Tuesday, 12 July 2011

Credibility crunch prompts debate on BoE mandate

Thus reads the headline on a Reuter's piece today instigated in the House of Lords by
Michael Spicer who challenged the government over the BoE's persistent inability to meet its inflation target. One of the original outside members of the  MPC, Willem Buiter, who was on the MPC when I worked at the BoE  and was in my opinion easily the best economist on that committee is quoted as below by Reuters.

"There has been a definite loss of credibility,"

Buiter said the BoE's rate-setting policy seemed to be more focused on supporting growth and the government's deficit reduction policy than its stated inflation target.

"The Bank...have overstepped the mark and acted in a very political way," he told Reuters.

He was very sympathetic to the BoE's wish to help growth, but said that by keeping rates low while claiming that it was still focused on reducing inflation, the BoE had damaged its credibility and was jeopardising its independence from politics.

"Rules matter and you can't opportunistically deviate from it whenever it suits you," he said. "There is a political mandate for the price stability objective. Any other objectives, even if MPC members personally consider them to be more important, have to be secondary."

He added that if he were still on the MPC and focused on returning inflation to its target, he would have voted for multiple rate rises by now.

"If I did not agree with the inflation target, I would have asked the Chancellor to revise the objectives, or I ought to have resigned. I think those are the only correct courses of action."

I can only support wholeheartedly Buiter's comments. When I was at the bank during the first MPC era I was a bit sickened by the amount of self congratulation and credit taking for 'controlling' inflation' that went on in the higher echelons of the BoE with the notable exception of Eddie George whose views when asked about this was to largely ascribe the control of inflation to benign external economic factors rather than BoE skill. That was only plain common sense something that is now noticeably lacking on the current MPC which is fixated on its pretty hopeless inflation forecasting model.

I write this as there is a great deal of schadenfreude about the current Eurozone mess and self congratulation about our wonderful foresight to not join the Euro. Absolute rubbish! The decision by Brown not to join in 97 was made on pure selfish political grounds to retain his powerbase in HMT. as was the decision to set up the MPC. Brown did not want to be labelled as responsible for raising interest rates. But just as with Gordon's gold sales things did not go the way Gordon thought they would!

The truth is the UK is in almost as big an economic mess as Greece and Portugal. When the markets have gorged on these two corpses and they are looking for more dead meat I fear they will turn their scrutiny to the UK. It has been a profitable feeding ground for them before on 16th Sept 1992 when George Soros made £2bn shorting sterling.

I expect an old fashioned  Sterling crisis this autumn.

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