‘Something has gone wrong.” Kwasi Kwarteng, the Business Secretary, was putting it lightly in remarks yesterday highly critical of the Bank of England’s recent performance in controlling inflation. Its governor, Andrew Bailey, had earlier sought to defend the Bank’s actions, pinning the blame for the inflationary tsunami on external factors such as the war in Ukraine. That is highly disingenuous. The Bank always took credit for falls in inflation, even those caused by cheaper prices for Chinese imports, so how can it not also accept some degree of responsibility for higher prices now?
The Bank’s mandate is to keep inflation at or around 2 per cent. Now, it is expected to reach 13 per cent – and that may be an underestimate given how poor its forecasts have been. It did much too little over the past year when it became clear that inflation was returning, it was too dismissive of anyone who criticised its complacency, and it spent years pumping so much liquidity into the system – hand in hand with the Treasury – that the conditions were perfect for a shock, such as the rise in energy prices, to turn into extreme inflation.
At the very least, the Bank should accept that it ought to have started raising interest rates earlier. The US Federal Reserve has conceded that it made mistakes – why can’t Mr Bailey? But there is also an urgent need to review its mandate so that this disaster is never repeated. The Monetary Policy Committee needs better, more heterodox members, the Bank should be prevented from drowning the UK in cheap money whenever growth slows, and monetary policy should take into account asset bubbles. Above all, it needs to be forced to take inflation much more seriously.