STEPHEN GLOVER: What's the point of our Bank of England Governor?

STEPHEN GLOVER: What’s the point of our Bank of England Governor and his £575,000 salary?

Unlike the Governor of the Bank of England, Andrew Bailey, I don’t have any whirring computers churning out supposedly authoritative inflation and growth forecasts.

I’m not able to instruct battalions of alleged experts to produce economic models. 

Nor do I have a highly paid chief economist with dozens of highly trained staff at my beck and call.

Even so, I can tell Mr Bailey something for free. 

The Bank’s recent forecast that inflation will reach 10 per cent by the end of the year is almost certainly undercooked. 

For goodness’ sake, yesterday’s figure was 9 per cent, and it’s only May. 

The trajectory is sharply upward.

I would have more confidence in the Bank and Mr Bailey if they hadn’t consistently underestimated the growth in inflation over the past year. 

Twelve months ago, Threadneedle Street opined that inflation might edge above its target of 2 per cent by the end of 2021, but that would only be temporary.

By November, a few doubts were creeping in. 

The normally unruffled Andrew Bailey conceded that inflation might rise to 5 per cent by early 2022 before levelling out, and starting to decline.

Andrew Bailey Governor of the Bank of England addresses the media on the Monetary Policy Report at the Bank of England earlier this month

Granted, that was before Russia invaded Ukraine in late February, and the consequent soaring price of energy and food. 

That has made things much worse. But inflation was already building up throughout last year, and the Bank seemed unconcerned.

There were, in fact, lots of people pointing out the dangers. 

One of them was the Bank’s outgoing chief economist, Andy Haldane. 

Last June, when the most recent inflation figure was 2.1 per cent, he suggested it could nearly double before the end of the year. 

He was right.

Under Mr Bailey’s direction, the Bank has been shamefully relaxed about rocketing inflation. 

Its monetary policy committee has raised interest rates — its key weapon in curbing the scourge of inflation — too little and too late. 

They stand at 1 per cent, extremely low by historic standards.

Mr Bailey’s laid-back attitude to life is confirmed by the revelation that the Bank’s officials are obliged to come in for only one day a week, with their long-term target set at just half of the working week. 

Such casualness is unforgivable when the nation is in the grip of an economic calamity.

To his discredit, in 2019 when he was boss of the Financial Conduct Authority, Mr Bailey allegedly nodded off in discussions with advocates for the victims of the British Steel Pension Scheme scandal, although he denies this.

It’s hard to be confident that this man and the Bank will get on top of inflation. 

On Monday, during a session in front of a Commons committee, Mr Bailey was about as impressive as a man trying to sweep leaves during a tornado.

Faced by a full-blown crisis, the habitually complacent Governor seemed suddenly overtaken by panic. 

He told MPs that families face ‘apocalyptic’ food price increases, and admitted that he felt ‘helpless’ over soaring inflation. This wasn’t the reassurance hard-pressed families are looking for.

If the Governor feels ‘helpless’ in the face of inflation, which the Bank is enjoined by the Government to keep at 2 per cent, one wonders what the point of this central banker — and his £575,000 annual salary — really is.

The all-important question is whether the Bank of England’s failings are the result of having the wrong man in the top job — or whether there are deeper systemic problems in an independent central bank unaccountable to voters.

Almost exactly 25 years have passed since the incoming Labour Chancellor, Gordon Brown, stunned the then Governor by making the Bank independent of the Government. 

The idea was that monetary policy would no longer be subordinated to calculations of political advantage.

Until now, the experiment has worked well. For a quarter of a century, we have had strikingly low inflation in comparison with the previous 25 years. 

The Bank dealt successfully with the financial meltdown of 2008/09. 

Huge quantitative easing — essentially printing money — did not then lead to rising prices.

Our present predicament is the first time things have gone badly wrong with the Bank since 1997. 

It is tempting to say — and some Tory MPs are saying it — that in these grim circumstances the country shouldn’t be at the mercy of a Governor who doesn’t have to answer to voters.

It is an alluring argument. 

The spectacle of the unelected and overpaid Andrew Bailey showing such impassivity in the eye of the storm makes one question the whole system. 

A politician who behaved in the same way would be swiftly hounded out of office.

Unless Mr Bailey and his colleagues get their act together pretty soon, there will be more legitimate questions about whether it is right in a democratic society for the Bank of England to be so unaccountable.

Nevertheless, the crisis is surely more a result of the shortcomings of a group of people — foremost among them the Governor — than of a system that has, after all, operated efficiently in the recent past.

Indeed, one could argue that the problem is not that the Bank is too independent, but that it has not been independent enough. 

Policy makers in Threadneedle Street realise how damaging to the Government’s finances even a small increase in interest rates would be, since debt payments would soar.

Britain’s Chancellor of the Exchequer Rishi Sunak speaks at the Confederation of British Industry’s (CBI) annual dinner today

According to the Institute for Fiscal Studies, each additional 1 per cent increase in interest rates adds £10 billion to the Government’s annual debt interest. 

At the same time, higher interest rates unfortunately mean higher mortgages, and therefore add to the cost of living.

The Bank of England’s sluggish approach to putting up interest rates has had the effect of providing Chancellor Rishi Sunak with some relief, though the extent to which this was deliberate is debatable.

At all events, the Bank forgot that the worst enemy for any government or society is out-of-control inflation, which is what we’ve got. 

However much higher prices can be blamed on external factors, inflation can’t be brought down without raising interest rates.

The most revealing remark made this week came from Mervyn King, who was Governor of the Bank of England from 2003 until 2013. 

He told Andrew Marr on LBC Radio: ‘The idea that interest rates of 1 per cent are going to have much impact on [the] inflation rate is really very strange.’

Lord King, who has studied German hyperinflation of the 1920s, doesn’t only criticise the Bank of England. 

Even before the Russian invasion of Ukraine, he accused major central banks of adopting ‘the King Canute theory of inflation’.

By this, he means copying the English king who is commonly believed to have thought he could turn the tide and defeat the forces of nature. 

Lord King rightly warns that inflation won’t remain low just because we say it will. That has been the Bank’s disastrous approach.

Can the lackadaisical Andrew Bailey be sacked — which is within Rishi Sunak’s power? 

Probably not without precipitating a collapse of confidence in the City. 

But he should take a good hard look at himself.

Inflation is a curse. 

It is the enemy of prosperity, and the destroyer of governments. 

It is going to get worse. 

How much worse depends on the ability of this unaccountable Governor to change his game.

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