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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Central bank independence 'threatened by QE, nationalism, and loss of trust in globalisation' – as it happened

Click play to watch the Bank of England’s conference on central bank independence

Recap: Central Bank independence under fire

Time for a recap.

The Bank of England has marked its 20th year of independence by hearing a string of warnings that central bank autonomy is at risk.

Former MP Andrew Tyrie outlined seven reasons why support for giving central banks control of monetary policy was fading. They include rising support for nationalism, and concerns that quantitative easing has made inequality worse.

His concerns were echoed by other experts.

Dame DeAnne Julius summed up the problem with QE - most people don’t understand it, or don’t think it is credible.

Instrument independence was good when people understood what the instrument was and how it worked.

Once you go from buying government bonds to buying corporate bonds to loosening credit through things like funding for lending, and mixing that up with what’s going on on the macroprudential side – where it can look like the bank is pushing lending with its interest rates policy but pulling it back with its regulatory policy – things get much more complicated.

Frances O’Grady of the TUC warned that politicians are keen to use central bankers as human shields.

Veteran central banker Stanley Fischer had wise advise for today’s policymakers - always be vigilant, and keep away from political influence if you want to remain independent.

The day began with Mark Carney arguing that BoE independence would help it to protect the UK from the consequences of the Brexit vote, but wouldn’t be able to stop real incomes falling.

Prime minister Theresa May grabbed the early attention, with a speech designed to push back against Labour’s criticism of free market economics.

My colleague Polly Toynbee wasn’t impressed.

Nor was one of the men who pushed BoE independence:

May also intensified the pressure on Boeing, over the Bombardier tariffs row.

Former PM Gordon Brown also had a stern warning; that populism will undermine support for central bank independence, and could spark a new financial crisis.

Brown also argued that BOE independence had helped keep the UK out of the euro, as he took a few digs at former governor Sir Mervyn King.

That’s all for today; thanks for reading and commenting. GW

Chart: On inflation targeting

Costas Milas, professor of finance in the University of Liverpool’s Management School, has co-authored some interesting research into inflation targeting - a key theme of today’s Bank of England conference.

This work examined whether adopting inflation targeting has made a significant difference to the persistence and variability of inflation.

As this chart shows, different countries got to grips with inflation at different speeds. In several countries, including the UK, inflation was calmed before the central bank got independence.

Inflation targetting

The study also found that inflation-targeters have not necessarily been more successful than non-inflation targeters in making inflation less persistence and/or reducing the variability of inflation.

Instead, the most important factor that determines the success in taming inflation, is the quality of the institutional framework within which Central Banks operate. So if a country’s government is effective, with a properly independent civil service, it is easier to bring inflation into line

Professor Milas explains that this has lessons for the future:

Our results do not argue against inflation targeting policies. Rather, we view the quality of central banks and institutions as a vital element in ensuring economic and financial stability in the aftermath of the recent financial crisis and the current attempt by Central Banks to gradually raise near-zero policy rates in order to return to economic ‘normality’.

More details here.

IMF softens its lines on Greek banks

Over in Athens, there is relief that the IMF has signalled that it will not take such a tough position on Greek banks as expected.

Helena Smith reports:

Addressing the Financial Times Investment Management summit in London earlier, Poul Thomsen, who heads the Washington-based body’s European department, said the IMF wasn’t overly worried about the Greek banking system’s stability.

Thomsen said:

“On the subject of the Greek banking system, let me emphasize that we see no financial stability concerns at all in Greece.”

Regular readers will recall that earlier this week we reported on Greek bank shares nosediving on the back of recapitalisation fears following the IMF’s demand for an asset quality review. On Monday ECB chief Mario Draghi raised the spectre of multiple stress tests which would highlight Greek lenders’ huge non performing loan portfolio.

But Thomsen insisted that Greece’s four systemic banks were still in dire need of a medium-term strategy for the management of bad debt. “We need to be sure that there is a strategy to deal with Greece’s exceptionally high levels of non-performing loans over the medium term,” he said.

Stanley Fischer takes a few questions:

Q: How does a central bank maintain its independence?

By being independent of political influence, and always acting as a technocratic institution.

Q: Would the Bank of England have been able to take such unconventional actions in recent years if it hasn’t been given independence?

History shows that governors can generally take actions which aren’t legally within their remit, in times of crisis.

Q: How dangerous is Donald Trump, given the progress made in financial regulations since the financial crisis?

Fischer declines to answer, as he’s still on the Federal Reserve board.

He points out that he discussed this with the Financial Times in August (he said it was “dangerous and extremely short-sighted” to unwind regulations).

Stanley Fischer: Central banks must always be vigilant

The watchword of a central banker should be be “Semper Vigilantes’, Fischer concludes.

Always be vigilant.

Because history and financial markets are masters of the art of surprise, as we have found out to our cost more than once.

And never say never, because you will find yourself having to do things that you never thought you would.

Fischer also warns his audience against assuming that laws can be changed quickly if a crisis breaks out.

He reminds them that the US House of Representatives dramatically voted down TARP (the Troubled Asset Relief Program, created to rescue Wall Street).

Fischer was governor of the Bank of Israel at the time, watching the vote with colleagues. One of them remarked that “[Fed chief] Mr Bernanke didn’t look very happy” as the plan was rejected (triggering an almighty selloff on Wall Street).

A week later, though, TARP was approved - so policymakers can get there in the end....

Stanley Fischer says it’s important not to underestimate the importance of reversing the stimulus measures introduced after the 2008 crisis.

After a long career in central banking, Stanley Fischer is retiring from the Federal Reserve next month.

And to celebrate his career, Mark Carney is presenting Fischer with a rare figurine of a pink-coated Bank of England doorman.

Fischer begins with a joke about a military parade, in which artillery and soldiers are followed by a platoon of economists carrying clipboards.

“Why are the economists marching”, one observer asks.

“You should see the damage they can do”, the military chief replies solemnly.

That’s why central banks need to be contained within their own space, Fischer smiles.

You can watch Fischer’s speech online here.

Back at Fishmonger’s Hall, Otmar Issing, the ECB’s first chief economist, is warning that central banks should resist launching ‘helicopter money’ operations.

Mark Carney was correct to warn today (see 9.21am) that Brexit is the most important factor on the UK economy, says Mihir Kapadi, CEO of Sun Global Investments.

He adds:

His statement indicates perhaps that the Bank of England no longer feels it has the full autonomy it has been enjoying over the last 20 years in determining the monetary policy. It now feels constrained by an external factor – the EU’s relationship with post-Brexit Britain...

As the BoE marks 20 years of political independence today, the current Brexit period points to new period of great uncertainty for the Bank

In other economic news...

Ireland remains on track to be the fastest-growing economy in the European Union for the fourth year in a town, according to Investec Economics.

It is forecasting Irish GDP to rise to up to 5% by the end of this year and growth of 4.4% next year. Unemployment in the Republic will fall to 6.1% of the Irish labour force - it’s lowest rate since June 2008 just before the financial crash.

Investec’s Dublin based economist Philip O’Sullivan said:

“We see this progress continuing over the coming years, with unemployment on course to fall to just 4.5% by 2019.”

But, O’Sullivan also warned Brexit could still pose a key threat to the Irish economy especially given that a sixth of all Irish exports go to the UK - Ireland’s biggest trading partner. The benign Investec forecast comes less than a fortnight before the next Irish budget from the Fine Gael minority coalition in Dublin.

This pick-up in US growth to 3.1% per year is a boost to Donald Trump, argues Alex Lydall, Head of Dealing at Foenix Partners.

He writes:

After a more bullish Federal Reserve meeting this month the tide appears to be turning at a crucial point, with Mrs Yellen and Trump seemingly singing to the same chorus.

With growth on the upward trajectory and inflation perhaps not causing the headache some Fed officials cited earlier in the year, the US is firing on almost all cylinders coming into year-end.

There are also signs that US car sales have picked up, says Paul Ashworth of Capital Economics.

The most encouraging news of the day is that the advance indicators report suggests wholesale inventories increased by a very strong 1.0% m/m in August, with retail inventories increasing by an even bigger 1.2%. The latter was driven by a 1.7% m/m increase in motor vehicle inventories.

Vehicle sales were hit by Harvey in late August but, according to preliminary estimates, it appears that the destruction of vehicles during the storm has led to a sizeable rebound in vehicle sales in September.

Updated

US growth revised up (a bit)

Just in: America’s economy grew a little faster than previously thought this summer.

US GDP grew by an annualised rate of 3.1%, the Commerce Department reports, up from a previous estimate of 3.0%.

But... the number of Americans signing on for jobless benefit has risen to 272,000 in the last week, up from 260,00 previously. That’s partly because of hurricane Irma, which caused severe disruption in Florida and Georgia.

Brown: We need reforms to avoid new crisis

Here’s the full text of Gordon Brown’s warning that government’s risk “sleepwalking” into another financial crisis, unless they create a better early-warning system.

“While there is now improved supervision of financial standards, reform must be intensified to prevent a future financial crash.

”If, for example, the next financial crisis comes out of Asia - and if, as likely, because of problems that arise from a shadow banking system in commercial and industrial lending, we will ask ourselves next time: Why did we not act after 2008 to create a better global early warning system and make our financial regime more fully-co-ordinated globally?

“These decisions to act cannot be left to bankers alone. Britain and the world urgently needs to get the balance right between the need for expertise, the need for proper accountability and the need for effective leadership. There will be no hiding place for the G20 or any government the next time.”

Brown’s solution is three-fold:

  • Create a strategic oversight authority for UK financial stability, combining expertise from the Treasury and the Bank of England
  • enhanced leadership by the G20 in delivering a global early warning system
  • better global co-ordination of the interconnected globally-banking system across all financial centres, including in Asia.

The former UK PM also warned that the Treasury can’t keep “washing its hands” of responsibility for financial regulation, and dumping it all on the Bank of England. He fears that the BoE will struggle when the next crisis comes.

Brown also predicts that protests against globalisation will “only grow” if people think the “elite” are taking decisions without proper accountability.

Sturgeon lays into Ryanair over flight cancellations

First Minister Nicola Sturgeon during First Minister’s Questions at the Scottish Parliament today.
First Minister Nicola Sturgeon during First Minister’s Questions at the Scottish Parliament today. Photograph: Jane Barlow/PA

Breaking away from the Bank of England conference.... Ryanair is in hot water after announcing a second series of flight cancellations yesterday.

Nicola Sturgeon, Scotland’s first minister, has attacked Ryanair’s “deeply regrettable” decision to cancel scores of flights from Scotland and backed the CAA’s legal warnings to the airline over misleading passengers about their rights.

Speaking during first minister’s questions on Thursday, Sturgeon said the Scottish government’s transport minister, Humzah Yousaf was writing to the airline to protest at its suspension.

Ryanair has cancelled Scottish services to London Stanstead, and to airports in Poland, Spain and Germany, amongst 18,000 flights it has dropped. Around 400,000 passengers are affected.

Sturgeon told MSPs:

“I have serious concerns about the decisions taken by Ryanair in the past couple of days. These will cause disruption to many passengers travelling to and from Scotland to London and indeed to other destinations in Europe.”

She added:

“We fully support the CAA’s launch of enforcement action because it is vital at the time of disruption that airlines provide full and accurate information about the rights that they have.”

Sturgeon was responding to attacks from Patrick Harvie, co-leader of the Scottish Green party on her proposals to firstly cut by 50% and then scrap air passenger duty in Scotland, using Holyrood’s new tax powers. Harvie said scrapping APD would benefit the wealthiest most, and were “unwanted, unnecessary and unsupported by any evidence”.

Gordon Brown ends his session by defending his tripartite system (which was found wanting in 2007).

And he does it with another pop at the Bank of England under Mervyn King’s leadership, insisting that the BoE was still responsible for spotting a crisis.

Brown insists:

The bank was still in charge of strategic financial thinking.... What failed was the implementation of the regime.

I suspect we may hear more about this when Gordon’s new book hits the news stands....

Brown also warns that laws introduced to avoid a new financial crisis are being pushed back in America:

Chris Giles of the Financial Times’s isn’t impressed by Gordon Brown’s criticism of the Bank of England in 2007.

Brown is now criticising the Bank of England for failing to cut interest rates faster when the financial crisis began in 2007, when he’d become prime minister.

He says he thought interest rates were too high, but kept his mouth shut because he didn’t want to undermine independence.

The BoE’s failure, Brown says, forced the government to act quickly with fiscal measures when the crisis broke.

A few months later, the Bank was trying to tell the government what to do about fiscal policy, says Brown a little bitterly (a pop at former governor Lord King, I think).

Updated

Brown says that a joint “strategic oversight group” should be set up, with officials from the Treasury and the Bank of England.

That would look for economic problems and issues where the government needs to act, such as in the housing market.

It should be more formal than the old (discredited) Tripartite system, Brown adds.

Otherwise, Brown says, the Bank of England is being exposed by the government, and left to try to fix problems alone.

Gordon Brown claims that granting the Bank of England independence in 1997 helped to keep Britain out of the eurozone.

He says that pre-independence, the debate about the euro was that Britain should give up on the relatively unstable regime in the UK, and go for the anchor provided by the euro and particularly the Bundesbank.

After independence, that debate changed - there was a stable economic regime in the UK too, and with a more pro-growth policy than the eurozone.

Brown says:

Independence for the Bank of England has been not just been a technical success, but also avoided many of the problems that might have taken us into the euro early, and pushed us out of the euro very quickly afterwards.

It certainly also avoided tensions between a Labour chancellor and the governor of the Bank of England, if the government had still set borrowing costs each month.

Gordon Brown is enjoying his trip down Memory Lane.

He says he had to phone the press after his historic announcement to make sure they understood it (apparently reporters were more interested that he’d also raised interest rates).

Brown also reminds us that the Conservative Party voted against the plan, and for several years promised to reverse independence when they got back into power.

Brown explains that Labour kept their plans secret until after the 1997 general election, to avoid interest rates becoming politicised.

He says that the Conservative government had resisted raising interest rates before the election, even though the Bank was recommending tightening monetary policy.

Gordon Brown then explains how the Labour government decided to hand independence to the Bank of England, in an attempt to end short-term planning in the UK.

Brown also makes a joke about how, in the past, reports of ‘England collapsing before lunch’ could apply to the cricket team or the pound.

Brown: Take Back Control movements on the rise

Gordon Brown, the man who gave independence to the Bank of England, is now giving his views.

Brown homes in on one of Andrew Tyrie’s points - that public concerns over globalisation threaten central bank independence.

If we do not understand that in an democratic system you’ve got to get the right balance between expertise, accountability and leadership, then anti-globalisation protests will rise.

And those people who are taking decisions, perhaps even the right decisions, will be blamed as “take back control” movements gain even more support in the years to come.

Tyrie: Seven reason why central bank independence is threatened

Andrew Tyrie

Andrew Tyrie, the former (highly regarded) chair of the parliament Treasury committee, is now speaking at the BoE’s conference on bank independence.

He warns that the benefits of independence been eroded over time, and gives seven reasons why:

  1. A large proportion of the population don’t remember the ‘ghastly’ effects of inflation.
  2. The Bank of England has been given an indemnity by the Treasury to allow its asset purchase scheme; there’s a risk that this will create political interference.
  3. People are very aware of the distributional consequences of policies introduced to fight deflation, namely QE.
  4. The widening of the Bank’s responsibilities after the financial crisis means it can be blamed for problems in a wider part of the economy, such as housing policy
  5. Central bank independence was underpinned by a wider consensus of how to run the economy, and the benefits of globalisation. That is now under political attack in many western economies
  6. Central banks are vulnerable to the wider loss of trust in institutions across the board
  7. Populist nationalism and socialism both have room to breathe in many western countries, and neither of them sit easily with central bank independence.

So what can the Bank of England do?

Tyrie says it must resist being overloaded with responsibilities, and it must remain accountable and keep explaining to the public what it is doing.

And he ends with a stern reminder of the Bank’s role in the 2008 financial crisis.

The Bank failed us when the crash came. There was groupthink. They were part of the same groupthink as everyone else.

It’s parliament’s job...to make sure that groupthink does not take root, and hack away at it when they see it.

Updated

TUC's O’Grady: politicians use central banks as human shields

Frances O’Grady, head of the TUC, says there has been a rise in the number of “pretty poor quality employment, and underemployment” in UK since the financial crisis.

There’s also been a rise in unsecured household debt, everyone should pay a lot of attention to that.

She criticises “counter-productive policies, such as austerity and seven years of pay freezes”, pointing out that this sacrifice wasn’t volunteered.

O’Grady then warns the BoE’s conference that politicians aren’t always on their side, and will blame monetary policy for the state of the economy.

One of the risks for the Bank is there are unrealistic expectations for the bank’s role in dealing with a much bigger set of problems.

There’s also a problem that politicians sometimes use central bankers as human shields, rather than facing up to the political choices they should be making.

[O’Grady doesn’t single any politician out, but nearly a year ago Theresa May did blame the Bank of England for making people poorer]

Updated

DeAnne Julius: QE threatens bank independence

Dame DeAnne Julius
Dame DeAnne Julius Photograph: Bank of England

Dame DeAnne Julius, a founder member of the Monetary Policy Committee of the Bank of England, warns that central bank independence is being threatened by policies such as quantitative easing.

She is telling the BoE’s conference that the move into ‘unconventional monetary policy’ is a danger, as it makes it harder to persuade the public that the central bank is doing the right thing.

QE is much more complicated than just raising or lowering interest rates, and it’s much harder to prove that it has worked.

As Dame Julius puts it:

Instrument independence was good when people understood what the instrument was and how it worked.

Once you go from buying government bonds to buying corporate bonds to loosening credit through things like funding for lending, and mixing that up with what’s going on on the macroprudential side – where it can look like the bank is pushing lending with its interest rates policy but pulling it back with its regulatory policy – things get much more complicated.

We all know that the more complicated things get, the less credibility experts have, she concludes.

If you missed Mark Carney’s speech, here’s a clip of the BoE governor explaining how the Bank will steer the economy through Brexit.

Guy Debelle concludes by pointing out that central bank independence can be improved, and that government policy also has an important role to play in balancing the impact of monetary policy.

Debelle: Central banks are being unfairly blamed.

Guy Debelle then takes a swipe at critics of central bank independence.

The deputy governor of the Royal Bank of Australia argues that central bankers are in the dock for issues that aren’t really their fault.

My view is that inflation targeting and central Bank independence are being blamed for economic outcomes that are not a consequences of either of them, but rather those outcomes are a consequence of our understanding or misunderstanding of how the economy operates.

Legitimate criticism of central bank’s understanding of the economy can be made, but that does not delegitimise the overall economic framework.

But what about the ‘distributional consequences’ of monetary policy -- the fact that stimulus programme such as QE have made the rich richer?

Debelle argues that monetary policy has always had this issue - changing interest rate makes some people richer, and others poorer.

Plus, unemployment is the biggest cause of economic inequality [this is often played as a trump card from central bankers, but it ignores the fact that many jobs created since the financial crisis are low paid or insecure].

Updated

But has central bank independence worked?

RSA deputy governor Debelle points out that inflation has certainly been low since the 1990s - ironically, inflation is now “too low” in some places.

That’s why some critics claim that bank independence is a solution to yesterday’s problem.

But, Debelle explains that Ed Balls (Britain’s light-footed former UK shadow chancellor) has conducted research showing that two decades of data backs up Debelle and Fischer’s 1994 paper on the issue of central bank independence.

Debelle points out that independence has held firm; bank targets haven’t been changed just to catch up (or down) with inflation, and there is little discussion about setting interest rates to match the political life cycle (ie, to create growth before an election).

Updated

Here’s Guy Debelle explaining how central banks moved towards independent inflation targeting in the 1990s.

Debelle cites the danger of allowing politicians to run economies ‘too hot’ in the run-up to an election.

It’s still a risk in emerging markets, even if all advanced economies have handed independence to their central banks.

And here’s a slide from his presentation.

Guy Debelle’s speech on central banks
Guy Debelle’s speech on central banks Photograph: Guy Debelle

Guy Debelle, Deputy Governor of the Reserve Bank of Australia, is now discussing the road to central bank independence.

Back in 1994, he and Stanley Fischer cowrote a paper examining how independent a central bank should be.

Debelle says they concluded that central banks should be “goal dependent, but instrument independent”.

In other words, politicians should tell central banks what to aim for, but give them the freedom to adjust monetary policy as they saw fit to reach their goal.

May: Not happy with Boeing's behaviour

The next question is about the Bombardier-Boeing trade dispute, following the shock news that America is slapping a 219% tariff on Bombardier jets (partly made in Northern Ireland).

May says Boeing’s behaviour isn’t acceptable.

We have a long-term partnership with boring, in various parts of government.

This is not the kind of behaviour we expect from a long term partner, and it undermines that partnership.

On a broader note, May also warns that “aspects of protectionism” are creeping in in parts of the world. She wants the UK to be a champion of free trade.

May: Government must help savers

Onto questions.

Our economics editor Larry Elliott asks Theresa May about her criticism of the Bank of England’s ultra-low interest rates and quantitative easing. What will she do about it?

May says governments must what they can to mitigate the impact of loose monetary policy, where necessary, and she cites the government’s efforts to support savers.

Low interest rates are good news for borrowers, but not savers.

Video: Carney on Brexit

Here’s a video clip of Mark Carney explaining how the Bank will use all its powers to mitigate the risks created by Brexit (as covered here).

May: Mustn't return to failed ideologies of the past

As predicted, Theresa May is now defending free market economics - but also admitting that it doesn’t work as well as it should.

For too long, too many communities have not seen the benefits of prosperity, she says. That waste of potential is bad for the economy as a whole..

But she then insists that free markets need to be improved, not abandoned as in Venezuela.

My argument has always been, if you want to improve a system that has delivered unparalleled benefits, then you must address its faults, May insists.

If you don’t, you risk a return to the ‘failed ideologies of the past’

This includes high inflation at home, and trade wars abroad, the PM continues (a timely warning, given the row between Bombardier and Boeing that is threatening thousands of jobs in Northern Ireland).

Our Politics Liveblog is tracking all the key points:

May: We're living with failure of Tripartite system today

Theresa May is now speaking. She jokes that when she applied to the Bank, as a geography graduate, she’d asked to work in its international department.

Instead, they put her in the economic intelligence department! (this doesn’t get much of a laugh, unfortunately).

May reminds her audience that UK inflation got as high as 22% in the 1980s, before Bank independence. The fact that sounds so outlandish shows what progress has been made.

But she also points out that problems developed during the Bank’s early years of independence, which came to light in the financial crisis.

She blames the ‘tripartite’ system set up by former chancellor Gordon Brown (splitting responsibilities the Bank of England, the Financial Stability Authority, and the Treasury).

As May puts it:

Tripartite regulation did not prove a success. It failed the country during the financial crisis and we’ve had to live with the consequences ever since.

[She’s referring to the collapse of Northern Rock, and the nationalisation of Royal Bank of Scotland and HBOS, followed by the deepest recession in decades]

Mark Carney wraps up by welcoming Theresa May - and joking that she gave up the chance of a good career at the Bank to enter Westminster.

As some of you may know, the Prime Minister began her career as a new graduate at the Bank before leaving after six years to pursue other interests – ultimately politics. Whilst at the Bank, the Prime Minister worked in the Economic Intelligence Department – then the cutting edge of our activities.

During her time she accomplished great things and was destined for much more. Just imagine what could have become of your career, Prime Minister, if you had stayed at the Bank: you could have been in Fishmongers Hall...

Carney then cites May’s achievements:

After the formation of the coalition government in 2010, she would become the longest- serving Home Secretary in over 60 years. During that period, she confronted many of society’s biggest challenges – for example introducing legislation to tackle domestic violence, to eradicate modern slavery and to counter terrorism.

Never afraid of a challenge, she stepped into the breach to become Prime Minister following the referendum.

Updated

Carney then warns that Brexit is the biggest single issue facing the UK economy (see earlier post for the full quotes)

Carney: We can't stop Brexit making you poorer

Mark Carney then points out that independence gives central bankers the freedom to deviate from their inflation targets in times of trouble.

That includes today, as Britain plots its exit from the EU.

Carney warns that he can’t prevent Brexit hitting the public’s real incomes (ie, making us poorer). But he can try to limit job losses, by allowing inflation to run over target.

As Carney puts it:

In exceptional circumstances like today when the economy is facing profound structural change, the MPC can extend the horizon over which it returns inflation to target from above in order to balance the effects on jobs and activity. After all, even though monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU, it can influence how this hit to incomes is distributed between job losses and price rises.

Carney also acknowledges that the Bank was “fundamentally reformed after the crisis”, creating a new Financial Policy Committee to address financial stability issues.

[That’s because the collapse of Northern Rock shows the weaknesses in the ‘tripartite’ system set up by Gordon Brown]

Carney: Bank independence will help us handle Brexit

Mark Carney then declares that the gains from independence since 1997 have been “enormous”.

He argues that the Bank played a vital role in the financial crisis, and can now help the UK get through its exit from the European Union.

In the two decades that followed independence, inflation averaged just under 2% compared with over 6% in the preceding two. It’s been one-fifth as volatile. Crucially, independence allowed monetary policy to respond boldly and effectively to the biggest financial crisis in a century.

And it leaves the Bank well placed to address a range of possible developments around Brexit.

Mark Carney speaking today
Mark Carney speaking today Photograph: Bank of England

Carney then hails Gordon Brown’s ‘bold decision’ to give the Bank of England operational control for setting monetary policy in 1997.

He reminds his audience of The Bank of England Act of 1998 which clarified the Bank’s responsibilities - for the first time and only time in three centuries.

Carney says the Bank is now accountable to the public and parliament, and jokes that he couldn’t get away with blaming a decision on his “instincts”, as former governor Montagu Norman once tried.

[To learn more about Norman, do read the brilliant Lords of Finance, which explains how central bankers helped created the Great Depression]

Updated

Carney reminds his audience of Britain’s economic travails since World War Two. Achieving low inflation is easier said than done.

Prices were anything but stable during the 1970s and 80s. With the collapse of Bretton Woods in 1971, UK monetary policy lost its nominal anchor. There followed a series of botched experiments, with targets for incomes, monetary aggregates and the exchange rate. The costs of such failures were enormous, with prices rising by 750% in the twenty-five years to 1992, more than over the previous two hundred and fifty years. Unemployment was high and growth volatile.

The inflation target rose from the ashes of the ERM debacle twenty five years ago this month, marking the point when price stability became the unambiguous objective of UK monetary policy.

This culminated in the “the ashes of the ERM debacle twenty five years ago”, when Britain gave up trying to peg sterling to the Deutschmark.

That’s when the UK became unambiguously aiming for price stability, but even that wasn’t a full success.

It simply wasn’t fully credible as the chancellor, Ken Clarke, was setting rates.

The danger is that politicians promise low inflation, then go for faster growth, and end up delivering neither.

BoE conference gets underway

And we’re off! Governor Mark Carney is speaking first.

Carney begins by explaining how price stability (ie, stable inflation) is the best contribution that monetary policy can make to the public good.

High inflation hurts the least well off in society the most. It distorts price signals, inhibits investment, and ultimately damages the productive capacity of our economy.

Equally, deflation imperils growth and employment, and, in the extreme, leads to financial ruin and economic collapse.

So ideally, you want “low, stable and predictable inflation”, Carney continues. Just enough to “grease the wheels of the economy” by encouraging people to spend, while giving space to central bankers to act when an economic shock hits.

Attendees are gathering in Fishmongers’ Hall for the Bank’s conference, which is running a little late.

I guess Theresa May’s late addition to the schedule may be causing a few problems....

BoE conference

Carney: Brexit progress is key factor for UK economy

As well as defending Bank independence, Mark Carney is also warning that Britain’s economic prosperity depends on the deal to leave the European Union.

Here’s the key section from his speech, which will be delivered shortly.

The biggest determinants of the UK’s medium-term prosperity will be the country’s new relationship with the EU and the reforms it catalyses. Most of the necessary adjustments are real in nature and therefore not in the gift of central bankers.

The Bank will do everything it can to support adjustment consistent with its statutory obligations. We will continue to assess and express our independent assessment of the risks associated with Brexit. We will also use all our powers, consistent with our remits, to mitigate those risks and to smooth the adjustment to new opportunities.

Monetary policy will be set to achieve the inflation target in a way that helps smooth real adjustment in the economy and supports jobs in the wake of very large external forces.

Banks will be capitalised so that they can withstand any severe shock that could be associated with Brexit – however unlikely – and still meet demand for credit.

The financial system as a whole will have the capacity to finance the transition and the opportunities beyond.

These are the best contributions the Bank of England can make to the good of the people of the United Kingdom.

Labour MP Rachel Reeves, who chairs the Business, Energy and Industrial Strategy Select Committee, tweets:

Correction, it seems that Mario Draghi isn’t taking part in the BoE’s conference (the ECB president was initially scheduled to close the event on Friday afternoon).

The Bank of England has been rather reluctant to heave away at the levers of monetary policy in recent years.

They’ve been on hold for over a year, at 0.25%, after almost a decade at just 0.5%.

But last night, the Bank’s chief economist Andy Haldane hinted that a rate rise was close, and would be “good news”.

Haldane told Sky News that:

This would be a sign of the economy healing, and therefore adjusting to that healing process. So rather than being a source of fear or trepidation, this ought to be a good news story about the economy proving resilient.”

The Bank of England’s remit is to keep UK inflation under control. Originally the target was 2.5%, later cut to 2%.

As this tweet from the Treasury shows, the BoE did well for the first decade, but then struggled once the financial crisis struck....

But...things were even worse in the 1980s, when interest rates were being set to protect the value of the pound (a policy that came unstuck on Black Wednesday).

Here’s another photo from the 1990s (spot a young Mervyn King on the front row).

Updated

Watch the Bank of England conference here

Helpfully, the Bank of England are streaming their two-day conference:

Theresa May to defend free markets

Britain’s Prime Minister Theresa May.

Prime minister Theresa May will kick off the Bank of England’s conference this morning, with a full-throated defence of free markets.

In a rebuttal to Labour leader Jeremy Corbyn, May will argue that a well-regulated open economy is the route to higher living standards, rather than state control.

May is expected to tell the BoE that:

“A free-market economy, operating under the right rules and regulations, is the greatest agent of collective human progress ever created.

It was the new combination which led societies out of darkness and stagnation and into the light of the modern age. It is unquestionably the best, and indeed the only sustainable, means of increasing the living standards of everyone in a country.”

The agenda: Bank of England celebrates 20 years of independence

The Bank of England in London.
The Bank of England in London. Photograph: Andy Rain/EPA

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

A gaggle of the world’s top central bankers and other luminaries have descended on the City of London to help the Bank of England mark its 20th year of independence, and plot the way ahead.

Over the next two days BoE governor Mark Carney will be joined by Mario Draghi (ECB) , Stanley Fischer (US Federal Reserve), Guy Debelle (Australia), Karnit Flug (Israel), Christine Lagarde (IMF), Mohamed El-Erian (Allianz) and Ed Balls ( Strictly Come Dancing Harvard Kennedy School).

Ed Balls, of course, was a driving force behind the surprise decision to grant the Bank of England independence back in 1997. Gordon Brown, then chancellor, shocked the City and Westminster by announcing that he would hand control of interest rates to the BoE.

Later today, Brown will look back on that landmark decision to give Threadneedle Street operational control of monetary policy.

As my colleague Larry Elliott reported at the time:

Mr Brown said last night that the objectives of policy were ‘high and stable levels of employment and growth’, the same as they had been in the 1940s when the Bank was nationalised, but added: ‘It is right in the 1990s to deal with them in modern ways.’

Mark Carney is also likely to defend criticism of the Bank’s independence. Some argue, powerfully, that central bankers now have too much power, and are exacerbating wealth inequality through policies such as quantitative easing.

Last year, Ed Balls co-authored an academic paper on this, and arguing that a new “systemic risk” committee should be set up to oversee some of the Bank’s activity.

As he put it:

“I think the case for independent central banks is as strong as it’s ever been. At a time of economic uncertainty but also great political risk, we need the [US] Fed and the Bank of England to play these roles.

But the reforms we’ve seen over the last few years have hugely concentrated power in central banks. I think it’s unfinished business.”

Students of politics may note that the Bank is rather late with its celebrations. Brown granted independence on 7 May, less than a week after the election. But still, any excuse for a party, I guess.

The full agenda is online here. Here are some highlights:

  • 9am BST: Welcome remarks from Mark Carney, followed by a speech by Theresa May defending free markets.
  • 10:00am BST: Central bank independence in retrospect, with Guy Debelle (Reserve Bank of Australia), Gus O’Donnell (Frontier Economics); Andrew Tyrie (former Chair of Treasury Select Committee); Charles Goodhart (LSE), DeAnne Julius (University College London); Frances O’Grady (Trade Union Congress).
  • 11.45am BST: Gordon Brown keynote speech: The history of independence
  • 1.45pm BST: Does the model remain fit for purpose? Monetary policy considerations, with Ricardo Reis (LSE), Stephanie Flanders (Bloomberg); Otmar Issing (Centre for Financial Studies, Frankfurt); Christina Romer (University of California, Berkeley); Zeti Akhtar Aziz (Asia School of Business, Kuala Lumpur).
  • 3.15pm BST: Stanley Fischer keynote speech: Reflections on the framework today
  • 4:30pm BST: Does the model remain fit for purpose? Financial stability considerations, with Adair Turner (Institute for New Economic Thinking) Panel discussion: Shriti Vadera (Santander); Ed Balls, Mohamed El-Erian, Don Kohn (Bank of England Financial Policy Committee); Tobias Adrian (IMF).

There’s also a bit of economic news to watch out for

  • 1pm BST: German inflation figures for September
  • 1.30pm BST: Updated US growth figures for the second quarter of 2017

Updated

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