The Bank of England’s commitment to achieving net zero carbon emissions is raising concerns about its effectiveness in addressing inflation, according to a report by the Economic Affairs Committee (EAC) in the House of Lords.
The House of Lords EAC released a comprehensive report yesterday that delves into the operational independence of the Bank of England, raising crucial concerns over a perceived “democratic deficit” in its leadership.
The assessment stems from the recent challenges posed by the surge in inflation and the subsequent loss of public confidence in the bank. Notably, the report highlights that all central banks, including the Bank of England, have grappled with errors in the execution of monetary policy in recent years, with high rates of inflation in 2021 inaccurately forecasted as “transitory.”
The committee highlighted the potential for the bank, headquartered on Threadneedle Street, to face challenges in maintaining its apolitical stance due to an extensive range of responsibilities, including the oversight of climate-related risks. This broad mandate, the EAC cautioned, poses a risk of politicisation and could undermine the institution’s ability to effectively combat inflation.
‘Time To Take Stock’
He said: “Twenty five 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.”
One significant factor contributing to these errors, as outlined in the report, is a perceived lack of intellectual diversity within the bank and other central banks. This deficiency in diversity may have hindered robust challenges to prevailing models and forecasts.
Julian Jessop, Economics Fellow at the Institute of Economic Affairs, spoke to The Epoch Times, highlighting key considerations regarding the Bank of England’s operations.
On the committee’s recommendation to prioritise money supply and credit in forecasts, Mr. Jessop stated: “The House of Lords committee is right that the bank should pay more attention to money supply and credit in its forecasts. This may well have helped the Bank to have tackled the threat of inflation much earlier.”
Regarding the call for increased “intellectual diversity” on the Monetary Policy Committee (MPC), Mr. Jessop expressed agreement, noting, “The report is also right to call for more ‘intellectual diversity’ on the MPC, and to warn against shifting focus away from the bank’s remit to control inflation.”
Over the years, the bank’s remit has expanded, leading to concerns about its ability to prioritise primary objectives and avoid entanglement in the broader policy agenda of the government, particularly in areas such as environmental, social and corporate governance (ESG).
BOE Under Attack From ‘ESG Mission Creep’
Emphasising the potential distractions from broader agendas, Mr. Jessop cautioned, “The focus on tackling climate change is the most obvious example of the ESG agenda’s mission creep, but the Bank also needs to be wary of being distracted by other elements such as gender and ethnicity targets.”The report also raised concerns about the continued deployment of quantitative easing, suggesting that it has blurred the lines between monetary and fiscal policy. It included a recommendation for the Bank and the Debt Management Office to establish a memorandum of understanding clarifying the interaction between monetary policy and debt management.
The report sets forth several key recommendations to address these challenges. It calls for a pruning of the Bank’s expanded remit, emphasising a focus on its primary objectives of tackling inflation and ensuring financial stability. Additionally, a review of the bank’s management structure was proposed in the paper, examining the potential for streamlining to enhance efficiency.
One crucial aspect highlighted in the report is the need for the bank to foster a diversity of views and strengthen a culture that encourages challenge. This involves attention to governance, hiring practices, and appointments, particularly within the Monetary Policy Committee.
The ongoing review into forecasting, led by Dr. Ben Bernanke, is expected to play a role in assessing whether appointments sufficiently contribute to a diversity of thought.
CBDC Warning
Cautioning about the potential impact of a Central Bank Digital Currency (CBDC) on the Bank’s operational independence and primary objectives, the report called for the Bank and the Treasury to clarify the effects of a CBDC and establish corresponding accountability mechanisms.Earlier this year, UK politicians and financial experts expressed their concerns over the proposal to introduce a CBDC, with fears that it could challenge both privacy and monetary stability.
