Is the idea of central bank independence all a game of smoke and mirrors designed to funnel money in the direction of the City of London? It's a question that has to be asked.
This is the audio version:
This is the transcript:
Is the Bank of England really independent?
Neoliberal politicians and neoliberal economists tell you that Central Bank independence is absolutely fundamental to good economic management of an economy. I question that and I question it for very good reason, which is I don't really think that we have, at least in the UK, an independent central bank, despite what Rachel Reeves and every Chancellor since 1998, when Gordon Brown made the Bank of England independent, has said. They are all making up a story that literally makes no sense at all.
Let's stand back a bit and go back to 1998 when the Bank of England Act was passed. The act in question was the brainchild of Gordon Brown, working with Ed Balls, who was not even an MP then. And what they believed in accordance with neoliberal doctrine was that the central bank of a country should be made independent of political control with the objective of ensuring politicians did not have a say on the monetary policy of the country in question so that the bankers could determine what interest rates should be within the country for the best overall wellbeing of the people as a whole, or perhaps as it's turned out, the bankers.
And that is my key point. There is this argument that the Bank of England is independent. But it isn't free of influence.
The Bank of England Act 1998 did in fact give the Chancellor of the day enormous power over the Bank of England, despite the appearance of independence being granted. There is a section in that Act that says, if a chancellor believes that the actions of the bank are contrary to the national interest, then at any point of time, they can, in fact, overrule, whatever it is that the bank decides to do, including on the setting of interest rates. And whilst they do need to go to Parliament to explain their position, they can have that position maintained for as long as they wish, if they think it is in the national interest to do so. So the pretence of independence was even built into the Act that made the Bank of England independent.
But we've seen two massive economic events since 1998 which have clearly proved that the Bank of England does not in, the event of a crisis, ever act independently of the UK government. The first was, of course, in 2008 when, because of failure on the Bank of England's part to anticipate the impact of moves in the economy in 2007, we had a financial crash.
Interest rates were kept far too high in 2007.
The Bank of England was far too optimistic about the state of the economy and the state of bank regulation, and we got the crash of 2008.
In consequence, the Bank did what it should always have done. It brought interest rates down, and they effectively reached 0% for a very long time thereafter, not rising again for more than a decade.
At the same time, they agreed, with the permission and direct authority of the Chancellor of the Exchequer, which showed exactly who was really in charge, to undertake quantitative easing.
And that circumstance was very similar to what happened in 2020 when we got Covid. The Bank of England offered the UK government an overdraft, which was terribly nice of it, given that it is owned by the UK government, after all, outright.
But it offered, first of all, an overdraft of £20 billion on what is called the Ways and Means account, which it maintains for the government.
Secondly, it then cooperated with another round of quantitative easing. The government issued another £400 billion of money into the economy via the Bank of England, basically to save the day and keep the economy going, and the Bank of England did exactly what the government wanted, and you would not been able to tell the difference in policy between the Treasury and the Bank of England, because they were in effect one and the same.
So my point is this. When the chips are down, and that's when any policy created by the Bank of England really matters, they always do exactly what the Treasury wants. So, there is no obvious actual operational independence by the Bank of England.
And even in normal times, this is the case. The inflation target is set by the government for the Bank of England. It is only given the interest rate to play with to try to achieve that target.
It's got no other tool available to it, apart from quantitative easing and quantitative tightening, both of which, as I've already noted, are under the control of the Treasury, to actually achieve any of its goals.
And so as a consequence, the degree of real independence between the Bank and the Treasury is very low, especially when we take into account the fact that the Treasury does, of course, appoint the people who run the Bank of England. Everyone from the Governor to the members of the Bank of England Monetary Policy Committee, who set the interest rates, all of them are approved by the Chancellor of the Exchequer, and therefore they know who they need to keep happy. It is the Chancellor, and this is how soft power works.
Whatever the structure of the law might say, the reality is that the Bank of England operates as the Chancellor wishes. So, we are living in a world that is a sham, but what is the consequence?
First of all, the government still has political power over monetary policy. To pretend otherwise when we can see the evidence of the interest rates from 2008 to after 2020, and the reactions of the Bank to both the 2008 financial crisis and Covid makes it very obvious that the political power inside this scenario still rests with the Treasury.
So does the Bank of England then do what it is required to do by law and operate monetary policy in the interest of the economy as a whole? I think that's where we come to the real nub of the question about Bank of England independence, because unlike politicians, the Bank of England can ignore the electorate.
And it does ignore the electorate. You and I simply don't count to it. It keeps the base rate high if it so wishes, as it is doing now, way above that which is required to maintain the economy in good order, because the Bank of England's primary focus is on appeasing the interests of the City of London, and not on appeasing the interests of you and I as the people who might vote.
So, in a sense, Bank of England independence has achieved everything that Ed Balls and Gordon Brown wanted of it. We have a central bank that does not operate in accordance with the whims of a politician, but does instead operate in accordance with the whims of the City of London. We have moved power from us, the electorate to the City of London, the unelected bankers, and that is what this Bank of England independence was always meant to achieve.
We did not get what we need. Therefore, we have a situation of supposed Bank of England independence, which is entirely contingent upon the whim of a Chancellor of the Exchequer to work, and therefore, frankly, is not independent at all, except to the point where the interests of the people of this country are taken into account where the politician has the most perfect excuse for saying that they cannot deliver the interest rate that people want because the Bank of England has set it independently, even though they know that's not true.
And the bankers get exactly what they want.
And let's also be clear about something else. The Bank of England still exists as what is called the borrower of last resort in the UK, and the borrower of last resort is, in fact, the person with whom the City of London will deposit its money when everybody else looks as though they might go bust. And in that sense, by guaranteeing the City of London that there is always a place where their money can be stored safely, the Bank of England, through its independence, guarantees that the power of the City of London will be maintained.
And that is what this whole charade is all about. This is the government being run for bankers rather than the government being run for people, and that has to end.
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Good description. If I may be so bold, missing is the relationship between the UK’s finance ministry and the bank.
Ostensibly the FinMin oversees gov finances and the funding requirements to keep e.g. UK industry up & running – with the BoE providing funds as and when. The recent farce with steel shows that the Uk in modern times (post 1945) has never had a coherent industrial policy of any sort. Apart from rumours of “nobody likes the FinMin” one hears little about it, its staff or the thoughts of leading lights, if indeed they have any (yes I know evidence of absence is not absence of evidence). Although the blog mentioned two politicos, could it be that there are a large number of people, who like to avoid the limelight, who in fact are more directly/indrectly responsible for the current state of affairs (BoE there to server banker interests, FinMin going along with this, given they appoint the BoE people etc. Begs the question: after retiring from the FinMin what do the more senior people do?
The Brits may not lead the world in much, but institutional corruption, world leaders by a country mile.
Thank you, Mike.
Since the turn of the century, many leading officials have come from the private sector or officials aiming for permanent secretary, second permanent secretary, governor and director general have sought (and been encouraged to seek) private sector gigs for a a couple of years. A prominent example is the late Jeremy Heywood. The senior posts are the stepping stone to a lucrative private sector gig.
The senior officials are equally culpable and usually share the neo-liberal and even neo-con perspectives of the increasingly professional politicians. As between politicians and journalists, there are also relationships. Jack Straw’s wife, Alice Perkins, was a senior civil servant. Ofcom’s Melanie Dawes is married to Lloyd’s Bank’s Benedict Brogan, formerly at the Torygraph.
You’re also right that the officials shun the limelight. The people who need to know will know.
There must be an upside to Bank of England and other central banks being operationally independent or else they would alter the structure, but what is it in your view?
In essence the inflation target which is positive and not zero is a nod to the analysis of James Tobin that that economy should always have a little inflation running through, and if you aggregate the official inflation data from 1997 to now and logarithmically divide that by the number of years it comes out at remarkably close to 2% which is the central government’s target.
Are there any other upsides to the current structure I wonder.
I think you are trolling
The name is just too unlikely….
Do you know Colonel Smithers and are you related to Harry?
I realise that the time to query this passed many years ago, but WHY was “the objective of ensuring politicians did not have a say on the monetary policy of the country in question ” appropriate. The government, made up of politicians, is elected to run the country. Should that not always include monetary policy? Or, to put it another way, why don’t armed forces senior staff have control of defence policy?
Politicians are considered unreliable – they seek to appease electorates, and that was considered unacceptable.
But only for monetary policy? On that basis, which I don’t dispute, politicians should not have control of any policy!
Trump is on that one…
Central bank independence was a concept that was deeply appealing in policy wonk circles around 30 years ago. The often cited motive is that independence promotes lower long term inflation and interest rates.
However, evidence points to politicians looking to delegate decisions to others to avoid answering difficult questions. Political leaders want to dissolve their responsibilities that come with their power. Politicians no longer want political contest over monetary policy mainly because they are not really interested in it and/or are bored by it and are completely uninterested in knowing anything about it. This has greatly diminished political debate and politicians don’t discuss whether monetary long term goals are actually being delivered.
Back in 1998 I rather assumed the wish to delegate certain monetary decision-making to the Bank of England (which isn’t actually the same as independence) was because politicians had such a poor track record with those decisions. Unfortunately, while politicians shied off difficult decisions because of their fear of voter unpopularity, the Bank turned out to be similarly scared of upsetting the financial industry.
Arguably one helpful consequence of the delegation of decisions is that information is published about the deliberations of the committee; I suspect that when the decisions were made by politicians the equivalent discussions would have little to do with economic factors and much more about the impact on future election prospects. However as you have pointed out before the committee is packed with yes-men (with usually a token yes-woman), and what is needed is an appointment mechanism that ensures a proper diversity of experience and expertise.
(On a different topic, I am intrigued by your thought experiment that the BoE reducing interest rates in 2007 might have prevented the 2008 financial crash. I would have thought the UK economy is so closely tied to the USA – as we have been discovering recently – that sharing the crisis was inevitable).
But we would have been better prepared
And I mean in all terms, but just on interest rates
No, it is not independent – nor should it be. There must be democratic control.
Should it be “operationally independent”? Possibly. In my younger days, Chancellors explicitly decided what the Base Rate should be and it was often fixed with party political goals in mind. In the early 90s we moved away from this to the “Ken and Eddy show” (Chancellor and Governor at the time) before “full” operational independence in 1997. It is not clear which of these regimes is best as there are too many other factors at play.
We want a BoE that operates for the whole country, we want a BoE that can act as a counter to narrow party political considerations, we want a BoE that can conduct monetary policy co-operatively with HMT and fiscal policy. We want a BoE (and HMT) that uses all the tools available to it – not just interest rates.
I am unclear as to what is the best institutional set up is best but we certainly need a broader MPC not one merely comprising bankers and economists. Also, a more explicit rebalancing away from pure “inflation control” to broader economic indicators.
Thanks
When you look beneath the surface, much of UK “democracy” is sham. Toothless House of Lords and sham royal assent for starters. Add consultations that are ignored and strongly held opinions of the majority that are ignored (e.g. climate change, Europe, Trump). I recall your own attempt to start a petition.
Legislation is riddled with loopholes. You have noticed a significant one. There are more.
The objective is always to reserve true power to an elite. MPs do not understand much of what they are voting for.
Tangentially linked, but god help us…
https://www.theguardian.com/business/2025/apr/30/bank-of-england-backs-scheme-to-put-more-economics-teachers-into-state-schools
This is utterly bizarre
Why?
Begs the question – which/what economics? neo-classical nonsense or a couple of different versions including MMT & its variants.
letting the BoE define the syllabus would be akin to the Barbary Pirates defining & running courses on human rights
See blog out this morning
Has the Treasury/Bank of England stopped or even slowed QT yet?
(https://gezwinstanley.wordpress.com/2024/10/28/infrequently-asked-questions-about-quantitative-tightening-that-you-were-never-even-meant-to-ask/)
No
That’s dismal and worrying (not that there isn’t plenty else to worry about these days too). BTW, thanks for all you do: impressed with the both the quantity and quality of the output. Solidarity (we’re all going to need a lot of that!).
Thanks
I can’t help thinking that, if only the general public knew and understood this and if it had an overall idea of how government spending works and how money is created and what tax does, then we would live in a far better society, because the bulk of our current politicians would not be in, or remain in, office. And those who replaced them would have to offer genuine options to improve society and care for the nation and its people, because that would become a prerequisite to obtaining electoral support.