Interest rates: is the Bank of England’s remit working?
Luke Johnson, serial entrepreneur and Chair of Channel Four, is obviously a man not afraid to stand out from the crowd. His website boldly describes him as an “unrepentant capitalist” – a position that clearly distinguishes him from all the repentant capitalists around at the moment. He is also one of the first people to publicly call today for a change to the remit of Bank of England so that it finds it easier to cut interest rates asap.
This segues nicely into the criticisms made by Chris Dillow over at Stumbling and Mumbling which were directed at the same suggestion I made on this blog a few days ago. Chris made a series of points but I’ll just deal with his first claim that the Bank already has the necessary leeway to cut interest rates to protect growth because it goes to the heart of Luke Johnson’s call.
Having thought about this and looked at the Bank’s remit again, I think Chris is probably right. There is a paragraph in the Bank’s remit which reads:
The Framework takes into account that any economy at some point can suffer from external events or temporary difficulties, often beyond its control. The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to kep inflation at the inflation target in these circumstances may cause undesirable volatility in output.
I don’t think this is a particularly clear or direct form of words (especially compared to the Fed’s Purposes and Functionsdocument which specifically mentions the need for interest rate setters to choose explicitly between higher growth or lower inflation during stagflationary periods) but I guess it is a sort of get-out clause for times like those we are currently going through.
This does raise the issue however of why the Bank’s Monetary Policy Committee (MPC) has not used this bit of the remit given that we are undoubtedly suffering from external events beyond the Bank’s control and that the holding of rates at 5% will almost certainly lead to volatility in output.
My hunch is that most members of the MPC are simply pre-disposed to holding down inflation as their economic priority (most having developed their economic expertise in an era when neo-classical economics has been all-conquering) and are pretty much ignoring that part of the remit. If you look at last month’s MPC minutes, you will see that bringing inflation back to target is the over-riding and recurrent concern.
So an intervention by the Chancellor would help focus minds on the MPC but I accept it would probably smack of panic at this stage and may create a backlash on the MPC who are, of course, independent of government. Maybe better for all those who want rates cut (and it’s a growing band: British Chambers of Commerce, Engineering Employers Federation, TUC, CBI) to firmly remind the MPC that they do have the above clause in the remit and now is the time to use it.
This, of course, does not address the wider debate about whether the Bank’s remit should be changed at some point in the future to offer a clearer balance between growth and inflation but that’s a debate for another saner time.