On the face of it one thing that’s certainly significant about this Budget is George Osborne’s decision to refresh the remit for the Bank of England. This is, in many senses, an historic moment.
Just consider the two times the Bank’s remit was overhauled in the modern era: the first was in 1992, when, in the wake of Britain’s ejection from the Exchange Rate Mechanism, it was first given an inflation target by Norman Lamont. The second was in 1997, when Gordon Brown gave the Bank full independence to pursue that inflation target. That remit remained unchanged since then (although the specific target changed once in 2003 when the old RPI inflation target was replaced with the new CPI target – although this was considered more of a technical than a substantial shift). It allowed the Bank to pursue the most radical monetary easing policies in British history.
In other words, each of the times the remit has changed, it has ushered in a brand new era of monetary policy. From ditching exchange rate targeting, to inflation targeting, to full central bank independence.
One might then expect today’s remit change to represent a similar revolution, but a glance at the newly re-written document seems to suggest otherwise. The Bank will retain the key element of the remit, its inflation target. There is a microscopic change of wording: whereas in the 1997 version the target is “2% at all times”, the new remit says the target of “2% applies at all times”.
Erm, yes, that is the sum total of changes to the official target. No new target, no nominal GDP measure, no radical departure. A minor re-wording.
The intention is to make it clearer that the 2% target is not prescriptive and that the Bank could veer away from it at all times as necessary. There are some changes to how and when the Governor should write letters of explanation when he misses the target, but, again, these serve to make those letters even less timely. And there’s nothing about making the minutes more open or timely, or about introducing full transcripts as the Fed has (delayed in its case by five years). So the meetings may well become more opaque.
The remit specifically mentions giving the Monetary Policy Committee the ability to “deploy explicit forward guidance including intermediate thresholds in order to influence expectations and thereby meet its objectives more effectively”. Translated, that means if the MPC wants, it can commit explicitly to having interest rates (or quantitative easing) at a certain level many months or years into the future. And can, like the Federal Reserve has in the US, give a specific “trigger” that would bring this to an end: for instance, pledging to leave rates unchanged and carry on with quantitative easing until unemployment drops below, say, 6.5%.
This is interesting and could, in time, become a radical policy option. The thing is, this kind of policy would almost certainly have been possible under the 1997-era remit. It might have involved a few more contortions in monetary policy terms, but the fact remains: this new remit doesn’t necessarily give the Bank any extra powers it didn’t already have.
Which begs the question: why is the Chancellor changing it at all? No doubt it’s partly designed to give markets and homeowners the impression of a fresh start at the Bank – particularly given it will coincide with the arrival of new Governor Mark Carney. More compellingly, it’s a subtle (or not so subtle) attempt to indicate that the Bank can provide even more accommodative policy (for which, read more QE) if it so wishes. It all comes back to George Osborne’s so-called “monetary activism”.
However, the timing is still odd. If Ed Balls and Gordon Brown’s 1997 remit was not fit for purpose, why not overhaul it in 2010 when the Coalition came into Government? Instead, at that time, when asked privately, senior Treasury advisors brusquely dismissed the idea.
It makes the switch look a little opportunist, and, if indeed this overhaul is as minor as it seems, undermines the notion of stability around the monetary policy framework. You mess with these things at your peril.
PS Is it just me or does the response from the Bank of England Governor, Sir Mervyn King, look a little bit like damning it with faint praise?