Jan 27 2007
The government stumbles - the Bank of England trips
We are told by the government that their huge economic "success" has come through making the Bank of England independent.
Yet over the last decade the UK has had considerably higher interest rates than Japan, the USA or Euroland, and now has considerably higher inflation.
Over the last 10 years Japanese base rates have hovered around zero, Euroland rates around 2%?? and US ones around 3% compared with the UK’s average around 4%.
When I asked Treausry Ministers why this should be there was no answer.
It is not because the UK has grown faster - the US has outpaced us.
It is not because we started from a??much worse inflation position.
There are three possible explanations - that the Bank of England got it wrong, that the government interfered with the Bank, and or that the government’s fiscal policy was undermining the Bank’s policy.
Over the last three years the government has been spending and borrowing too much. This has meant the Bank has to keep interest rates higher to offset the effects of too much public debt.
In 2003 the Chancellor did interfere with the Bank in a most unhelpful way. He changed the target for inflation, from 2.5% increases on the RPI to 2% on the CPI.
This represented a substantial relaxation of policy. The CPI had been going up about 1% per annum less than the RPI. The Bank had to adjust its policy to allow a bit more inflation, at a critical time.
The Chancellor also enjoyed the power to choose a majority of the members of the Monetary Policy Committee. In the run up to the 2005 election the Committee kept interest rates quite low. When the new Governor of the Bank was appointed he was outvoted when the Committee decided to cut interest rates by 0.25% at a time when the inflation threat was beginning to emerge again.
The question to ask is why have we been paying so much more to borrow money in the UK than in the three main overseas currencies, the yen, dollar and Euro? The answer is that the governemnt did not make the Bank sufficiently independent, and then made its task much more difficult by mismanaging the public sector and borrowing too much.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
