Bank of England groupthink has made inflation worse

The mandate of the Bank of England’s Monetary Policy Committee is to maintain price stability in the UK, defined as keeping inflation at 2 per cent. Unlike the US Federal Reserve – which is also required to support maximum sustainable employment – this is the Bank’s only mandate.

Inflation in the UK is currently five times this figure at 10.4 per cent. As my Stanford colleague John Cochrane has put it, in the aftermath of a military failure of similar magnitude there would be an internal inquest, an after-action report and the senior officers responsible would likely be denied future command. Such consequences do not exist in central banking, where one of the Bank’s deputy governors was recently reappointed to a second five-year term.

This lack of introspection is perhaps not surprising for an institution that now suffers from an acute scarcity of intellectual and professional diversity within its senior ranks. The Governor was appointed after more than three decades at the Bank. His deputy governors are alumni of the Bank or the Treasury. The chief economist began his career at the Bank.

The check on internal groupthink is supposed to come from external members on the Bank’s monetary and financial policy committees. But while efforts have been made to increase gender diversity, intellectual and professional diversity remains lacking. Too many CVs are marked by work in central banks or the Civil Service.

To be unequivocally clear, each of the current committee members, internal and external, is eminently qualified. It is absolutely essential that senior Bank leadership includes a deep bench of experienced hands intimately familiar with the institution or central banking more generally.

But there is a risk that people who think alike will tend to make the same mistakes, especially since participants are already briefed on internal modelling and forecast materials by career staff at the Bank. Inflation running at five times the Bank’s mandate is a colossal blunder. It is also a mistake committed with alarming uniformity by MPC members, and one they continue to make.

At their latest meeting, seven members voted to raise the Bank’s target interest rate by 25 basis points, while two voted for no change. But with inflation rising by 0.3 percentage points, and inflation expectations increasing, this actually means that in real terms the MPC barely hiked at all. This failure to distinguish between nominal and real interest rates was a persistent error of monetary policymakers during the Great Inflation of the 1960s and 1970s.

The Bank still appears united in its belief in “immaculate disinflation”, the notion that inflation will fall without any need for higher interest rates. It is not a problem if some members of the MPC believe, as many policymakers did in the 1960s and 1970s, that the recent surge in inflation is mostly the result of temporary “cost-push” factors that will fade before inflation expectations come unanchored. But it is a problem if they all think that.

Once businesses and consumers really start to notice inflation, they quickly incorporate it into their daily decision-making. In this way, expectations of higher inflation can become self-fulfilling. We are seeing evidence of this in the UK already.

Tyler Goodspeed chaired the White House Council of Economic Advisers 2020-21