Friday, February 11, 2011
It is time to end the farce of threadneedle street
One should always be suspicious of simple solutions to complex problems. For a least four decades inflation bedevilled the UK economy. In the early 1990s it was fashionable to believe that an independent central bank would resolve the problem. If we simply handed over monetary control to a hard-nosed banker, inflation would more or less disappear. Monetary policy would be determined by a rational consideration of economic data. Political factors would have no influence on interest rates.
Gordon Brown was a believer. As soon as Labour were elected in 1997 he made the Bank of England independent. He created a monetary policy committee and told them to keep inflation under 2 percent. He also promised that the government would not interfere in monetary policy decisions.
Roll forward 14 years, and the independent Bank of England has given up the fight against inflation. Apart from a few lucky months, it has missed the inflation target consistently since about 2006. It irresponsibly kept interest rates low for over a decade and provided the necessary conditions for an unprecedented asset price bubble. When the bubble burst, the financial system teetered on the brink of total collapse.
Since the bubble evaporated, the Bank has ignored its remit to keep inflation under control. Instead, monetary policy has been directed towards recapitalising the banks at the expense of savers. The consequences are now apparent in prices. Inflation is rising and there is no prospect in sight of any remedial action by the monetary policy committee.
Despite some appalling inflation numbers in December, this week the MPC decided to keep interest rates fixed at near zero. Like clockwork, the appalling inflation numbers keep coming. Today, the ONS published producer and output price data. Output price inflation rose 4.8 per cent in January 2011, while input price inflation rose 13.4 per cent.
It is time that the denial stopped. The Bank of England is incapable of maintaining price stability. It is time to close the show down. It is time to disband the monetary policy committee and re-establish political accountability. If the government again managed interest rates, they would be answerable for their decisions at the ballot box. In any event, they could do no worse than the Bank of England.