Publications
The new politics of inflation
| Authors: | Alasdair Murray, Giles Wilkes |
| Date of Publication: | November 2008 |
“The Bank of England's independence should be strengthened to fight deflation as much as inflation”
Less than a month after inflation hit fifteen-year highs, the Bank of England became concerned about a downward spiral in prices as the economy slides into recession. To many, the Bank’s speedy reduction of rates was evidence of its earlier slowness in dealing with the crisis. Many politicians are convinced they could do the job better, and believe a dismantling of Bank independence would rescue the UK from depression.
This report argues that a truly independent Bank of England remains the only way to secure Britain’s long term economic stability against such unprecedented shocks. Alasdair Murray and Giles Wilkes argue that a more independent Bank of England would make it easier to deal with the current, and future, economic crises. Explaining, Wilkes said:
“Politicians make terrible central bankers. Rates are now far lower than they would have been if the Chancellor was in control, because no one can trust a politician to keep a lid on inflation in the long term. For instance, the last time Britain went into a downturn, the Treasury kept rates at punitive levels, making the subsequent recession far worse.
With the risk to the UK’s economy veering wildly between inflation and deflation, we need a central bank that can act swiftly and with foresight while maintaining the trust of the financial markets. That requires more independence, not less. This financial crisis should usher in profound reforms to our economic institutions, the Bank included. But the last thing anyone needs is politicians taking control again.”
The report argues that allowing the Bank to set its own inflation target – in line with most other central banks around the world – would ensure the Bank could adopt a more flexible response to the challenges posed by both inflation and deflation without losing credibility. It also argues that to help prevent a repeat of the crisis of the last year its duty to maintain financial stability should be enshrined in legislation: the next time a bubble threatens to derail the economy, the Bank should be taking steps to calm it down, not stoke it up further.