The Bank of England's mandate to solely target stable prices has long been a cornerstone of economic policy, but the recent political shakeup and the growing number of economic challenges have sparked a debate about whether this approach needs a rethink. As the new Labour leader, Andy Burnham, assembles his team, the question of whether the Bank's mandate will be reshaped is on everyone's mind. This is particularly intriguing given the recent controversies surrounding Louise Haigh's role in the government and her past as a backbencher. While Haigh's policy prospectus may have been overlooked at the time, it has now become a focal point for economists and policymakers alike.
The Bank of England's monetary policy committee (MPC) has been tasked with setting interest rates to achieve price stability, which is currently defined as an inflation target of 2%. However, the MPC's approach to dealing with inflation shocks has come under scrutiny. The recent Middle East war, for instance, has driven up energy prices, and the MPC has been cautious about raising borrowing costs, fearing it could jeopardize economic growth. This has led to a growing consensus that monetary policy alone cannot be the only line of defense against inflation.
One of the key challenges is the impact of supply-side shocks, such as the Iran conflict, where inflation is driven by shortages rather than demand. As extreme weather events become more common due to the climate emergency, food price shocks are also expected to increase. The MPC's independent member, Swati Dhingra, has argued that the Bank's sole focus on inflation shocks means higher interest rates, which not only slows the economy but also raises the cost of borrowing for businesses and consumers.
This has led to calls for better coordination between monetary and fiscal policy. The Fabian Society, for instance, has proposed a new Treasury-Bank coordinating committee to discuss the trade-offs. Jo Michell, a professor of economics, argues that the lines between monetary and fiscal policy are blurred and that a new institutional framework is needed to allow for some form of coordination.
The Labour Party's new leader, Andy Burnham, has signaled that he intends to take action to cut the cost of essentials. Working more closely with the Bank of England could be part of this strategy. One suggestion is to give the Bank a 'dual mandate' that includes growth as well as inflation, similar to the US Federal Reserve's approach. Another proposal is to urge the Bank to re-examine its approach to quantitative tightening (QT), which critics argue costs the Treasury twice over.
Burnham and his team will need to be cautious about compromising the Bank's independence, which is seen as a positive legacy of the New Labour years. However, taking a fresh look at the Bank's role would send a strong signal that the Labour government is prepared to do things differently. The question remains: will the new administration take the plunge and reshape the Bank of England's mandate?
In my opinion, the Bank of England's mandate needs a rethink. The current approach, while well-intentioned, has failed to address the root causes of economic challenges. By working more closely with the Bank and adopting a dual mandate, the Labour government could send a powerful message that it is committed to a more holistic approach to economic policy. This would not only benefit the economy but also send a signal to the public that the government is willing to take bold steps to address the challenges facing the country.
