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Liz Truss wants to review the Bank of England’s mandate

Truss first hinted at the prospect of a change in the Bank’s mandate during the Conservative Party’s election campaign in Cardiff on August 3.

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LONDON — The favorite to become Britain’s next prime minister plans to review the Bank of England’s mandate in a move that concerns campaigners and think tanks.

British Foreign Secretary Liz Truss, the current favorite to win the Conservative Party leadership race to become British Prime Minister, has indicated she may consider limiting the central bank’s independent decision-making on rates of interest.

Truss first suggested a possible change to the Bank’s mandate at a campaign event in Cardiff on August 3.

“The best way to manage inflation is monetary policy and what I said was that I want to change the mandate of the Bank of England to ensure that in the future it matches some of the most effective central banks in the world at controlling inflation,” Truss said. said.

“Investors love certainty”

According to Scott Corfe, research director at the Social Market Foundation, a Westminster-based cross-party think tank, uncertainty over what might be in store for the central bank – if Truss becomes prime minister – could create difficulties for investors. .

“Investors like certainty,” Corfe told CNBC.

“If there is a lack of clarity for some time on what the new mandate of the Bank of England will be, or the extent to which politicians may interfere in the rate-setting process in the future, it creates some uncertainty around what the outlook for inflation and economic growth in the UK is going forward,” he added.

This view was echoed by Fran Boait, executive director of Positive Money, a UK-based think tank that campaigns for systemic change in the financial system. Speaking to CNBC’s “Street Signs Europe” on Aug. 25, Boait said it would be good if Truss “set out a bit more of what she hopes to achieve” in a potential mandate review.

Truss’s campaign team told CNBC his “bold plan will challenge failing economic orthodoxy and deliver needed growth to the UK economy.”

“As Prime Minister, Liz would review the Bank’s mandate because after 25 years she thinks it is right to make sure it is fit for purpose and works in today’s economic environment” , the campaign team said.

Former finance minister Rishi Sunak, a rival for the leadership of Truss, told Sky News last week that the discussion around the Bank’s autonomy could “scare” international investors.

Limiting the Bank’s independence would be a “mistake”, Sunak said, and would be “bad for all of us”.

Shadow finance minister Rachel Reeves also questioned Truss plans in an interview with The Guardian.

“This is deeply irresponsible of a Conservative leadership candidate. It creates enormous uncertainty that will hold back vital investment in our economy,” she said.

Meanwhile, Bank of England Governor Andrew Bailey stressed earlier this month that central bank independence “is of crucial importance”, in an interview with BBC Radio 4’s “Today” programme.

“Shifting the Blame”

Truss’ campaign team said the Conservative party leader was “committed” to independence from the Bank of England.

However, if his promised review of the central bank’s mandate leads to a deeper redesign of its functions, it could have huge ramifications, Corfe said – including a banking system that revolves around election cycles.

“Politicians wanting to get involved in rates and rate setting would be very dangerous indeed,” Corfe said.

“If an election is approaching, politicians will be reluctant to raise interest rates if that is what is needed to drive rates down, because higher rates and higher mortgage bills are not necessarily an election winner. “

Truss’ plans come as the UK battles inflation at a A 40-year high, with many households caving under the pressure of the worsening cost-of-living crisis.

By shining the spotlight on the Bank of England, the government is “washing its hands” of implementing policy to fix the problems, Corfe said, and instead places the blame on the Bank.

“I think you’re seeing this kind of blame shifting now where the government, rather than rolling out the necessary fiscal support to help households with prices, is instead saying, ‘Well why don’t you do more? about it?” Corfé said.

“Politicians want to shift the blame elsewhere and say it’s the sole responsibility of monetary policy rather than government and fiscal policy.”

Positive Money’s Boait said discussions about financial regulation in the UK at the moment were “very worrying from a civil society perspective”.

“Most people want a banking and financial system that is resilient, that doesn’t collapse, that also provides the basics, access to payments, investment in the things we need like the green transition and the small businesses… And we’re so far away from those things right now,” she said.

“None of the current Conservative leadership candidates – who want to be our next prime minister in the next few weeks – are talking about a financial system that does any of these things.”

Sunak’s campaign team did not respond to a request for comment when contacted by CNBC.

What might a change of mandate look like?

Truss has a number of options on the table regarding a potential change in the Bank’s mandate.

Currently, the Bank of England’s objective is to keep inflation down.low and steadyto 2%, according to its website, in an effort to keep the UK economy in a healthy state.

“What is most likely is a review of the 2% inflation mandate and whether something else would be more appropriate in the eyes of the government,” Corfe said.

“I could see, for example, the inflation target changing or maybe the Truss government wanting to pursue some sort of dual mandate of inflation and economic growth.”

In the United States, the Federal Reserve has a dual mandate which aims to “maximum employment, stable prices and moderate long-term interest rates”.

It would not be the first time that there has been speculation that the UK will adopt a US-style mandate. In 2013, then-Chancellor George Osborne was thought to adopt a Fed-style mandate as the country grappled with an economic crisis and emerged from a double-dip recession.

Bank of England Governor Andrew Bailey said central bank independence “is critically important”.

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Investment bank JPMorgan outlined two options for a potential Bank of England overhaul by Truss in an Aug. 19 memo. She invented one scenario “the seeds of change” and the other – rather disturbingly – “the dark arts of politics”.

The “seeds of change” option includes changes that could see the Bank target nominal gross domestic product, or GDP, or the monetary aggregate – the amount of money in circulation – instead of the inflation rate.

Truss said in mid-July that the UK “hasn’t been tough enough on the money supply”, but JPMorgan does not expect the focus to be on the money supply. coming.

“It’s hard to see any sort of return to this policy replacing the BoE’s inflation target,” he said.

Former British Prime Minister Margaret Thatcher’s government attempted to target the money supply in the 1980s to combat rising inflation

Corfe agreed that a similar strategy was “unlikely” this time around, as “it has not been entirely successful…because it is difficult to precisely control the broad money supply in the economy”.

JPMorgan’s “dark arts” option suggests that interest in the Bank’s tenure may have more to do with “presentation appeal.”

“A review that challenges the status quo would signal new energy being injected into solving the cost of living crisis,” JPMorgan said.

“As inflation inevitably declines from its peak, the government could claim this process even if the policy implications were limited.”


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