Bank of England should have its remit ‘pruned’ alongside forecasting shake-up
The Bank of England’s remit should be “pruned”, according to a report by a Lords’ committee which is critical of its work in the build up to the cost of living crisis.
The Lords Economic Affairs Committee said the Bank, which works to keep the rate of inflation close to a 2% target set by the Treasury, had been spread too thin.
The peers criticised an expansion of its objectives in recent years to include areas such as energy security and climate change, alongside monetary policy and financial stability.
They declared public confidence had clearly been shaken as the pace of price growth surged following the end of the COVID pandemic – exacerbated by the effects of the Russian invasion of Ukraine.
Inflation ultimately hit its highest level in 41 years – above 11%.
The peers said witnesses had reported “a lack of intellectual diversity”, which had led to an “over-reliance on inadequate forecasting models” and a “persistence of above-target inflation.”
The Bank has faced criticism for being slow to raise interest rates in a bid to choke demand in the economy.
It believed, in the second half of 2021 like other major central banks, that the rise in inflation in the West was “transitory” – temporary in nature – but it has argued no one could have seen the war in Ukraine coming.
Sanctions imposed on Russia contributed to the unprecedented surge in energy and other commodity costs that followed.
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The Bank’s monetary policy committee first acted against inflation in December 2021 as economies got back in gear from the pandemic.
It subsequently raised the cost of borrowing a further 13 consecutive times until this summer as the effects of Russia’s war played out.
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The Bank has pointed out it was the first Western central bank to impose an interest rate rise but admitted failures in its forecasting models.
It ordered a review, which is being led by former chairman of the US Federal Reserve, Ben Bernanke.
The committee’s other suggestions included additional scrutiny of the Bank’s work by parliament due to the expansion of its regulatory oversight.
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“We are concerned that a democratic deficit has emerged, which risks undermining confidence in the Bank and its operational independence,” it said.
“We therefore believe that current parliamentary arrangements should be enhanced. In particular, we recommend that Parliament should conduct an overarching review of the Bank’s remit, performance and operations.”
The Bank responded: “We’d like to thank the Lords EAC for this report and will be giving the recommendations careful consideration. We’ll respond formally in due course.”
The UK’s jobless rate ticked up to 4.6% in April while payrolled employment has fallen sharply since, according to official figures covering the period when budget tax hikes on businesses came into effect.
The Office for National Statistics (ONS) said the new unemployment rate covering the three months to April was the highest since July 2021.
It had previously stood at 4.5% – a total of more than 1.6 million people.
At 4.6%, it is above the peak level predicted for this year, just in March, by the Office for Budget Responsibility.
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Figures from the taxman also highlighted by the ONS showed the number of people in payrolled employment during May fell by 109,000 – double April’s revised figure of 55,000 and the biggest monthly drop in five years.
The ONS Labour Force Survey data was the first to cover April’s rises in employer national insurance contributions and the national living wage – hikes to costs for businesses which lobby groups had warned would result in job losses, price rises and lower wage settlements.
The ONS figures showed average weekly earnings, excluding the effects of bonuses, over the three months to April were weaker, from a downwardly revised 5.5% to 5.2% year on year.
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Liz McKeown, ONS director of economic statistics, said: “There continues to be weakening in the labour market, with the number of people on payroll falling notably.
“Feedback from our vacancies survey suggests some firms may be holding back from recruiting new workers or replacing people when they move on.”
The ONS data piles more pressure on Chancellor Rachel Reeves, just a day after she confirmed her winter fuel U-turn would cost £1.25bn.
She has consistently defenced her budget, arguing the taxes on business were a one-off necessary evil to account for a £22bn “black hole” in the public finances inherited from the last government.
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Employment minister Alison McGovern said in response to the data: “Six months after we launched Get Britain Working, we are already seeing the benefits with economic activity at a record high, with 500,000 more people in employment since we entered office and real wages growing more since July than in the decade after 2010.
“People all over the country are benefiting from increased training opportunities and the newly launched Jobs and Careers Service will allow us to test new and innovative approaches to personalise employment support.”
Despite the wage figure easing, that 5.2% level remains comfortably ahead of the 3.5% rate of the pace of price growth – inflation.
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The curb to consumer spending power will be welcomed by the Bank of England as its rate-setters continue to fret that strong wage growth represents an inflation risk ahead.
The ONS figures did little to boost financial market expectations of a further rate cut next month.
LSEG data showed 90% of market participants believed there would be no no change – with just one further cut this year being fully priced in.
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