation down much less damaging to the economy.
Carsten Jung, senior economist at the Institute for Public Policy Research and a former BoE official
The Bank of England was not alone in poorly forecasting recent inflation – other central banks as well as much the private sector were equally wrong-footed about how persistent inflation’s would be. At the heart of this is lack of models and tools to properly analyse the type of events we experienced after the pandemic: the gumming up of global supply chains, the enormous energy price shock and how they affect price setting.
The standard models can’t do this. Therefore, I don’t think the Bank of England’s remit was somehow in the way of making better positions. Rather, it is the lack of imagination and foresight in macroeconomic institutions, and likely group think in the economics profession that has have led us here.
Julian Jessop, economics fellow at the Institute of Economic Affairs
The House of Lords Committee is right that the Bank should pay more attention to money and credit when forecasting both inflation and growth. This may well have helped to avoid the policy mistakes of the last few years. The report is also right to call for more ‘intellectual diversity’ on the MPC, and to warn against dilution of the inflation remit. The focus on tackling climate change is the most obvious example of mission creep, but the Bank also needs to be wary of being distracted by other elements of the ESG agenda, such as gender and ethnicity targets.
Damian Pudner, director of the Institute of International Monetary Research
The Institute strongly endorses today’s damning Lords Economic Affairs Committee report, which calls for substantial reforms at the Bank of England. This key report echoes closely the Institutes many longstanding public criticisms of the Bank’s operational shortcomings.We are particularly pleased to see the report highlight our concerns over the Bank’s dependency on forecasting models that are now considered ‘inadequate’, particularly in their failure to properly consider monetary aggregates, and the concerning perception of ‘groupthink’ among MPC members.