Speaker 1: Government will set the inflation target. The Bank of England
Speaker 1: will be charged with the setting of interest rates and
Speaker 1: it will do it through the Monetary Policy Committee that
Speaker 1: will be the instrument for making the decision about the
Speaker 1: interest rates. There is no membership of that chance or
Speaker 1: Chief Secretary or anybody else. There is no politician involved
Speaker 1: in that committee at all. That was then Chancellor Gordon
Speaker 1: Brown at his first Treasury news conference back in he
Speaker 1: stunned the City and Westminster by hand and control of
Speaker 1: Britain's interest rates to an independent Bank of England. Well,
Speaker 1: this week the old Lady of Threadneedle Street turns three
Speaker 1: hundred and twenty eight, so we thought it would be
Speaker 1: a good time to reflect both of the history of
Speaker 1: the bank's independence and why it is now coming under
Speaker 1: question thanks to the Conservative leadership candidates taking aim. I'm
Speaker 1: David Merritt in the London studio and this is in
Speaker 1: the City Blimber Podcasts, connecting you to the stories at
Speaker 1: the heart of the City of London. And joining me
Speaker 1: this week we have Bloomberg's senior economics reporter Phil Aldrich
Speaker 1: and Bloomberg Television and Radio economics and government correspondent for E. M.
Speaker 1: E A. Lizzie Burden, phil could you talk us a
Speaker 1: little bit about the history and how the bank was created.
Speaker 1: It started in six and it was a bunch of
Speaker 1: city merchants, where a lot of them were French Huguenot
Speaker 1: Protestants who left France and they wanted to help the
Speaker 1: government finance their wars. So they said, look, give will
Speaker 1: raise one point two million pounds, which obviously was a
Speaker 1: lot of money back then sixt and and you can
Speaker 1: use it to finance your your wars. And the quid
Speaker 1: pro quo was that they would be able to issue money.
Speaker 1: So they were the first sort of official issuer of
Speaker 1: bank notes because of you know, banks were at this
Speaker 1: point we're issuing their own money, and they would be
Speaker 1: the sole banker to the government. And because of this
Speaker 1: status that it gave them this credibility within the city
Speaker 1: and so they sort of effectively amassed power over over
Speaker 1: time as a smaller banks would use them, and slowly
Speaker 1: came this kind of central bank inasmuch as it was
Speaker 1: a supporter of the financial system and other banks in
Speaker 1: the city. I know that originally the bank notes were handwritten,
Speaker 1: and that did evolve because from twenty five they then
Speaker 1: started issuing bank notes in increments of ten pounds from
Speaker 1: twenty to ninety and then when France declared war on
Speaker 1: Britain in people started flocking to the bank to try
Speaker 1: and swap these bank notes into gold, which was possible
Speaker 1: at the time because and it was until the end
Speaker 1: of the gold standard, and the amount of gold that
Speaker 1: was held from the bank at that time dropped from
Speaker 1: sixteen million pounds to two million pounds, so it was
Speaker 1: a big problem. The Prime Minister at the time, William
Speaker 1: Pitt the Younger, put a Privy Council order on the
Speaker 1: Bank of England. He ordered it to stop paying notes
Speaker 1: on gold. And because of this cartoon of pit trying
Speaker 1: to woo the gold off an old lady who represented
Speaker 1: the Bank of England to help fund the war in France,
Speaker 1: the Bank of England got its nickname the Old Lady
Speaker 1: of thread Needle Street. At the big moment in our
Speaker 1: kind of recent memory, of course, was the brand new
Speaker 1: labor government of Tony Blair and Gordon Brown, and Brown
Speaker 1: surprised everyone, didn't he by announcing independence. We kind of
Speaker 1: assume now that central bank independence is this given this orthodoxy,
Speaker 1: but it wasn't always like that, and as recently as
Speaker 1: before the government was actually setting interest rates. Right, and
Speaker 1: you've both been covering the bank for a while, how
Speaker 1: significant was that moment, and you describe what it was
Speaker 1: like for the city or for the markets as well.
Speaker 1: To hear that, I have to say I was not
Speaker 1: covering it in but I hear that it absolutely stunned
Speaker 1: the financial markets. The headlines read set the old Lady
Speaker 1: set free and it was days after Gordon Brown took office.
Speaker 1: So it absolutely transformed monetary policy in the UK because
Speaker 1: it took the politics out of rate setting, which is
Speaker 1: different to budgets, right, because there's likely to be this
Speaker 1: spending spree in the run up to an election where
Speaker 1: you couldn't do the same with interest rates anymore. And
Speaker 1: former Bank of England Governor Mervin King said that it
Speaker 1: actually helped to improve the relationships between the Bank of
Speaker 1: England and the Treasury, though given the state of the
Speaker 1: relationship at the moment that might not be the case.
Speaker 1: If it's trust in number ten right exactly. The process
Speaker 1: of independence had been coming for a long time. The
Speaker 1: shock really was was the fact that it happened so quickly,
Speaker 1: and Gordon Brown was the first thing he did, but
Speaker 1: it was pretty much the first thing he did well. First,
Speaker 1: we have to remember that this was, as we were
Speaker 1: just saying, it was a private bank and it was
Speaker 1: nationalized after the Second World War effectively, and then it
Speaker 1: was a nationalized sort of institution right up until we
Speaker 1: had this. We had Black Wednesday in the e r
Speaker 1: M crisis in the UK and that was the moment
Speaker 1: we shifted to inflation targeting. After that, there was always
Speaker 1: the plan to one day give the bank independence, to
Speaker 1: separate the politics from interest rate setting, which is what
Speaker 1: course inflation. Back then, as when our remembering was the
Speaker 1: biggest threat to the economy, and so they wanted an
Speaker 1: institution which could control inflation. But the bank just wasn't
Speaker 1: in a position where it could it had the resources.
Speaker 1: At that point. The treasury was full of the brains
Speaker 1: and the bank was sort of thin on them. Nowadays,
Speaker 1: you know, it's the bank that is the is the
Speaker 1: sort of intellectual reserve of the UK economy and the
Speaker 1: treasury is much thinner on the ground. And the things
Speaker 1: that there was this shift and by they were ready effectively,
Speaker 1: and then from then on in it became the idea
Speaker 1: that actually we needed this institution to target inflation. But
Speaker 1: so the banks built up a brain trusts. Gradually the
Speaker 1: government split the Financial Services Authority out, so the prudential
Speaker 1: regulation of the banks was removed from the Bank of England,
Speaker 1: which obviously then became this catastrophic crisis in two thousand
Speaker 1: and eight with the financial crisis, because the bank had
Speaker 1: not had oversight of the financial system to the degree
Speaker 1: that it it needed to have done. And obviously what
Speaker 1: happened was the FSAY came back into the bank. But
Speaker 1: but in that in those interfining years between two thousand
Speaker 1: and the Bank built up a huge brain trust under
Speaker 1: largely under Irvin King as governor and as as previously
Speaker 1: as the Deputy Government the head of the sort of
Speaker 1: monetary analysis. People accused him of neglecting the financial stability
Speaker 1: side of the bank, but in that in the process
Speaker 1: of doing so he did he did build up the
Speaker 1: sort of economic expertise and that was one of his
Speaker 1: strongest legacies. Actually, So the two thousand eight crisis you've mentioned,
Speaker 1: that was obviously a huge test for the Bank and
Speaker 1: central banks all around the world. Irvin King is at
Speaker 1: the helm here in London trying to save the financial
Speaker 1: system this idea of quantitative easing, of course, you know,
Speaker 1: a new tool to try to stave off financial armageddon.
Speaker 1: How did the Bank do throughout that process? Were they
Speaker 1: kind of leading the world? Were they following the pack?
Speaker 1: What was the kind of the scorecard of how they
Speaker 1: managed to steer Britain through that? Amazingly, you didn't get
Speaker 1: the inflation levels of the nineteen seventies that we're seeing now.
Speaker 1: The independence of the Bank of England enabled it to
Speaker 1: have this coordinated rate cup with the Fed in October
Speaker 1: two thousand and eight that they wouldn't have been able
Speaker 1: to do if the Bank hadn't been independent. And even
Speaker 1: now critics of the Bank of England aren't calling for
Speaker 1: its independence. But every time you listened to Andrew Bailey
Speaker 1: come on the Treasury Select Committee and talk about how
Speaker 1: the Bank of England's doing, he will refer back to
Speaker 1: the financial crisis and how much the Bank has come
Speaker 1: on in terms of ensuring financial stability, because that really
Speaker 1: is a proud moment for him because he was running
Speaker 1: that before he was the governor. So it's the kind
Speaker 1: of finest hour was it If you go right back
Speaker 1: to that's all the Bank of England did it ended
Speaker 1: up being a sort of financial stability crisis. Yeah, the
Speaker 1: backstopping the crisis because it was big enough and it
Speaker 1: had that sort of core customer, which is the government,
Speaker 1: and so it still had that role, but it hadn't
Speaker 1: got the powers to supervise the bank. So it was
Speaker 1: a bizarre separation of powers, which meant there was this
Speaker 1: disjunction and then the financial crisis. Obviously we saw the
Speaker 1: consequences of that. But then when Mervin King stepped down
Speaker 1: or came to end of his turn, the bank looked
Speaker 1: outside of Britain for the first time and they found
Speaker 1: a certain Mark Arney, a very different sort of personality.
Speaker 1: How did it go down? The bank became under him
Speaker 1: a much sort of leaner business like operation. Of course,
Speaker 1: one of the accusations at Mark Ny is that he
Speaker 1: got way too political. He talked about Brexit in ways
Speaker 1: which aggravated a lot of people within the Tory Party
Speaker 1: of Brexit is causing short term volatility in the economic data,
Speaker 1: and more fundamentally, it's creating a series of tensions in
Speaker 1: the economy, tensions for business. And I guess one of
Speaker 1: the legacies is there is this kind of lingering sense
Speaker 1: that the Central Bank has overstepped because Mark Karney thought
Speaker 1: it was his right and his duty to tell everyone
Speaker 1: that breaks it was a terrible idea. There was this
Speaker 1: huge tension with Mervin King and Gordon Brown previously because
Speaker 1: Mervyn King had done something similar. He'd said that after
Speaker 1: the financial crisis and there needed to be austerity and
Speaker 1: obviously Gordon Brown had effectively felt like he was being
Speaker 1: bounced to an austerity budget at some point because of
Speaker 1: what Irvin King was saying, and he was he was
Speaker 1: livid in private, but he couldn't say anything in public
Speaker 1: against the Governor Markimland because this independent setup was his creation,
Speaker 1: so he didn't want to undermine his own creation. He
Speaker 1: then later did once he left, and once Mark Arnie
Speaker 1: was there and he felt like he could free, he
Speaker 1: was free, he could feel like he could write about it.
Speaker 1: But and then you had Mark Connie was he was
Speaker 1: just this sort of uber chief, exact type of manager
Speaker 1: who not as intellectual on economics as Irvin King, but
Speaker 1: a smooth operator. But the difference as well between Mark
Speaker 1: Carney and Andrew Bailey is, yes, Mark Carney has been
Speaker 1: was outspoken on Brexit and other issues. Andrew Bailey doesn't
Speaker 1: seem to me to have been that outspoken, but he
Speaker 1: does draw media attention for his communications because he tends
Speaker 1: to you. He called for the restraint in wage bargaining,
Speaker 1: so controversially he forgot how much he earns, and it's
Speaker 1: more than half a million pounds. What was your play
Speaker 1: over the same period, what was it? Um? That's somewhere
Speaker 1: over five hundred and I can't tell you it's luckly
Speaker 1: what it was. I didn't carry that around in my head.
Speaker 1: I think including pension five hundred and seventy five, you
Speaker 1: never got. With Carney, there would never be a gaff.
Speaker 1: He has always went in super prepared. His team were
Speaker 1: permanently exhausted because of the amount the demands that he
Speaker 1: would put on them, so that he was briefed incredibly thoroughly.
Speaker 1: That's not happening under barely. It's a more relaxed environment.
Speaker 1: I saw him coming out obviously, were just right opposite
Speaker 1: the Bank of England here and I walked past the
Speaker 1: door the other evening and out he trotted with his briefcase.
Speaker 1: And what I thought was remarkable is that no one
Speaker 1: in the crowd batters an elix. He's been very anonymous.
Speaker 1: You know Mark Carney emerged, there'd probably be sort of paparazzi,
Speaker 1: but he was just just another city guy in his seat,
Speaker 1: tottering off to the I often see him and I'm
Speaker 1: stood in front of the Bank of England covering previewing
Speaker 1: the decision at four am, and he'll not at quite
Speaker 1: four am. He'll wander in at six maybe on b
Speaker 1: O E day and no one bats an Island people.
Speaker 1: But the best thing is a print journalist not covering
Speaker 1: Mark Harney anymore? Is that Actually Andrew Bailey just speaks
Speaker 1: in sentences instead of ever dividing subclauses. And it was
Speaker 1: impossible cover Markney. You both those press conferences you can't
Speaker 1: quite follow At the point is but what about now?
Speaker 1: So they're getting it in the neck, aren't they? For
Speaker 1: all sorts of things. We've got a spiraling inflation backdrop
Speaker 1: here in the UK. Was Bailey late to raise interest rates?
Speaker 1: I mean we've got ministers being critical, We've got former
Speaker 1: Trade Secretary Lean Fox is called for an investigation, saying
Speaker 1: it's consistently underestimated the threat of inflation. The Bank of
Speaker 1: England persisted beyond any rational interpretation of the data to
Speaker 1: tell us that inflation was transient, then it would pick
Speaker 1: up five. They have consistently underestimate to the level of
Speaker 1: the threat. Is that fair, phil and I did an
Speaker 1: interview with Jagit Chater, the director of the National Institute
Speaker 1: for Economic and Social Research, and I think he summed
Speaker 1: up the view that we get from economists all around,
Speaker 1: which is that the bank was strategically right but tactically
Speaker 1: wrong in that it should have raised interest rates. Perhaps
Speaker 1: it did it a month or too late, but had
Speaker 1: it gone much sooner, it risked sparking a recession. And
Speaker 1: it didn't know what the impact on unemployment would be
Speaker 1: at the end of the furlough scheme because we've never
Speaker 1: had a furlough scheme in the UK. So really, when
Speaker 1: Conservative ministers are coming out and criticizing the Bank of
Speaker 1: England for failing to do its job on inflation targeting,
Speaker 1: it does seem politically convenient for them because it was
Speaker 1: at the same moment when the government was being criticized
Speaker 1: for not doing enough fiscally. But now in the Tory
Speaker 1: leadership contest you have Rishi soon Like standing up for
Speaker 1: the Bank of England, which seems a little ironic. I mean,
Speaker 1: and you know, listening to Liz try to talk about
Speaker 1: smashing up the economic orthodoxy, I mean, it's hard not
Speaker 1: to read into that that what she means might be
Speaker 1: the mandate of the Bank of England, the relationship the independence.
Speaker 1: Do you think that's sending shivers down the spines of
Speaker 1: everyone at thread Needle Street. Yeah, it's definitely unnerving them
Speaker 1: because you don't know who you're I mean, ultimately, the
Speaker 1: Treasury makes these decisions and you don't know what to
Speaker 1: decisions theyre going to make. There is a sort of
Speaker 1: separate argument going on in the financial regulation sphere, where
Speaker 1: you know, the Treasury wants to have these call in
Speaker 1: powers as it were, it seems, and which would give
Speaker 1: them the right perhaps even in secret lires and even
Speaker 1: issues about transparency about some of these potential powers which
Speaker 1: they're talking about, to tell the regulator to change its
Speaker 1: regulations just because it might suit some politicians. That is
Speaker 1: absolutely the kind of thing which the banking and would
Speaker 1: dread because it would have to be making policies, had
Speaker 1: to be acting on policies which would be counter to
Speaker 1: what it needs to do to maintain regulatory stability, and
Speaker 1: it may not even be able to disclose the fact
Speaker 1: that actually it's making stupid decisions because that's what the
Speaker 1: politicians wanted to do. There are these real issues. And
Speaker 1: again with monetary policy, if they changed the mandate, it's
Speaker 1: hard to imagine that they would tear out the mandate
Speaker 1: and we do something completely uniquely idiotic and in the
Speaker 1: Western world. But conceivably it's possible. I don't think even
Speaker 1: those trust knows how she would like to change the
Speaker 1: Bank of England's mandate. You know, she referred to the
Speaker 1: Bank of Japan is perhaps a source of inspiration, But
Speaker 1: I think we need to look at the best practice
Speaker 1: around the world, the countries who have been most successful
Speaker 1: at controlling inflation, for example, the Bank of Japan. Does
Speaker 1: she realize that deflation has been a problem in Japan?
Speaker 1: I was going to ask about that. I mean, what's
Speaker 1: she trying to do by drawing analogies between Britain and Japan.
Speaker 1: I think that she's trying to pump up her impression
Speaker 1: of Margaret Thatcher by referring to a monitorist theory. That's
Speaker 1: the unforgiving view. The generous view would be that perhaps
Speaker 1: she could change the target to nominal GDP, which is
Speaker 1: not necessarily so radical. Even former Treasury Minister Jim O'Neill
Speaker 1: was suggesting that. But when I speak to analysts macro strategists,
Speaker 1: they say, changing the Bank of England's mandate in the
Speaker 1: middle of a crisis, an inflation crisis, is only going
Speaker 1: to add to the problem because of the instability, which
Speaker 1: is just on the point of the political interference of
Speaker 1: where it comes from. It's not really about should they
Speaker 1: have raised rates a few months earlier? Is it's actually
Speaker 1: I think more about the quantity of easing program because
Speaker 1: they doubled the size of the Bank's que program um.
Speaker 1: And so the criticism is probably a lesson should you
Speaker 1: have raised rates in July? And like we were talking
Speaker 1: about with and more too much money? Did you just
Speaker 1: print too much money? Um? And I think it's the
Speaker 1: criticisms are coalescing around that and as we go for
Speaker 1: its depending on who I suppose is sitting in Downing
Speaker 1: Street from September and who the Chancellor is and what
Speaker 1: the mandate it continues to be the Bank of England,
Speaker 1: What do you expect Bailey to do as the year
Speaker 1: pans out with the backdrop of the inflation spiraling that
Speaker 1: we've got with the economic head where with this huge
Speaker 1: balance sheet that the bank's got to deal with, how's
Speaker 1: it going to play this in the coming months. They
Speaker 1: are obviously going to be raising rates this This is
Speaker 1: supposedly going to be the first ever half point interest
Speaker 1: rate hike in early August. They're also going to be
Speaker 1: the potentially the first central bank in the world to
Speaker 1: do active quantitative tightening, So active quantity of tightenings where
Speaker 1: you actively sell the guilt that you brought through the
Speaker 1: quantity of using program rather than just letting the mature
Speaker 1: and just sort of drop off the balance sheet. Rather
Speaker 1: interferes with the process of the government raising debt to
Speaker 1: pay for whatever this trust might want to raise debt for.
Speaker 1: But they have emphasized that that is not the active tool,
Speaker 1: So don't read too much into the active quantitative tightening.
Speaker 1: It is another mechanism by which you raise interest rates
Speaker 1: alongside the more traditional and their ahead of the pack
Speaker 1: on this, you say central bank in the world to
Speaker 1: consider if the yeah, yeah, they've got to actually do
Speaker 1: it to be the first and it is the guilt
Speaker 1: market ready for it. It's actually gonna be quite complicated
Speaker 1: because the last thing you want to do is completely
Speaker 1: mess up markets and then cause borrowing costs to us
Speaker 1: if you, yeah, by doing it at the Bank of
Speaker 1: England and then really annoying your paymasters at the Treasury,
Speaker 1: that's only going to encourage them to say this mandate
Speaker 1: needs to be changed and these guys need to be
Speaker 1: pulled into line. Say it's it's a very tricky times,
Speaker 1: the first time since they got independence where they actually
Speaker 1: are working against the politicians. So the politicians are going
Speaker 1: to in terms of the economy is going to be
Speaker 1: actively tightened. They may actively have to cause unemployment, name
Speaker 1: may actively have to tip the economy into recession to
Speaker 1: control inflation. And everything they've done since has been relatively easy.
Speaker 1: This is the first time that there is a real
Speaker 1: tension and if if they do do that, or if
Speaker 1: the fingers are blaming can be pointed at them for
Speaker 1: increasing unemployment. I mean, you can imagine certainly if there's
Speaker 1: trusses in Downing Street from September that the noises get
Speaker 1: more intense, right, that they're going to be blamed for
Speaker 1: all the economic problems of the government's Yeah, but it's
Speaker 1: an easy goal to score for people who don't understand economics.
Speaker 1: I think that you asked, how would the Bank of
Speaker 1: England be responding to the next Prime minister. We're assuming
Speaker 1: that the next Prime Minister is going to be Lows.
Speaker 1: Trust If it's Riscie sooner, I think things will move
Speaker 1: along quite comfortably because she has been defending the Bank
Speaker 1: of England not just in terms of the need for independence,
Speaker 1: not to change the mandate, but also on its inflation
Speaker 1: fighting record, because he's worked so closely with them through
Speaker 1: the pandemic crisis. Liz called him a bean counter. That
Speaker 1: was interesting, insulting a former Conservative chancellor. That's the politics
Speaker 1: that we're in at the moment, isn't it insult What
Speaker 1: is it now? I failed my Matt's ailable trust me
Speaker 1: with the nation's finances. Thanks for listening to this week's
Speaker 1: In the City. We'll be back next week for a
Speaker 1: look at what's in store for the City of London's
Speaker 1: job market. But in the meantime, if you like our show,
Speaker 1: please head on over to Apple Podcasts or wherever you
Speaker 1: listen to your podcasts and rate, review and subscribe. This
Speaker 1: episode was host did by me David Merritt and produced
Speaker 1: by Summersadi and Elena Ganatra. Special thanks to Phil Audrick
Speaker 1: and Lizzie Burden h