The Bank of England governor Andrew Bailey recently received an email from a member of the public begging him to “please, please, please be more cheerful”. The best he could come up with, said The Economist, was: “We are not doomed, far from it. But we are in difficult times.” He’s not kidding. For the first time since polling began in 1999, more people are “dissatisfied” with the Bank’s performance than satisfied. And “the political environment” has become ever more “hostile” – with the frontrunner to be the next PM, Liz Truss, attacking the Bank for excessive money-printing and “suggesting that its mandate needs toughening up”.
Even by his own standards, Bailey delivered “an unusually apocalyptic economic outlook” as he announced the biggest interest-rate hike for 25 years, said Marcus Ashworth on Bloomberg. After the Truss camp accused the Bank of “talking Britain into a recession”, tensions were further fuelled by Business Secretary Kwasi Kwarteng, who warned that “something has gone wrong” on Threadneedle Street, said Tony Diver in The Daily Telegraph. Under plans being floated, the Bank could be told to abandon its 2% inflation target and ordered to target nominal GDP (the size of the economy in cash terms) instead. It sounds a minor tweak, but it actually spells a “radical” overhaul.
There’s no doubt the BoE needs it, said Ambrose Evans-Pritchard in The Daily Telegraph. Whatever new model Truss suggests “could not be worse” than the “dog’s dinner of corrupted New Keynesian fallacies” currently dictating BoE policy. By worshipping at the altar of “inflation expectations”, and ignoring money supply signals, the Bank wildly underestimated the inflation danger. Now it is compounding the error with “a double-decker” interest-rate rise just as the inflation cycle has “already rolled over” and the threat is receding.
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Yet there are actually plenty of reasons for maintaining the status quo, said Valentina Romei in the FT: not least the fact that the Bank has a pretty good long-term track record of hitting its mandated inflation target. Moreover, any call for a review by the Government is likely to raise “questions about the BoE’s independence” – and that would certainly worry investors. Truss’s “frankly bizarre suggestion that the Bank should target money supply makes little sense to anyone who remembers the lesson of the 1980s”, said The Economist: namely, that “the relationship between money supply and inflation is too unstable for it to work”. In circumstances like these, “a sensible politician ought to be grateful” for the Bank’s monetary policy independence – “and leave it well alone to take unpopular decisions”.
