Calling the bank’s independence into question will only dig the economy into a deeper hole
Liz Truss, who looks likely to become the UK’s new prime minister next month, has stirred controversy with recent statements on the Bank of England. To gather support in the Conservative Party’s leadership contest, she’s proposing a departure from “business-as-usual economic strategy”. Among other things, she wants to review the central bank’s mandate.
Truss says she isn’t threatening the bank’s “operational independence”, granted by the government in 1997. Unfortunately, she hasn’t said much more. Perhaps she’ll tweak the inflation target, which now defines “price stability” to mean an inflation rate of 2%. Maybe there’ll be new instructions on growth in monetary aggregates and/or nominal GDP. Once the bank is given a new and better mandate, Truss suggests, it can again be left to do its job.
Already, analysts are wondering what Truss really intends. Despite her complaints about excessive inflation, some suspect she’d now like looser monetary policy than the bank has in mind, to boost the economy before the next election. Her talk of instant tax cuts and a softening of the government’s fiscal rules seems to point the same way.
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