Is Nigel Farage challenging the independence of the Bank of England?

Reform’s leaders have been bending the ear of governor Andrew Bailey, just as Donald Trump has been haranguing the US Federal Reserve. Sean O’Grady looks at what the party is up to and whether the Bank might listen

Nigel Farage, and his Reform UK deputy Richard Tice, have popped round to Threadneedle Street for a chat with the governor of the Bank of England, Andrew Bailey. It was a packed and pretty technical agenda, but both sides seem to have got something out of it…

What does Farage want from the Bank of England?

Pre-meeting spin was that he and Tice were concerned about four topics: first, Farage wants lower interest rates; second, he wants the Bank to pay less to commercial banks on reserves held at the Bank, which, Farage argues would indirectly save public money and help cut taxes; third, he is concerned about “quantitative tightening” or QT – tightening the money supply, pushing interest rates up a bit and costing the taxpayer money to cover the Treasury’s losses on the programme; last, and more fancifully, Farage wants the central bank to start hoarding cryptocurrency in a strategic reserve.

Will he get those, hypothetically?

To some extent, but it’s nuanced. If he wants to stick to the present inflation target, then the Bank has to set interest rates relatively high to push inflation down to the 2 per cent target. It’s always a judgement, but at the moment the UK is forecast by the Organisation for Economic Cooperation and Development (OECD), for example, to have the highest rate of inflation in the G7 in the next year or two. Of course, if Farage became PM he could set the mandatory inflation target higher (as it used to be) and the Bank would have to adapt its policy accordingly.

Bank reserves and QT is complicated, and the Bank thinks it’s got things right for the sake of inflation and protecting financial stability. But, given that this is about taxing commercial banks, and the taxpayer funds the Bank’s operations, these are essentially political matters, just as quantitative easing (QE) was during the 2008 financial crisis. The Bank will happily do as it is asked, provided it is allowed operational independence to reach objectives set by ministers and parliament.

As for cryptocurrency, that is a much more radical idea, carrying significant risks of losses from such a volatile asset. The Bank will resist that, though it says it has an open mind and has toyed with a “central bank digital currency” in the past, when Rishi Sunak was keen on it.

Is Farage copying Trump again?

It seems so. Trump has been trying to bully Bailey’s counterpart at the US Federal Reserve, Jerome Powell, into cutting rates for some time and has also launched his very own cryptocurrency. Farage has called Bailey “hopeless” but has now mellowed somewhat. Perhaps Farage will launch Faragecoin? More seriously, Trump plainly wants to “take over” the Fed and run it himself – the worst-case scenario being that he’d turn the Fed into a personal, limitless, money pit, like a dictator raiding the national reserves. Who knows if Farage would seek to follow suit?

What’s the Bank of England trying to do?

In the shorter term, to understand what Reform UK policy, such as it is, might amount to and to gain some trust. They also want to reassure Farage that the Bank is not part of some economic “blob”, as Liz Truss argued, determined to frustrate the democratically elected government of the day. If the Bank can explain some of the realities and complexities of policy to Farage and his team, it will be time and effort well spent.

The Bank cherished the operational independence granted by the Blair government in 1997 (formalised in 1998), in part for the natural reason that all institutions try to defend their powers, but also because a properly independent central bank generally delivers lower inflation and interest rates than one ordered around by politicians looking to win elections with policy “bribes” to voters. Not that Farage would dream of such a thing, of course.

What’s next?

Tice wants a parliamentary debate on quantitative tightening, and its fiscal implications, which he might secure in Westminster Hall but it would be an intellectually gruelling, poorly attended session. Meanwhile, the Bank and its prospective future bosses will keep in touch, albeit a little warily. Farage and Tice have scored the significant reputational goal of an audience with the Bank of England. They’re happy.