Louise Haigh, a key figure in Andy Burnham's operation, previously called for a rethink of the Bank of England's mandate, suggesting a greater focus on economic growth alongside price stability. This proposal, which appeared in a policy prospectus for the Renewal journal in May, has gained attention as Burnham prepares for potential leadership.
Background on Bank Independence
The Bank of England gained operational independence in 1997 under Gordon Brown, with its Monetary Policy Committee (MPC) setting interest rates to achieve a 2% inflation target. This mandate is reaffirmed annually by the chancellor. The current framework allows for some flexibility, as seen when Andrew Bailey cited the risk of undesirable volatility in output to justify not raising rates during the Middle East war.
Challenges from Supply-Side Shocks
Recent years have seen frequent supply-side shocks, including Covid, Russia's invasion of Ukraine, and the Iran conflict, which have complicated monetary policy. Swati Dhingra, an independent MPC member, argued that relying solely on interest rates to combat inflation from such shocks can slow the economy and raise borrowing costs for net-zero investments. Climate-related extreme weather events are expected to increase food price shocks, further straining the current framework.
Proposals for Reform
Economists have proposed various reforms. The New Economics Foundation's Theo Harris described the current framework as creating a "doom loop of economic self-harm," where rate hikes to counter supply shocks lead to unemployment and reduced investment. A Fabian Society paper suggested a new Treasury-Bank coordinating committee to discuss trade-offs. Jo Michell, a co-author, emphasized the need for an institutional framework that allows coordination without unsettling markets.
Another idea is a dual mandate, similar to the US Federal Reserve, which considers both inflation and employment. The London School of Economics Grantham Institute proposed adaptive inflation targeting, temporarily allowing higher inflation during climate shocks. However, the most likely reform for Team Burnham may be urging the Bank to review its quantitative tightening (QT) program, which critics argue costs the Treasury through losses and higher borrowing costs. The Office for Budget Responsibility estimates QT adds £6bn to the budget deficit this fiscal year.
Political Implications
Burnham and his likely chancellor, Shabana Mahmood, would be cautious about compromising Bank independence or rattling financial markets. However, a fresh look at the Bank's role would signal a willingness to do things differently on economic policy. As Haigh wrote, "the time is right to re-examine the mandate and see whether better coordination and a greater focus on economic growth should also be included."
