The Bank of England after Boris Johnson: should inflation target be raised?
The performance and mandate of the Bank of England have become central issues in the contest to succeed Boris Johnson as leader of the Conservative party, and therefore as the UK’s prime minister. But with recent reviews of other leading central banks offering little guidance amid today’s soaring inflation, it might make sense to revive an old idea for reforming the prevailing anchor for monetary policy.
It is not surprising that the Bank’s performance is in question, given the central bank’s 2% annual inflation target. With UK inflation currently running at 9.4% and expected to exceed 13% later this year, something has clearly gone wrong. But some of the Conservative leadership candidates, and notably the frontrunner, Liz Truss, have gone beyond merely criticising the Bank’s governor, Andrew Bailey, for taking his eye off the ball. They talk about changing the Bank’s objectives, or even its very status. Truss has pledged to alter its mandate to toughen its focus on inflation, and one of her lieutenants has asked whether the Bank is “fit for purpose in terms of its entire exclusionary independence over interest rates”.
No, I don’t know what that means either – but it sounds threatening. Others have talked about being “more directive in setting [the Bank’s] mandate” and suggested that some of today’s inflation has been caused by growth in the money supply. That hints at a possible reintroduction of money-supply targets, which were in vogue under Margaret Thatcher’s government in the early 1980s.
As it happens, I had the grand-sounding job title of “principal, monetary policy” in the Treasury in those far-off days when the government set interest rates to meet money-supply growth targets. It didn’t go so well. We tried
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