The Bank of England has been attacked by Leave campaigners for articulating what they deem to be pro-government, pro-Remain views about Brexit, when it should supposedly be independent. Governor Mark Carney’s comment that leaving the EU is the “biggest domestic risk to financial stability” provoked the criticism that he is breaching the bank’s independence. But it seems more likely that this is a case of shooting the messenger in order to distract attention from the message.
The idea of central bank independence came to prominence in the late 1980s and 1990s. The underlying idea was that monetary policy decisions should be taken not by government ministers, who might have political axes to grind (such as cutting interest rates to stimulate the economy prior to an election), but by technical experts pursuing agreed long-term objectives.
Since 1997 the Bank of England has had an inflation target set by the government, and the role of the bank’s Monetary Policy Committee has been to try to hit that target. The government sets the target but the bank is free to use interest rates (or other measures) to achieve it. In the jargon: the bank has instrument, but not goal, independence.
Shades of independence
However, it is widely thought that the independence of the bank has been compromised since the financial crisis. The policy of quantitative easing required Treasury approval, and a Treasury guarantee against losses that might be sustained by the bank as a result. Other schemes, such as Funding for Lending, which finances bank loans for small businesses with government backing, have been joint with the Treasury too.
Above all, Carney’s appointment as governor from July 2013 can be seen as highly political. He was known as the architect of “forward guidance” at the Bank of Canada – publishing guidance on when and how interest rates might be raised. This was clearly wanted in the UK by Chancellor George Osborne, who had painted himself into a corner with his insistence on fiscal consolidation. He needed extra monetary stimulus to counter the stagnation of the economy under the effect of his austerity measures. Carney duly provided a UK version of forward guidance in August 2013, a month after he started at the bank. Criticised from the start, the policy’s effects are unclear, and it is now largely forgotten.
Financial stability, the other main objective for the Bank of England, has become a much more prominent issue since the financial crisis. Whereas before it, responsibility was widely distributed, it is now heavily concentrated in the Bank.
The new Financial Policy Committee has something of the form and the independence of the Monetary Policy Committee: objectives set by the government, to be pursued by a committee which includes outsiders as well as insiders. Here, however, the issue of independence is a matter of independence from commercial banks and the City of London, at least as much as from the government, which is regularly lobbied by the banks on financial regulation matters.
Shooting the messenger
On Brexit, the Bank of England produced a 100-page report last October, which reviews the relevant literature in a critical and focused manner. It argues that EU membership may have increased the openness of the UK economy – making it more dynamic and resilient, but also increasing its vulnerability to shocks from Europe, which could make the bank’s pursuit of financial stability more difficult. It also notes that the bank’s ability to deal with shocks to financial stability is affected by a range of EU regulations, given the UK’s participation in the single market.
Carney, in his letter to the Treasury Committee chairman, Andrew Tyrie, and appearance before the committee, summarised the bank’s report and considered the impact of the new EU settlement for the UK, recently obtained by the government. He concluded that it provides some guarantees that UK financial stability policy will not be adversely affected by policies devised for the eurozone.
While the bank’s arguments on openness and dynamism are firmly in line with the research which its report reviews, what it says on financial stability is relatively narrow, technical and carefully focused on the issues for which the bank has responsibility. It is therefore difficult to see how it can be construed as a political or pro-government intervention in the Brexit debate. Or in what sense it is (avoidably) “speculative”. The problem for the Brexiteers is not the lack of independence of the Bank of England, but the failure of the intellectual arguments to conform to their prejudices.