Yet another consecutive meeting of the Monetary Policy Committee has kept the base rate constant at 0.5%, a phenomenon that’s fast become the norm having stuck at this historic low since March 2009. The base rate is the rate that the Bank of England (BoE) decides it’s willing to lend to other banks. Following the fall out of the economic crisis in 2008 the BoE appointed Mark Carney, the ‘Rockstar Bank Governor’ who brought in the notion of ‘Forward Guidance’ and amalgamated the banks announcements into a once a month event dubbed ‘Super Thursday’ (exciting stuff). But forward guidance has waned of late as it quickly became a movable goal post, this has cost the bank the euphoria surrounding ‘super Thursday’ meaning it has now faded into just another day of the week for many a pundit and commentariat it passes almost without notice.
Forward Guidance’ has been neither guidance nor useful for planning the future, with every target that is met another target is set. Endlessly moving the goalposts may be good stewardship, but it diminishes the credibility of the Monetary Policy Committee and the Governor himself. There is room to criticise but it would be unfair to criticise Mark because the bank has rather a limited scope and power. This begs the question what levers does the BoE have power over, and what could it lay claim to in the future?
It could do big things with the base rate but it cannot only have the one lever but in situations such as now the interest rate is detached from economic realities and so movements are subtle and backroom. Backroom moves over for example capital and reserve ratios have ramifications but tweaking is its limit. Then the BoE has Quantitative Easing (QE) aka ‘super loans’ by buying financial bonds though this has ground to a halt recently in the UK (though refinancing of these loans remains under reported). It begs the question what is the use of the BoE in these times and can we give them more levers?
There is serious scope for following the path of the FED and to ask the central bank to focus on growth, jobs and wages as well as the current ask of targeting inflation. This could be achievable, however, it is worth looking to give more tools to allow the bank to pursue policy objectives that take into account more than merely inflation changing their model to encapsulate other variables as inflation has detachment from growth and the level of unemployment of Foreign Direct Investment.
Following Jeremy Corbyn’s acceptance of Tax Justice Campaigner Richard Murphy’s idea from for People’s Quantitative Easing as part of the Corbynomics. This has since fallen flat as there is perceived to be no need for more Quantitative Easing but it did get considerable coverage and backing from some serious names in the macroeconomic sphere. This would involve buying bonds from a ‘State owned or backed Investment Bank’ that could invest into long term economic infrastructure at rock bottom interest rates within a political or apolitical way depending on preference. Governments cannot reach its targets using only fiscal policy and not monetary and by applying these targets and powers I would argue do not encroach on democratic mandates of governing parties and targets. As the targets would be set by the party in power and a Committee can decide who gets what say, taking it out of the hands of the ruling party.
Passing a target for growth and the powers to reach this may actually help close the democratic deficit that has the potential to foster when giving more power to an unelected bodies. This is because if there is a shift from inflation to real GDP targeting the central bank could respond in a more reasonable way to supply or demand shocks, such that, it might consider loosening rather than tightening monetary policy in response to a shock such as the Oil price. The ability to pursue a policy that does not run opposite to the ruling party but alongside it would mean better results for both employment and growth and the economy’s health as a whole.
The BoE would be better equipped going forward, and have more options if it had to respond to a crisis like 2008. There would also be no threat of encroaching on the democratic mandate of governing parties If it had to answer to the Chancellor and or the Prime Minister on growth as well as or instead of merely inflation for example. It would also create an environment whereby it could have a more adequate response, both sharper and better targeted. Not one of these proposals would require changing greatly the original mandate for an independent and nonpolitical Bank of England enshrined a little over 18 years ago. It is also time to get a better deal from and for the BoE recognising its need for renewal is vital for the economy and democracy.