The case, though, cannot be shrugged off. The backbench Treasury committee is expected to produce a valuable cross-party endorsement of reform next month. Just as important, the intellectual running is still being made by reformers, who rightly point out that politicians tend to use interest rates as much in the battle for votes as in the battle against inflation.
Yesterday a distinguished panel, chaired by Lord Roll, tackled some of the remaining worries about central bank independence, and proposed a form of independence for the Bank that would fit happily with British traditions*. In reply to the Prime Minister's concerns about accountability, the Roll report retorts that monetary policy is one of the least accountable areas of public administration, since interest rate changes are determined by the Chancellor and Prime Minister alone. There is no need to explain change to the Cabinet, let alone Parliament. The report recommends that the Bank of England should set both an inflation target and the interest rates needed to achieve it. It would report to the Treasury committee on its success. It would also be subject to an override by Parliament that would be temporary and overt (to take account, for example, of shocks to the economy such as the 1973-4 and 1979 oil price rises).
This formula is preferable to the German or New Zealand models. Although the Bundesbank council has a regional structure, it is unaccountable to the Bundestag or other elected bodies. The New Zealand model suffers from the disadvantage that the government may simply raise the inflation target that the central bank is contracted to meet. The markets are likely to remain sceptical, negating the cheaper financing costs for government borrowing that are one of the advantages of independence.
Yesterday's unexpected fall in inflation is excellent news, but it has been won at the price of a deep and damaging recession. If we are not to repeat the unhappy experience of Eighties boom and Nineties bust, we must alter our institutions. We have much to lose if we do not now lock in low inflation.
*Independent and Accountable: a new mandate for the Bank of England; Centre for Economic Policy ResearchReuse content