Boris Johnson’s likely successor wants to review the Bank of England’s mandate. And some are worried
LONDON — The front-runner to become the U.K.’s next prime minister plans to review the Bank of England’s mandate in a move that’s concerning campaigners and think tanks.
British Foreign Secretary Liz Truss, the current favorite to win the Conservative Party leadership contest and become British prime minister, has indicated that she could consider curbing the central bank’s independent decision-making on interest rates.
Truss first suggested a possible alteration to the Bank’s mandate at a campaign event in Cardiff on Aug. 3.
“The best way of dealing with inflation is monetary policy and what I have said is I want to change the Bank of England’s mandate to make sure in the future it matches some of the most effective central banks in the world at controlling inflation,” Truss said.
‘Investors like certainty’
Uncertainty over what could be in store for the central bank — if Truss does become prime minister — could create difficulties for investors, according to Scott Corfe, research director at the Social Market Foundation, a cross-party think tank based in Westminster.
“Investors like certainty,” Corfe told CNBC.
“If there is a lack of clarity for an amount of time around what the new mandate of the Bank of England will be, or the extent to which politicians might meddle in the rate-setting process in the future, that does create some uncertainty around what is the outlook for inflation and economic growth in the U.K. going forward,” he added.
This view was echoed by Fran Boait, executive director at Positive Money, a U.K.-based think tank campaigning for systemic change in the financial system. Speaking to CNBC’s “Street Signs Europe” on Aug. 25, Boait said it would be good for Truss to “lay out a bit more what she’s hoping to achieve” in a possible mandate review.
Truss’ campaign team told CNBC that her “bold plan will challenge the failing economic orthodoxy and deliver necessary growth to the UK economy.”
“As Prime Minister, Liz would review the Bank’s mandate, as after 25 years, she believes it is only right to ensure it is fit for purpose and works for the current economic context,” the campaign team’s statement said.
Former Finance Minister Rishi Sunak, Truss’ leadership rival, told Sky News last week that the discussion around the Bank’s autonomy could “spook” international investors.
Curbing the independence of the Bank would be a “mistake,” Sunak said, and would “be bad for all of us.”
Shadow Finance Minister Rachel Reeves also questioned Truss’ plans in an interview with The Guardian.
“This is deeply irresponsible from a Conservative leadership candidate. It creates huge uncertainty that will hold back vital investment in our economy,” she said.
Meanwhile, Bank of England Governor Andrew Bailey stressed earlier this month that central bank independence “is critically important,” in an interview with BBC Radio 4’s “Today” program.
‘Shifting the blame’
Truss’ campaign team said the Conservative Party leader front-runner is “committed” to the independence of the Bank of England.
However, if her promised review of the central bank’s mandate leads to a deeper rearrangement of its functions, it could have huge ramifications, Corfe said — including a banking system that revolves around election cycles.
“Politicians wanting to get involved with rates and rate setting would be very dangerous indeed,” Corfe said.
“If an election is coming up, politicians will be reluctant to raise interest rates if that’s what’s required to bring rates down because higher rates and higher mortgage bills are not necessarily an election winner.”
Truss’ plans come as the U.K. battles inflation at a 40-year high, with many households buckling under the pressures of the deepening cost-of-living crisis.
By putting the spotlight on the Bank of England, the government is “washing its hands” of delivering policy to address the issues, Corfe said, and instead placing responsibility on the Bank.
“I think you’re seeing this kind of shifting the blame now where the government, rather than rolling out the fiscal support needed to help households with prices, is instead saying, ‘Well, why aren’t you doing more about this?'” Corfe said.
“Politicians want to shift the blame elsewhere and say this is the responsibility of monetary policy alone rather than government and fiscal policy.”
Positive Money’s Boait said the discussions around financial regulation in the U.K. at the moment were “very worrying from a civil society point of view.”
“Most people want a banking and financial system that is resilient, that doesn’t crash, that also provides the basics, access to payments, investment in the things we need like green transition and small businesses … And we’re just so far away from those things right now,” she said.
“Neither of the current Conservative leadership candidates – that want to become our next PM in the next couple of weeks – are talking about a financial system that does any of these things.”
Sunak’s campaign team did not respond to a request for comment when contacted by CNBC.
What could a mandate change look like?
Truss has a number of options on the table when it comes to a potential change in the Bank’s mandate.
Currently, the Bank of England’s objective is to keep inflation “low and stable” at 2%, according to its website, with the aim of keeping the U.K. economy in a healthy state.
“What is most likely is a review of the 2% inflation mandate and whether something else would be more appropriate in the government’s eyes,” Corfe said.
“I could see, for example, the inflation target changing or maybe the Truss government will want to pursue some kind of dual mandate of inflation and economic growth.”
In the U.S., the Federal Reserve has a dual mandate that strives for “maximum employment, stable prices, and moderate long-term interest rates.”
It wouldn’t be the first time there has been speculation about the U.K. adopting a U.S.-style mandate. In 2013, it was thought that then-Chancellor George Osborne could adopt a Fed-style mandate as the country tackled an economic slump and emerged from a double-dip recession.
Investment bank JPMorgan outlined two options for a possible Bank of England shake-up by Truss in a note on Aug. 19. It coined one scenario “the seeds of change” and the other — rather ominously — “the dark arts of politics.”
The “seeds of change” option includes alterations that could see the Bank target nominal gross domestic product, or GDP, or monetary aggregate — the amount of money in circulation –instead of the inflation rate.
Truss said in mid-July that the U.K. has “not been tough enough on monetary supply,” but JPMorgan does not expect a focus on supply going forward.
“It’s hard to see any sort of return to this policy replacing the BoE’s inflation target,” it said.
Former British Prime Minister Margaret Thatcher’s government attempted to target money supply in the 1980s in an effort to battle rising inflation
Corfe agreed that a similar strategy was “unlikely” this time around, as “it wasn’t wholly successful … as it is difficult to control with accuracy the broad money supply in the economy.”
JPMorgan’s “dark arts” option suggests that interest in the Bank’s mandate could be more to do with “presentational appeal.”
“A review that challenges the status quo would signal that new energy is being injected to resolve the cost of living crisis,” JPMorgan says.
“As inflation inevitably declines from its peak, the government might stake a claim in that process even if the policy implications were limited.”