The Bank of England has questions to answer
The Bank of England has a simple mandate: to keep inflation at 2 per cent. With inflation now at 10.4 per cent after a surprise increase in the latest figures, it is a mandate that its Governor, Andrew Bailey, has manifestly failed to fulfil. Appearing on BBC Radio 4’s Today programme yesterday, however, Mr Bailey appeared eager to blame everyone and everything but his own organisation. He went so far as to ask businesses to display restraint in raising prices, warning that, if inflation became “embedded, interest rates will have to go up further”.
The BBC, evidently comfortable with a line of argument in which business was depicted as at fault, failed to challenge Mr Bailey, preferring to focus instead on exactly who the “people setting prices” might be. It would have been better advised to ask whether the Bank has lost control.
Here was the Governor of one of the world’s oldest and most esteemed central banks, reduced to mimicking his request last year for workers to refrain from asking for higher wages. Curiously, Mr Bailey made no mention of the generous pay rises awarded to public sector workers in response to a series of strikes.
Perhaps the Governor does not feel sufficiently secure in his independence to criticise the Government. He has, after all, presided over a series of extraordinary failures, from the meltdown in the pension market last year to a 40-year high in inflation, and his organisation must feel itself to be under considerable pressure.
It deserves to be. The quality of the Monetary Policy Committee, responsible for setting interest rates, seems to have fallen considerably in recent years. It was evident in late 2021 that inflationary pressures were building. As the great economist Milton Friedman once wrote, monetary policy affects economic conditions only after a “long and variable” delay. It is little use to wait for inflation to hit before raising rates, but the Bank dithered.
For Mr Bailey to now complain that inflation expectations risk becoming embedded is an admission of failure. Inflation in a modern economy is as much a function of people’s beliefs about future price rises as it is of current economic conditions. Once the public loses confidence in the Bank’s ability to bring inflation down, inflation can become a self-fulfilling prophecy. We may have seen harder and faster rate hikes than might otherwise have been the case.
It is little use asking businesses and workers to trust the Bank’s predictions that inflation really will come down. It is now pinning its hopes on falling energy prices in Europe delivering a reprieve. This may well occur. But it will not excuse the Bank’s pitiful record.