The Bank of England Loses its Mojo

IN EARLY February, when the Russian invasion of Ukraine was still an unimaginable prospect, Governor Bank England walked into a political storm by proposing that workers should refrain from pressing for substantial wage increases to compensate rising cost living. Martin Sandbu Financial Times nailed one problem with tweeted question: ‘why does governor encourage restraint in demands but not call businesses’ attempts protect their profit margins?’ Some earnest corrections officials followed: tighter monetary policy would suppress demand and put pressure on profits as well wages. But damage had been done, bigger question loomed background. Which century is living in? Its analysis seemed old fashioned point nostalgia. Bailey invoked world which inflation expectations drove actual inflation, credibly independent central bank could influence adhering firmly its inflation-targeting mandate. This before financial crisis, banks turned attention stability, flooding markets liquidity, fuelling epic asset price bubbles protecting wealth relatively few people, while many struggled relentlessly competitive labour market. The war has meant prices key commodities have gone even higher prospective hit standards much greater. So people will struggle pay food energy bills consumer already waning, suppressing any incipient demand-driven inflationary process without help England. Monetary Policy Committee lives comforting Keynesian-neoclassical synthesis where these things don't happen, research departments move on. They think about effects inequality some households live hand-to-mouth, spending all income they receive it. Wealthy households, meantime, save so soar interest rates are depressed, rendering conventional ineffective. According International Fund's 2022 Global Economic Outlook, main structural issues facing economy. other climate change. Central wield powerful instruments can affect both change, leading calls expand mandates address issues. US Federal Reserve dual mandate promote employment it begun report unemployment minority ethnic communities, tacitly acknowledging looking just at macroeconomic aggregates enough.1 European Bank, mandated ‘support general economic policies EU view contributing achievement Union's objectives’ now included change carbon transition among strategic goals, conducting regular surveys household inequality. England's maintain stability—the latter post-financial crisis addition. governors quite reasonably insist up Parliament if wants, pursues goals given. However, this declared deference accompanied vigorous defence principle independence pursuit narrow stability Leading figures influential proponents view. One former Deputy Governor, Paul Tucker, written book effect.2 Called Unelected Power, argues power exercised only be legitimate circumscribed tightly-specified accountability well-defined target. To give wider remit interfere decisions taken elected governments debated parliaments. For consider distributional impact policies, example, mean entering area reserved politicians who accountable voters. argument spurious. It simultaneously exaggerates Bank's capacities regard hiding import actions affecting public goals. Starting exaggeration: credibility value bank's commitment target rests proven success meeting did meet targets 2010s because lacked combat deflationary pressures. created liquidity abundance, ‘pushing string’. Recognising this, pointed harm being done fiscal austerity need coordination between authorities. far cry days stern bankers reined profligate governments. Now, pressures back, believe make difference immediate future. Not there massive supply-side drivers increases, also swilling around economy incremental unlikely effect. At best, current wave provides reason start long restoring more normal conditions. cover story absence outcomes than inflation. doughty inflation-fighters past, less important were. On contrary, players processes financialisation. Since become crucial dense infrastructure markets. gain capacity participation international networks banks, orchestrate mysterious swap arrangements forms mutual support. bodies own right. Herein lies fundamental flaw Tucker's Power: specifically his (capitalised) Principles Delegation. imagine bundle sector powers government felt inclined, proposes may efficient delegate certain bank. That delegation managed controlled government, sets clear delegates monitors them closely. do UK take over network relationships banks—or rather, did, use those achieve lost. links losing access resources provide. Certainly, intervene seek exercise control; additional away. such steps alter fact intermediary organisations capacities. Once we recognise equally know imagined Tucker. A instead allows accountability. challenge find effective ways enlist service interest. Remits green finance, assess risks balance sheets institutions long-term stance least beginning doing this. thinking banking urgently needed, available problems. Furthermore, banks’ future horizon. issue whether allowed create digital currencies compete new private platform crypto assets. (CBDCs) potential range problems, promoting inclusion (a task accepted Bahamas ‘sand dollar’) providing steering macroeconomy. makes nervous that, adopt high-profile instrument, mobilised tasks. why downplay significance CBDCs, insisting heavily constrained. Labour office recast government's relationship Gordon Brown's assign rate widely seen brilliant strategy. disposed problem—Labour's reputation profligacy—and warmly received community. era targeting time pursue relationship. party try limit powers. how might able problems proved intractable governments, or worse. probably means, things, equipped CBDC fend off challenges state money—something realistically do. quid pro quo serve interest, starting objectives. reward guff what hard-pressed target, information used full benefitted them.