Ministers should set interest rates, not the Bank of England
We shouldn’t worry that the Bank of England risks losing its independence: governments are paid to govern, not to outsource their dirty work to unelected central bankers.
Chancellor Alistair Darling has confirmed that as interest rates head for zero, the bank will have to lose its independence and must work “hand in hand” with ministers.
Before the Monetary Policy Committee was created in 1997 to decide rates we had the “Ken and Eddie Show” when Bank governor Eddie George each month told chancellor Ken Clarke what should happen and Clarke told the governor what would happen.
Now it will be the Ali and Merv show, the experiment in independence having lasted only as long as the conditions were sunny.
It seemed to some a good idea to take interest rate decisions away from ministers who use them for political ends, but the fact is that the Bank is not infallible. It allowed commercial banks to lend too much and customers to borrow too much; it wrongly said house prices are not a key economic driver and it attempted to block the Northern Rock rescue.
Governments – or any colour – are not perfect either, but at least the public can vote them out. Bank governor Mervyn King and his team of economists are answerable to no-one.
Even without a crisis it ought to be obvious that the Treasury needs to include interest rates in its range of tools for steering the economy. The Bank’s task was to move rates simply to control inflation – another key factor that the government washed its hands of by this outsourcing. A holistic approach means ministers must be allowed full control – and must take full responsibility when it goes wrong.
You wouldn’t expect a government to have an independent Ministry of Defence or a Department of Business that ignored political direction; interest rates have to be on the government’s own agenda too.
