Giving the government control over interest rates would be a disaster

It’s not entirely fanciful to imagine Boris Johnson being tempted one day; he is hardly reluctant to grab the levers of power

Andrew Bailey was right to tell the Treasury select committee that 80 per cent of the increase was due to global factors beyond the Bank’s control (PA)

After inflation hit a 40-year high of 9 per cent today, Conservative MPs, including some ministers, are again pointing the finger of blame at the Bank of England and its governor Andrew Bailey for raising interest rates too slowly.

Worryingly, some senior Tories are even raising the question of whether the Bank should lose its operational independence on monetary policy,  threatening the 25-year consensus since Gordon Brown ceded the politicians’ control of interest rates to the Bank.

Liam Fox, the former cabinet minister, argues the Bank should stick to its “day job” of hitting the government’s 2 per cent inflation target, rather than worrying about political matters such as climate change (though Rishi Sunak added that to the Bank’s mandate last year).

Fox said: “There is a distinct feeling that those who should be protecting us from the debasement of our currency, the erosion of our earnings and the devaluation of our savings, have had their minds too much on a political rather than a monetary agenda.”

True, the Bank has failed spectacularly on the inflation target and was slow off the mark last year in spotting the scale or pace of the hike; the two-percentage point rise in the annual rate between March and April is highly unusual. Yes, there is a “groupthink” problem on the Bank’s monetary policy committee.

Yet Bailey was right to tell the Treasury select committee that 80 per cent of the increase was due to global factors beyond the Bank’s control. So acting sooner would not have made much difference; the key question is where we go from here, and how the Bank brings down inflation without making a recession or 1970s-style wage-price spiral more likely. This will provide its biggest test since 1997.

Ministers are seething about Bailey’s doom-laden warning about an “apocalyptic” rise in food prices. They saw it as an attempt to switch the headlines from allegations the Bank was “asleep at the wheel,” as the committee chair Mel Stride put it. If it was, it worked.

Blaming the Bank is a convenient diversion for Tory MPs as they fret about the cost of living crisis. Labour puts the crisis at the government’s door, so the need for a scapegoat to soak up some of the blame is obvious. It’s much easier to lash out at someone outside their party than blame Sunak’s feeble response in his spring statement, though the Tory cries for immediate action rightly get louder by the day.

It seems the chancellor is finally getting the message and will now act before parliament starts its summer break in July. There is speculation in today’s newspapers that he will expand the £150 warm homes discount by between £300 and £600 and cut income tax or VAT this autumn.

Cost of living: how to get help

The cost of living crisis has touched every corner of the UK, pushing families to the brink with rising food and fuel prices.

• The Independent has asked experts to explain small ways you can stretch your money, including managing debt and obtaining items for free.
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• Citizens Advice provides free help to people in need. The organisation can help you find grants or benefits, or advise on rent, debt and budgeting. https://www.citizensadvice.org.uk/.
• If you are experiencing feelings of distress and isolation, or are struggling to cope, The Samaritans offers support; you can speak to someone for free over the phone, in confidence, on 116 123 (UK and ROI), email jo@samaritans.org, or visit the Samaritans website to find details of your nearest branch.

He should target help on the poorest: according to the Resolution Foundation, inflation is already at 10.2 per cent for the bottom 10 per cent on the income scale, compared to 8.7 per cent for the richest tenth, because the poorest spend a greater proportion of their budget on energy bills.

Sunak was right to hose down the idea of the Bank losing its power to set interest rates. He told the Commons yesterday: “Whilst we do face challenges at the moment, the record of 25 years of central bank independence speaks for itself with an average inflation rate of exactly 2 per cent.”

Indeed, the system has broadly worked well – until last year, at least. Success has many fathers and both Tony Blair and Brown claim parenthood in their memoirs, though I recall that Brown’s team did the heavy lifting.

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Under Brown’s bombshell announcement five days after the 1997 election, the Bank governor must write an open letter to the chancellor if the inflation target is being missed. The system worked so well that Eddie George, as he retired as governor in 2003, wrote to Brown to… explain why he had not written any such letters.

The Tory MPs who now rail at Bailey are breaching the deal struck in 1997: politicians would not comment on monetary policy while, in turn, the governor would not give a running commentary on fiscal policy. It hasn’t always worked. Mervyn King, George’s successor as governor, irked prime minister Brown and his chancellor Alistair Darling by making clear he wanted them to tackle the deficit in the public finances. When I revealed in The Independent ministers’ suspicion that George was “getting too close” to the Tory opposition, it provoked a protest by the Bank to Downing Street.

It would be disastrous if ministers ever took back control of interest rates because they would inevitably be driven by short-term political pressures. Although I doubt it will happen, it’s not entirely fanciful to imagine Boris Johnson being tempted one day; he is hardly reluctant to grab the levers of power.

It’s also not so difficult to envisage a conversation between Johnson and Sunak about the PM’s desire to cut rates on the eve of a general election when the chancellor judged it irresponsible. The first lord of the Treasury would win, and the country would lose.