ALEX BRAMER: Chancellor has what Americans call “representation for hooligans” – after bad calls from the Bank last year, he demonstrates his intention to take advantage of this
A key ritual in a quarter of a century since the Bank of England gained independence is the requirement that the governor write to the chancellor with his excuses if the inflation target is not met.
The Chancellor is responsible, and both letters are issued with minutes of discussions at the Bank.
Against the backdrop of all the hype about the vague inflation forecast (now up to 11 percent) and the impact of rising interest rates on mortgage service and corporate debt, the nuances of the Chancellor’s responses could easily be missed.
Concern: Bank independence does not allow Chancellor Risha Sunak to dictate to Monetary Policy Committee
Rishi Sunak is clearly afraid. As the person in charge of the country’s finances, he does not want interest rates to rise. The rising cost of borrowed funds has a drastic effect on the cost of servicing the mountain of public debt.
Sunak acknowledges that while much of the rise in the cost of living is due to bottlenecks following the pandemic and Russia’s war with Ukraine, there are aspects that need to be better addressed.
His June letter to bank chief Andrew Bailey and the Monetary Policy Committee (MPC) on setting interest rates contained firm words. Last but not least, Sunak emphasizes that “it is necessary to reduce inflation to the target” of 2 percent.
The chancellor is less than impressed by those economists, including former U.S. Treasury Secretary Larry Summers, who argued there was no risk in allowing borrowing and indebtedness to be passed on.
They argued that inflation was well fixed and interest rates at record lows were likely to remain there.
How quickly that changed. As Sunak notes in his latest letter to Bailey, he is particularly concerned that rising prices will not become permanent.
Concerns about the possibility of rising wage prices are one of the reasons why the government is closely monitoring negotiations between railway companies (several of which operate in the public sector) and the Union of Railway, Maritime and Transport Workers (RMT).
In addition to potential disruptions to national production, the government believes that public sector employees receive relatively good remuneration, and it does not want inflation forecasts to be included in wage deals in the future.
The independence of the bank does not allow the chancellor to dictate to the MOC in his letter. The tone is firm, Sunak emphasizes the importance of decisive action by the committee. The bank will argue that it did just that with five consecutive quarter-point rate hikes.
However, the MPC would be wise to find its internal Walker (opinion of the former chairman of the Federal Reserve, US Federal Reserve). He argued that the rise in borrowing costs should be convincing enough to convince consumers and businesses to restrain their behavior.
The growth of Fed rates by three-quarters of a percentage point to a range of 1.5 to 1.75 percent may not have raised them to a much higher level than on Treadmill Street.
But it showed a degree of sword rattling and determination that was lacking in the Bank. The Fed’s decision to raise the interest rate forecast for 2024 to 3.8 percent, which is a full point higher than previously predicted, says Chairman Jay Powell, who learned from Walker.
What is striking in the MPC protocols is the unity of the Bank’s insiders (most of whom worked in His UK Treasury) against the dissent of three outside members who wanted something more daring.
Former Bank of England executives are usually cautious about public comments about their successors. But Mervyn King, who founded the Bank as a reliable machine to fight inflation, made adjustments to an article in an off-track viewer’s diary.
King writes that when inflation disappeared, it was time to “talk” to those MPC members, including Bailey, who in 2021 were interested in negative interest rates.
The former governor, a highly regarded academic economist, noted that inflation is spreading beyond energy, where it began, to much of the economy.
The independence of the bank means that Andrew Bailey is insured against dismissal. Indeed, he is only in the foothills of an eight-year solitary term. The rest of the MPC has less protection and can be violated over time.
Most importantly, the chancellor has what Americans call a “representative department” in the form of his letters to the governor.
After unsuccessful calls from the Bank last year, he intends to take advantage of this.
ALEX BRAMER: Chancellor Rishi Sunak is taking over the Bank of England
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