The Bank of England’s struggle to restrain the fastest inflation in four decades drew fire from two lawmakers seeking to become the UK’s next prime minister, with Foreign Secretary Liz Truss hinting she may change the central bank’s mandate if she wins power.
In Sunday’s televised debate of the five remaining Conservative Party lawmakers vying to succeed Boris Johnson, Truss said the UK is facing “unprecedented economic times” and that the “business as usual economic strategy” isn’t working.
She said the next government should look at other economies that had been successful in controlling inflation, citing the Bank of Japan which has faced repeated bouts of deflation in recent decades despite running the biggest quantitative easing program of all major central banks.
“I completely support the Bank of England’s independence,” Truss said on ITV. “We need to look at the best practice around the world. The countries who have been most successful at controlling inflation.”
“We need to look at the mandates they have, for example the Bank of Japan. The last time the mandate was set was in 1997, in completely different times.”
There may also being a battle brewing over the BOE’s regulatory role as the government looks for lighter touch rules after Brexit. The Financial Times reported Monday that a bill published later this week is set to give ministers power to “call in” decisions made by the BOE which it doesn’t agree with.
Chancellor of the Exchequer Nadhim Zahawi will call for “growth-focused” approach regulation in his Mansion House speech on Tuesday, the FT said. BOE Governor Andrew Bailey is resistant to the plan, the newspaper said.
The BOE has been dragged into the leadership debate as sky-high inflation drives a cost-of-living crisis. It gained independence in 1997 and has a 2% inflation target. But price growth is currently 9.1% and the BOE expects it to reach double digits despite five successive interest rate hikes, which it is set to extend next month.
Truss is currently third in the leadership race but would beat all other contenders in the final head-to-head among Tory members according to a poll over the weekend. She did not spell out what a BOJ-style mandate would look like.
Japan’s central bank has conducted more quantitative easing, owns a larger share of government debt than the BOE and is technically Japan’s biggest shareholder through investments in exchange traded funds. The BOJ’s balance sheet is now equivalent to about 135% of gross domestic product. The BOE’s is just below 40% of GDP.
Also asked about the mandate, Kemi Badenoch, a former Treasury minister, criticized the inflation overshoot. Monetary policy makers are “human beings,” but lawmakers “haven’t been marking their homework,” she said. “We need to be bolder challenging orthodoxy.”
Former Chancellor of the Exchequer Rishi Sunak, the current front-runner in the race, said he was “worried by some of the things I’m hearing.” He argued the average rate of inflation over the past 25 years showed the BOE has been successful in meeting its target.
Truss has indicated she might give the BOE a money supply target to ensure it is “tough on inflation” if she replaces Johnson. In comments made during Friday’s Channel 4 leadership debate that will burnish her credentials as the heir to Margaret Thatcher, she hinted at a partial revival of 1980s monetarism.
“We have inflation because of our monetary policy,” she said. “We have not been tough enough on monetary supply. That’s the way I would address that issue.”
She picked up the theme in an interview with The Sunday Telegraph, pledging to “look again” at the BOE’s mandate. The newspaper said she also voiced fears that inflation has been worsened by excessive money supply.
In the early 1980s, Thatcher set money supply targets to grapple with double digit inflation. Those were supplanted by inflation targeting in the early 1990s and are no longer a prominent part of central bank economic models.
Tom Tugendhat, another prime ministerial candidate and the chair of the foreign affairs select committee, has previously blamed inflation on the £450 billion of bond-buying the BOE undertook during the pandemic.
“What’s triggering inflation is the lack of sound money,” he has said. “’What we’ve got here at the moment is we haven’t been controlling our own money supply adequately.”
“I’m afraid the quantitative easing that has been pumping up the economy. And that’s triggered the inflation.”
Bailey has hit back at criticism that his quantitative easing program was at fault, telling MPs last week: “I’m afraid I don’t subscribe to the view that QE is responsible.”
He also said that he wouldn’t “join in the debate around” who should lead the Conservative Party, but that the BOE’s independence was a “very serious issue.”
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