Lords calls for Bank of England reform

The Economic Affairs Committee has published a new report which is calling for the operational independence of the Bank of England to be preserved.

The report 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 framework for operational independence has been tested by the rise in inflation and the resulting loss of public confidence in the Bank. All central banks, including the Bank of England, made errors in the conduct of monetary policy in recent years. In 2021 high rates of inflation were incorrectly forecast to be “transitory”.

Possible reasons for this include a perceived lack of intellectual diversity in the Bank of England and other central banks, which contributed to insufficient challenge as regards modelling and forecasts. Over the years the Bank’s remit has grown: this risks jeopardising the Bank’s ability to prioritise its primary objectives, and risks drawing the Bank into the Government’s wider policy agenda.

The growth in the Bank’s remit has not been met with a commensurate increase in accountability and Parliamentary scrutiny. 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.

The recommendations say that the Treasury should prune the Bank’s much-expanded remit, with a focus on the number of matters it is expected to “have regard to” or “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 Bank must do more to foster a diversity of views and strengthen a culture that encourages challenge. Areas that need attention include governance, hiring practices and appointments, especially to the Monetary Policy Committee. The Committee hopes that the Bank’s current (and welcome) review into forecasting, led by Dr Ben Bernanke, will also consider whether appointments are creating sufficient diversity of thought.

Parliament should conduct an overarching review of the Bank’s remit and operations every five years, enhancing Parliament’s 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.”