One of the first tasks awaiting Britain’s prime minister next year is the appointment of a new Governor of the Bank of England, since the current incumbent, Mark Carney, is actually postponing his departure.
While the identity of the next Governor matters, what matters more is the mission and mandate of the Bank. It is now more than 20 years since the Blair-Brown government gave the Bank operational independence and a mission to target inflation at 2%.
That decision and mandate set the global agenda for central banking. Today, Britain is lagging far behind. Around the world, economists, central bankers and politicians are rethinking the role and powers of central banks, yet Britain’s politicians are almost entirely absent from the debate.
Some of the debate is technical, arising from new views of the nature of inflation and how it relates to economic growth and unemployment. The US Federal Reserve is considering a shift to targeting average inflation over an economic cycle. There are calls for the European Central Bank to change its price stability target too; under its new head, Christine Lagarde, the ECB is about to review its strategy.[1]
Some of the debate is about bigger, long-term issues. Patrick Honohan, former governor of the Central Bank of Ireland, suggests central banks should have mandates that allow them to focus on “ethical” issues such as climate change and economic inequality.[2] (The 2019 Labour manifesto talks about the BOE having a role directing the financing of decarbonisation, but is light on detail and does not explain how that role might be reconciled with the current mandate.)
The more immediate questions about central bank missions comes from the next financial and economic crisis. Of course, no one knows when it will come or what form it will take, but there is a widespread concern that neither governments, still heavily indebted following the last crisis, nor central banks in their current form, have the scope to stimulate economic activity in the event of an emergency: governments can’t easily spend much more, and central bank interest rates are near-zero and sometimes below it.
Hence talk about giving central banks some sort of fiscal policy role where, in extremis, they would create and spend new money to support economic growth. These ideas are now being taken seriously by serious people: Blackrock, one of the world’s biggest fund managers, has said “helicopter money” should now be an option.[3] But there’s a reason fiscal policy has always remained with politicians: voters generally feel that decisions about allocating public money should be taken by people who are directly accountable to the public. When central bankers do things that affect the distribution of wealth and income, the consequences go beyond economics. The Bank of England’s emergency response to the last crisis had some very political consequences, boosting both incomes (good for young people) and the price of assets, especially housing (good for older people).[4] Central banking sounds dust-dry and irrelevant to most voters, but its consequences can go the very heart of our politics.
And right now, there is a big and important debate taking place about the role and powers of central banks. Getting to the right answers in that debate could matter a lot when the next crisis hits. Yet, in a general election supposedly all about Britain’s future prospects, no-one has talked about the Bank of England. Once the election is over, that should change – quickly.
[1] https://www.project-syndicate.org/commentary/ecb-new-mandate-broader-inflation-target-by-marcel-fratzscher-2019-11
[2]https://www.piie.com/publications/working-papers/should-monetary-policy-take-inequality-and-climate-change-account
[3] https://www.blackrockblog.com/2019/08/20/how-central-banks-might-deal-with-the-next-downturn/
[4] https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/the-distributional-impact-of-monetary-policy-easing-in-the-uk-between-2008-and-2014.pdf