Called to account

Whilst most of us are thinking about winding down for Christmas, the UK Treasury Select Committee today decided to play Scrooge by announcing that it will hold an inquiry in 2017 into the effectiveness and impact of post-2008 monetary policy in the UK. If the timing was a surprise, then the idea of opening up the conduct of monetary policy to this kind of scrutiny certainly is. Since the BoE was granted operational independence almost twenty years ago, I cannot recall an inquiry into monetary policy on these terms.

The TSC wishes to look more closely at three aspects of policy: (i) The effectiveness of monetary policy in meeting the inflation target; (ii) The unintended consequences of policy and (iii) monetary policy prospects. All of these topics have been covered on this blog at some time or another and the issues at stake here are not simply confined to the UK. The BIS has long pointed out that monetary policy has been kept too lax for too long, and that it indeed has pushed up financial asset prices with at best a questionable impact on the real economy. Of course, the issue is not whether so-called unconventional monetary policy was the right thing to do in 2009: It is whether it is still appropriate in 2016. Indeed, the BIS titled Chapter 1 of its 2015 Annual Report “Is the unthinkable becoming routine?”

I must confess to a couple of contradictory views on the question of whether monetary policy should become politicised in this way. On the one hand, although the BoE does have operational independence it is only right that it is subject to parliamentary account. After all, the decisions which it takes affect those to whom parliament is accountable: the electorate. Yet the BoE Governor and members of the MPC appear before the TSC at least four times per year, and in the course of 2016 Mark Carney has had to endure additional sessions where he has been forced to defend at length the BoE’s conduct both before and after the EU referendum. On the other hand, it is surely no coincidence that the pressure on the BoE has mounted after it in effect backed the losing side in the Brexit debate. I wrote before the EU referendum that in the event of a vote for Brexit “Mr Carney’s position will become extremely uncomfortable given the strained relationships between himself and many Eurosceptic MPs, some of whom sit on the Treasury Select Committee to which he is accountable.”

TSC Chairman Andrew Tyrie also pointed out that “the BoE has been given huge powers but that comes with equally large responsibilities” and in exchange for BoE autonomy, the governor should stick “closely to his statutory objectives.” This follows interventions by the BoE on issues such as the Scottish referendum (although senior civil servants at the Treasury were equally culpable for opining on that issue), climate change, inequality and pensions. The question of whether BoE officials – of which the governor is the most high profile – should be given the freedom to discuss other areas outside their direct remit is contentious. The likes of Tony Yates, professor of economics at Birmingham University and a long-established blogger, has often made the point that the governor should tread carefully. As he wrote earlier this month (here) “reflecting on how to respond to [the risks of social dysfunction] is just not a job the Bank has been mandated to carry out. At least not in public.”

This is fair comment. But as I have long argued, governments are not exactly rushing to fill the gap with policy prescriptions of their own and there is a role for policy heavyweights to speak out. After all the ECB has been doing it for years, and Alan Greenspan was never short of an opinion on policy matters outside the monetary sphere. In any case, many of these issues – notably fiscal policy – do impact elsewhere because they have a bearing on the appropriate monetary policy stance. But it is hard to avoid the suspicion that the decision to scrutinise the BoE’s policy remit is at least in part a response to Carney’s speech earlier this month, in which he called for a greater contribution from fiscal and structural policy to help support growth (here).

Two final thoughts: Given the limited resources available and a pressing time constraint, surely it would make more sense to focus on the policy response to Brexit in 2017 rather than waste energy on this issue. And second, by piling ever more scrutiny on monetary policymakers, the BoE’s policy independence will, at the margin, be eroded. After all, who is going to want to take unpopular decisions if they are going to be put under the microscope at every turn? Like a Facebook relationship status, monetary policy decision-making might be about to become very complicated.