A Governor for our Brexit times
In the first 142 meetings of the Bank of England’s Monetary Policy Committee since it was established in 1997, Bank Rate was changed 44 times. In the 113 meetings since the depths of the global financial crisis, there have only been three changes. But rather than merely sitting on its hands, the Bank has developed a significantly broader remit since the crisis. Instead of being simply an inflation targeter manipulating interest rates to achieve its objective for consumer price inflation, it has adopted wide-ranging responsibilities for financial stability across markets and banks.
Even its operations in monetary policy – with the asset purchase facility and various lending schemes for commercial banks – go far beyond traditional policy instruments. And they may have had economic consequences for the distribution of wealth rather different in scale to the plain vanilla up or down movement in the nation’s key interest rate. At the same time as the development of this broad set of responsibilities, it is no coincidence that the fundamental objectives of monetary policy are also being widely and increasingly questioned, with objectives for income growth and its distribution being touted.
It is reasonably clear that the Bank is well placed to meet an objective for inflation, and has done so with success since it was granted operational independence in 1997. It is also clear that the body politic wanted giant steps towards greater financial stability following the savage crisis of 2008/9. But it is not at all obvious that the Bank has the instruments or the public mandate to pursue broader social objectives, which are essentially ones that ought to be set and pursued by democratically-elected politicians.
Indeed, we should be concerned that some politicians are seeking to mask their choices by suggesting more active use of the Bank’s balance sheet to avoid democratic transparency. Resource allocations are essentially a political choice, while aggregate stabilisation policy can be thought of as technocratic. Pursuing Brexit lies in the same arena: it is not per se a central bank objective and cannot be thought to be so. It is essentially the Bank’s role to smooth the violence of economic fluctuations whatever Exit Door is chosen and to ensure that the financial system can cope with the resulting shocks without the dislocation that would otherwise amplify fluctuations.
Such a prompt and flexible response will be critical as we leave the European Union. And it is within this, often fiery, public narrative that we are deciding on the next Governor. I would suggest three critical requirements for the appointment. First, the next Governor must understand the particular set of economic and social circumstances that have led the country to seek an exit from the EU. He or she must act as a Governor for the whole country, not just for the City of London, because the shock of Exit and that arising from the process of economic reorientation will not be felt uniformly and might indeed heighten regional inequalities. But here’s the rub: the new Governor will not have the luxury of easing into with a two to three-year period of getting to know the country, its institutions and regions.
Secondly, the Governor will need to have deep and broad experience of all the areas in which the Bank now operates rather than being only (…ahem) an economic analyst. This means combining technical and practical knowledge at a high level.
Thirdly, he or she should not be appointed as a deliverer of EU Exit. The objective to be pursued is simply to ensure monetary and financial stability subject to whatever constraints any government may place on him or her, whether it is a No-deal Brexit or People’s QE. Whether we leave the EU on 31st October or not, much of the real work of re-orienting the economy to the rest of the world will dominate the work of the next Governor throughout each 8-year term of office. So he or she will have to see far beyond any cliff edge and will need insight, foresight and hindsight.