Technocrats are a tempting target for politicians with a populist streak. And few unelected specialists have the high public profile afforded central bankers.
Little surprise then that monetary guardians have been getting it in the neck even more of late, as lawmakers look to deflect the blame for the hit to voters’ finances delivered by decades-high inflation.
Liz Truss, the front-runner to be the next U.K. prime minister, is raising the prospect of changing the Bank of England’s mandate to ensure it controls inflation –- implying the Old Lady of Threadneedle Street has failed to salve Britain’s cost of living crisis.
“The best way of dealing with inflation is monetary policy and what I have said is I want to change the Bank of England’s mandate to make sure in the future it matches some of the most effective central banks in the world at controlling inflation,” she said.
Analysts question the BoE’s guilt. “On our forecasts, higher food and energy bills will directly account for 60% of the anticipated peak [U.K.] inflation figure in October print. Non-core inflation is not something monetary policy can impact,” Bruna Skarica, U.K. economist at Morgan Stanley, wrote in the FT this week.
This matters beyond the principle of fairly apportioning blame. Since being granted operational independence 25 years ago, the Bank of England of course has had critics but few in the market question the value of a monetary and regulatory mandate mostly free from political interference.
“The independence of the regulators is important because much of our international standing depends on this,” Bank of England Gov. Andrew Bailey told British lawmakers in July.
Investors are acutely sensitive to the cost of central bank credibility crumble. Turkey provides a warning for policy capture by populist. Autocratic president Recep Tayip Erdogan eschews monetary orthodoxy and has regularly sacked central bank governors in order to stymie higher interest rates. Turkish inflation is 79.6% and the lira
has tumbled to a record low near 18 lira per dollar from less than 4 lira five years ago.
Turkey may offer an extreme example. Yet the rumblings from the U.K.’s Truss shows investors and businesses might be naïve to assume it would deter leaders in developed nations from using a crisis to take back more control of monetary and regulatory policy.
Truss maintains that she is not questioning BoE independence, but noted: “The last time the mandate was looked at was in 1997….Things are very different now.”
A U.K. government already can chose to use more forcefully the available conduits for political influence. These include inflation target setting, the appointment of policymakers and the potential overruling of decisions, suggested Columbia University professor and former BoE policymaker Willem Buiter recently.
Yet, analysts are wary about how the market might express its concern about such moves.
“Should the Bank’s independence come under question, this could risk undermining inflation expectations and price stability altogether,” said Sanjay Raja, senior economist at Deutsche Bank. The pound
would weaken if political interference was perceived as the cause of any BoE inflexibility, Raja added.
Daniela Russel, head of U.K. rates strategy at HSBC, said: “Anything that could potentially undermine the BoE’s independence and its commitment to achieving its inflation target over the long-run would be a concern for gilt investors. Any sign of increased political interference would also be concerning and would probably be met with an increase in the risk premium on long-dated UK debt.”
Former U.S president Donald Trump delighted, when in office, in the regular trolling on Twitter of Fed chairman Jay Powell. But he stopped shy of statutory interference.
Should the BoE’s relationship with government be tweaked it may encourage lawmakers in the U.S. and perhaps even the E.U. to revisit their central banks’ autonomy and mandates. That would deliver another layer of uncertainty investors can do without.
“Just as giving the Bank independence in 1997 was reassuring for markets, undoing that now is likely to do the opposite,” said Russel.