John Redwood

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Happy Birthday to the Monetary Policy Committee

I write to say Happy Birthday to the Monetary Policy Committee now it is ten. I do so thanks to the most extraordinary propaganda coup of the Blair/Brown years.

Gordon Brown has persuaded most in the nation that he made the Bank of England independent, and that this has created  unprecedented economic stability. “No more boom and bust” has been delivered thanks to this masterstroke at the start of the Labour government.

Like many soundbites it bares little examination and little relationship to the truth. Far from making the Bank more independent, Mr Brown presided  over a major reduction in the Bank’s powers and activities, shifting much of its important work supervising and monitoring banks to the FSA. He himself decided to sell large quantities of our gold reserves at a very low price against Bank advice, showing that he not they are in charge of our foreign exchange reserves.

He set up a dual structure, where the FSA has  responsibility to control and monitor each bank and building society, ensuring they are run by suitable people and have sufficient balance sheet strength, whilst leaving the Bank with a residual overarching responsibility for “financial stability”, and detailed responsibility for payment systems. I am glad we have been living through years of generally easy money world wide so this division of labour has not had to be severely tested.

His strict claim is to have made the Monetary Policy Committee of the Bank independent, giving them the right and the duty to influence the level of UK short term interest rates once a month by setting a lead rate. Mr Brown tells us this has given us an era of low interest rates and low inflation.

He always supports this contention by comparing the last ten years record with the UK at selected times in the past when we did badly -  a simple spin device to portray something in a good light, but not a mature way of analysing the impact of the decision. What really matters is how the UK has done compared to the rest of the world, for any sensible analyst would agree that any given time the state of US, Japanese and Euro interest rates is a major influence on the UK, and the state of world inflation has a big impact on our price levels.

Judged in  this more sober way the record is less impressive. The UK has over the Brown years paid more to borrow money on average than the US, Japan or Euroland: 1% more per year than the US, 2% more than Euroland  and 4.5% more than Japan. Despite paying extra, the UK has grown more slowly than the USA, and has ended up with the highest inflation of these four key currency areas.

We need to ask why house buyers and businesses in the UK have had to pay more for their credit and why inflation has recently been higher. The answer is that the MPC is not truly independent, and that Mr Brown’s interventions have been unhelpful.

The worst case of interference which probably accounts for our current relatively high rate of inflation was   the Chancellor’s decision before the last election  to change the target for inflation. In the early years the Bank was told to keep price rises down to a 2.5% increase as measured by the standard UK measure, the RPI. This made sense, as the RPI is used in most wage negotiations and contracts, and is used for payments on index linked government securities. Instead, the Bank was asked to keep prices down to 2% on the CPI. It could be presented as a tough measure, bringing us into line with EU partners. In practise it persuaded the Bank to loosen monetary policy, because the CPI had been going up by around 1% per annum less than the RPI. The crucial loosening before the 2005 election was a happy coincidence for Mr Brown from this change of target, and occurred at a bad time, leading to our present difficulties.

The Bank has also had to contend with a loose fiscal policy in recent years, when the Chancellor has borrowed and borrowed more, often underestimating his spending and taxing demands in his budget figures.

The Monetary Policy Committee members are all chosen either by the Chancellor or by the Governor of the Bank of England, who in turn is chosen by the Prime Minister on the advice of the Chancellor. Many of the external members have deserved their place and have been independent, but there have been questions over some of the appointments the Chancellor has made. If he really wanted an independent committee he would have asked another body to make the appointments, or asked Parliament’s  Treasury Committee to vet them.

Gordon Brown’s spin has chosen to ignore the record balance of payments deficits we have been racking up in recent years, turned a blind eye to the million lost manufacturing jobs, and barely mentioned the 5.3 million people of working age still living on benefit. He has not answered why Ireland is now a richer country per head than we are and why Ireland has outgrown us over the last ten years, both with its own currency and now even within the Euro.

If the Brown era is to see the end of spin and the beginning of a new honest style of government seriously wrestling with policy, he could well begin it by rewriting his interpretation of the economic successes and failures of the last ten years. On the Monetary Policy Committee’s tenth birthday I have no wish to rain on their parade, but it is a good time to ask for some better understanding of what is actually happening. Ten years on we have a gravely weakened bank when it comes to bank supervision and management of the exchange reserves. Ten years on we have an MPC that struggles for independence because a clever Chancellor can change the rules and the people at crucial times.    

Gordon Brown promises us a new earnest era. Cast aside spin, forget about lies, banish the exotic foreign holidays, say goodbye to the police at Downing Street – usher in studious types who will apply the principles of Bank of England independence to the Health Service and who will wake early to research some more figures on “child poverty”. Before he moves to make anything else “independent” of government, he should buttress the independence of the Bank’s MPC, and restore some independence to its work in fostering “financial stability” and good management of the reserves.