Bank of England independence must remain no matter the political weather
When Gordon Brown summoned then-governor of the Bank of England Eddie George to his office at the Treasury in 1997, the man in charge at Threadneedle Street was accompanied by a young civil servant – one Andrew Bailey.
At that meeting, George – and presumably Bailey – were surprised to be told that the newly appointed Chancellor was to give the Bank total independence to set interest rates. It was a political masterstroke, giving the country confidence that Labour’s tendency to fiddle with the economy was a thing of the past. For the Bank, it was a welcome opportunity to set a new financial course that gave the City more confidence that the whims of Westminster would never again affect decisions on rates.
It is ironic that that same Andrew Bailey will be at the centre this week of the first greate stress test of the Bank’s independence. Yesterday’s morning newspapers were packed full of quotes from (notably anonymous) ministers decrying Bailey’s efforts to tame inflation. Now, a cynic might suggest this is to distract attention from the Government, which seems inexplicably to have been caught on the hop by a cost-of-living crisis that even the most half-asleep economist was predicting a year ago.
But nonetheless Bailey will today be grilled by MPs on his record, and perhaps the only thing he can be glad of is that the probably grim job and inflation figures are coming out after his trip along the District Line. It is likely that some will give him both barrels.
We have not always been Bailey’s biggest fan, and for a raft of reasons the call to take markets up the hill last November only to tell them to go back down again was a tactical misstep. But since then his communication has been more effective, and it is also true that he faces a most unenviable task.
One thing is clear, however: the Bank is better off independent. It has a mandate to deliver 2 per cent inflation. Political pressure shouldn’t be allowed to distract them from that task to delivering growth. Goodness knows there is already enough political meddling in the economy.