On the eve of the 25th anniversary of the Bank of England being granted operational independence over monetary policy, and geopolitical influences affecting economic activity, James Lynch, Fixed Income Manager at Aegon Asset Management, asks whether we can take for granted the BoE’s continued independence.
For those who were there at the start of the Bank of England independence journey, getting to 25 years would seem quite an historic achievement. Operational independence has led to innovative policies such as Quantitative Easing and Term Funding Schemes which may not have occurred otherwise.
What might have been done if the Bank of England had not been independent through the varying crises over the years? Rates would probably have been more volatile, inflation higher, liquidity for banks during the financial crisis less available. Sterling would have been weaker too.
Inflation targeting can in general be judged a success, however not all the reasons for the low inflation era were central-bank-related. This includes the globalisation of trade and services, low wages, growing inequality and the rise of the internet and its impact on pricing power and transparency for companies.
Monetary policy independence works very well in the environment of low inflation, growing economies, and a stable political backdrop. But it does not take much imagination to see where these conditions could be challenged.
We are now in an era of making political and economic decisions based on security, not just growth and profit. This is across manufacturing, supply chains, food security, health security, energy security and defence.
Trying to predict the next 25 years would be foolish – but this is going to be a very different environment for the Bank of England to navigate than the last 25 – one in which it would also be foolish to take central bank independence for granted. While highly unlikely this will change, remember even Turkey’s central bank was properly independent for a while.
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