The Bank of England should make it clear when it kicks us
Should you kick someone when they’re down? In life, the correct answer should be “no”, but when it comes to monetary policy, the correct answer should be “yes, when necessary”.
Imagine that you are a policy maker and you have been given the task of controlling inflation. If you think price increases are getting more persistent, the job market is too hot, and companies are too eager to pass cost increases on to customers, you need to tone things down. The tool you have is interest rates, which you raise to increase borrowing costs and encourage more saving than spending. It is a painful medicine that you administer.
This describes exactly the position of the Bank of England. Last week he raised interest rates by a quarter point to 1%, the highest in 13 years, even though he knew households are facing the biggest squeeze in the cost of living since decades. He also predicts that the UK economy will be 0.8% weaker next summer than this summer.
When making its decision, the central bank’s monetary policy committee added that most members believed that “some additional monetary policy tightening may still be appropriate in the coming months”. There is no doubt: the BoE gives us all a good kick when we are down because it thinks it is the right thing to do.
He wants us to feel poorer, spend less, and be more afraid to demand raises. He wants companies to think twice before raising prices. The alternative would result in a further rise in prices and nominal wages, without companies or households getting richer. And that would require an even more unpleasant action later.
Although the BoE’s policy stance is clear from its interest rate outlook and decision, bank executives have been exceptionally coy about articulating its implications. When asked what the bank had to say to the people it hit, Gov. Andrew Bailey and two of his deputies danced around the subject. In four minutes of obfuscation, the answer seemed to be that monetary policy had been carefully calibrated, a phrase governors have used five times.
No one doubts that the MPC was diligent in reviewing the evidence. All nine members clearly voted for the monetary policy path they believed was most likely to achieve the 2% inflation target while minimizing volatility in the economy. But to have the best hope of making high inflation transitory, they needed to give the public and businesses a clear message that they were adding to the pain and that it was necessary for the BoE to restore price stability. .
The only reason these governors sit in the privileged position of unelected officials making important decisions is that society demands that they make expert decisions and tell the public the whole truth. The BoE gained operational independence to set interest rates 25 years ago because history taught us that politicians could not be trusted to take tough and necessary action on interest rates. interest, which led to an inflationary bias and a more volatile business cycle.
Since independence in 1997, the BoE has not really faced a sharp rise in inflation at a time of extremely low unemployment and excess demand. Now that the test has arrived, officials look more like politicians than central bankers, who should tell it like it is, however unpopular that makes them. This can only amplify inflation expectations, ensuring that the BoE will eventually have to raise interest rates more than necessary to stifle persistent price increases.
Let me say it frankly. If BoE officials are unwilling to tell us about the pain needed to bring inflation down, there is no point in asking them to set policy. At least with politicians, we can kick them out.