"While we are of the strong view that independence should be preserved, reforms are needed to improve the Bank’s performance and to strengthen its accountability to Parliament."
- Lord Bridges of Headley, Chair of the House of Lords Economic Affairs Committee
The Economic Affairs Committee has published a new report, 'Making an independent Bank of England work better', which concludes that reforms are vital to improve its performance, strengthen its accountability to Parliament, and ensure it focuses on its key objectives of tackling inflation and maintaining financial stability.
The report says the framework for operational independence "has been tested by the rise in inflation and the resulting loss of public confidence in the Bank". It added that "all central banks, including the Bank of England, made errors in the conduct of monetary policy in recent years", noting that in 2021 high rates of inflation were incorrectly forecast to be “transitory”.
The Committee believes there is a "perceived lack of intellectual diversity" in the Bank of England and other central banks, which has contributed to insufficient challenge regarding modelling and forecasts.
In addition, the Bank’s remit has grown over recent years, which the report says risks jeopardising the Bank’s ability to prioritise its primary objectives, and risks drawing the Bank into the Government’s wider policy agenda.
The report concludes that recent growth in the Bank’s remit has "not been met with a commensurate increase in accountability and Parliamentary scrutiny".
It concluded: "While an independent central bank reassures markets, critically important economic decisions are delegated to unelected officials. The Committee is concerned that a democratic deficit has emerged, which risks undermining confidence in the Bank and its operational independence. Furthermore, the continued use of quantitative easing has blurred the lines between monetary policy and fiscal policy."
Key recommendations
The Committee says the Treasury should "prune the Bank’s much-expanded remit", with a focus on the number of matters it is expected to consider, to ensure that the Bank is focused on its primary objectives of tackling inflation and ensuring financial stability. The Bank’s management structure, which has grown along with the Bank’s remit, should be reviewed with a focus on whether it could be streamlined.
The report added that the Bank must do more to foster a diversity of views and strengthen a culture that encourages challenge, and wants Parliament to conduct a review of the Bank's remit and operations every five years, enhancing its ability to hold the Bank to account and express its view on the Bank’s performance and leadership.
Lord Bridges of Headley, Chair of the House of Lords Economic Affairs Committee, said: “25 years after the Bank of England was made operationally independent, it is time to take stock. While we are of the strong view that independence should be preserved, reforms are needed to improve the Bank’s performance and to strengthen its accountability to Parliament.
“The Bank should learn from the errors it made – along with other central banks – in the conduct of monetary policy during the recent period of higher inflation. But that alone is not enough. The Treasury must prune the Bank’s expanded remit so the Bank can focus on controlling inflation and maintaining financial stability.
“Given the powers that unelected Bank officials wield, Parliament should conduct a review of the Bank’s remit, performance and operations every five years. Independence and accountability should go hand in hand. At the moment, we are suffering from a democratic deficit.”
Newspage asked mortgage brokers to share their views on the new report.
Amit Patel, adviser at Trinity Finance, commented: "Andrew Bailey has been running around like a headless chicken from day 1 at the helm of the Bank of England. He should have gone months ago. We now need an overhaul of how the members of the MPC are elected. What we can see with the current set-up is that each member has similar life experience, education and background. What we need are people from diverse backgrounds who can bring their life experiences to the table. We need real solutions to the challenges we face, not some hypothetical forecasting model. There is a lot of theory on Threadneedle Street but not enough real-world practice."
Samuel Mather-Holgate, IFA at Mather and Murray Financial, said: "Not only has Andrew Bailey done a woeful job, but he was the wrong appointment to the position. The Bank acted too late on inflation and, as a result, had to go too far too quickly. It’s also too early to really understand the consequences of such steep rate hikes, but we will see significant repossessions and homelessness. Bailey has caused a winter of discontent for so many."
Chris Barry, director at Thomas Legal, commented: "The Bank of England, by their own admission, say they got it wrong and should have started increasing the base rate much earlier. Due to their lack of decisiveness, borrowers across the country have seen steeper rises at fast increments, which has been catastrophic for anyone trying to plan. The more recent concern is the Monetary Policy Committee are making decisions based on backwards-looking data rather than forward-looking data and their ruthless approach to quantitative tightening will go way above their remit of controlling money supply."
Ken James, director at Contractor Mortgage Services, added: "More oversight seems inevitable, as the current members of the Monetary Policy Commitee do not have the capacity to rise to the challenges the markets and economy set. We need to have a more diverse group who are not afraid to be outspoken and to stand when others sit. They were slow out of the gates when it came to tackling inflation and the woes of the economy. The decision to increase rates should have started sooner, allowing the markets to adjust. I feel they panicked and went into overdrive. More oversight and control would help give them more accountability and, fingers crossed, a more proactive approach to managing their remit."
