T he former governor of the Bank of England, Mervyn King, has told this paper that the Bank’s focus on net zero has distracted it from its core role of tackling inflation. The Bank’s recent performance certainly requires explanation, from its initial delay in responding to surging price rises to the possibility that it will now over-tighten monetary policy and risk a recession in the next year.
Lord King offers a compelling answer: the scope of the Bank’s tasks has expanded over time, and is now so broad that the institution is not able properly to achieve all of them. What was once a body focused almost exclusively on monetary policy, with a simple rule for the target level of inflation, has found itself tasked with maintaining financial stability and overseeing prudential regulation.
Then, in 2021, the Bank’s mandate was further expanded to encompass a duty to facilitate the Government’s policy of transitioning to a net zero economy. This, in Lord King’s view, was the straw that broke the camel’s back. Climate change has very little to do with monetary policy. It is, in his words, “not even obvious” that it poses a particularly immediate threat to the stability of the banking system.
It is also not clear how the Bank is supposed to pursue this responsibility. As the Nobel prize winning economist Jan Tinbergen has noted, for each objective a policymaker seeks to achieve, he or she requires at least one policy instrument. Was the intention that interest rates be used as a device to encourage green investment, or that regulation be focused predominantly on environmental initiatives? What if there is a conflict between the Bank’s various goals?
In practice, the damage may have been done less through the excessive proliferation of targets and more through the diversion of attention. The concern must be that talent in the Bank is now spread far too thinly, and that the brightest and best are no longer focusing on critical monetary decisions but instead running around devising net zero policies.
Central banks live and die by their credibility, and the Bank of England’s has been severely damaged in recent years. This has broader implications, because it could mean that interest rates may have to stay higher for longer than they otherwise would have, as policy-makers seek to regain the trust of financial markets.
Therefore, Lord King’s comments further buttress the case for a review of the Bank’s mandate, as well as a proper investigation into whether its decision-making has been impaired by groupthink or by its officials straying into political matters.
The public would surely prefer that it does one job very well, rather than multiple jobs badly.
