The Tories seem to be undermining the Bank of England’s independence. First, Theresa May says there “have been some bad side effects” of low interest rates: “people with assets have got richer…people with savings have found themselves poorer. A change has got to come.” Then Lord Hague says that low rates are “penalising the poor and the prudent" and “losing credibility and producing very dangerous side effects.” And then when Mark Carney queries this, David Davies tweets:
Mr Carney you are an unelected bank official. Theresa May has got every right to tell you how to do your job!
I’m unhappy with these developments. For one thing, as they stand they are plain wrong in three ways:
- Since 2014, inflation has been below its target. This means that if the Bank has erred, it has been by having too tight a policy. Interest rates have been too high, not too low. Savers haven’t been penalized enough.
- If Ms May wants the Bank to raise real interest rates, she has the means to do so. She could reduce the inflation target, and remove the Bank’s ability to “look through” short-term price increases.
- Any successful stimulatory monetary policy will cause people with assets to get richer. This is simply because it will raise expected future GDP and hence raise share prices.
One problem I have is that none of these statements address the logic for central bank independence. This is that, because central banks have no incentive to stoke up pre-election booms, people will trust them to deliver low inflation. This reduces inflation expectations, which helps reduce inflation at no cost in terms of output. The empirical record is consistent with this theory: see, for example, this paper (pdf) by Athanasios Anastasiou and the many papers he cites.
This is not to say there’s no case against Bank independence. You might argue that it entrenches anti-austerity ideology by reinforcing the notion that aggregate demand must be suppressed. And it’s sometimes said (pdf) that it might cause a lack of coordination with fiscal policy. Personally, I don’t find these arguments convincing. Shifting control over rates back to the Treasury won’t in itself overturn anti-austerity ideology. And in recent years the obstacle to fiscal-monetary coordination has been the zero bound rather than Bank independence. But this debate doesn’t matter: the Tories aren’t arguing along these lines.
Of course, the Bank has made policy errors. But these are inevitable, simply because the economy is unforecastable. There’s no reason whatsoever to suppose that the Treasury would avoid such errors. In fact, pre-1997 history suggests it has been at least as error-prone as the independent Bank.
These attempts to undermine Bank independence are therefore without merit.
I fear, though, that what’s going on here isn’t a narrow matter of macroeconomic management. There might be more to it. The idea that the government knows better how to set interest rates is part of a pattern. It’s part of the same mindset that thinks the government has the capacity to negotiate good trade deals, or the ability to enforce sensible immigration controls.
This is the same mindset behind the Brexit slogan, “take back control” - the urge that government must be in control. From this perspective, an independent central bank is much the same as European judges – an unwanted constraint upon government power. When Ms May spoke of a desire to have “our judges sitting not in Luxembourg but in courts across the land”, I doubt she was calling for a strong independent judiciary.
The kindest thing one can say about this is that it over-estimates state capacity. But it might be more sinister. If we read these attacks upon independent institutions alongside demands to silence “unpatriotic” Remainers, what we’re seeing is a step away from liberty and towards totalitarianism.