This week marks 25 years since arguably the biggest change to UK economic policy that no one voted for – the handing over of control of monetary policy and inflation to the Bank of England, a newly ‘independent’ central bank.
Established in 1694 and nationalised in 1945, the Bank of England has always had a close relationship with the government, from its early history helping the government finance its wars, to its post-war role guiding investment towards the government’s industrial priorities. But the role of the Bank of England has often flown under the radar of mainstream political debate. It therefore probably came as a surprise to most people when one of New Labour’s first acts of government in 1997 was to grant operational independence to the Bank of England – something that was absent from the manifesto they had just been elected on.
What this meant in practice was that the Bank of England was tasked with targeting inflation at 2% and given independence over monetary policy (setting the price of money through interest rates) to decide how to do this. The idea was that this would take the ‘printing presses’ away from elected politicians, who New Labour feared the public (and financial markets) didn’t trust not to turn on for short-term popularity. While this may sound like a well meaning idea, it has turned out to be unfit for purpose.
This separation of economic policy between fiscal authorities like the Treasury and independent central banks like the Bank of England has ended up exacerbating the crises of the
— source positivemoney.org | Simon Youel | May 6, 2022