There has recently been a growing chorus of opinion, including that of a number of former Chancellors of the Exchequer, calling for the implementation of an independent central bank in this country. The Liberal Democrats are the only party to have consistently championed the case for independence for the Bank of England. We believe that this will allow it greater autonomy over monetary policy.
By providing credibility to the Government's anti-inflation policy, an independent central bank would facilitate a reduction in both short- and long-term interest rates, enabling increased private sector investment. All the evidence suggests a strong correlation between the independence of a country's central bank and low inflation and interest rates. There is no evidence to suggest that this trade-off has been achieved at the cost of higher unemployment. Indeed, if anything, there is evidence to support the reverse.
Nor will central bank independence in any way limit the Treasury's ability to promote growth in output and employment. The only freedom that will be lost will be politicians' freedom autonomously to inflate at the economy's expense.
Removing direct control of monetary policy from the hands of the Chancellor would make it less vulnerable to the kind of political manipulation we have become accustomed to in recent years. We also support making the bank directly accountable to Parliament for its monetary policy decisions - a vital democratic safeguard that does not exist now.
An independent central bank would not be a panacea for all this country's economic ills, but it would provide a necessary first step towards a stable and accountable macroeconomic policy that would help to institutionalise price stability. For these reasons I strongly regret the failure of Nicholas Budgen's Bill to be debated in full on the floor of the House last Friday.
MP for Berwick-upon-Tweed
House of Commons
The writer is deputy leader and Treasury spokesman of the Liberal Democrats.Reuse content