The Bank of England's mandate, established by Gordon Brown in 1997, has been a cornerstone of the UK's economic policy. However, with the rise of supply-side shocks and the increasing urgency of the climate emergency, some economists are questioning whether it's time to reconsider this mandate. The article explores the potential for a new approach, focusing on the Labour Party's potential shift under Andy Burnham's leadership.
The article begins by highlighting a policy proposal from Louise Haigh, a former Labour MP, who suggested a re-examination of the Bank of England's mandate. Haigh's proposal, published in the Renewal journal, calls for a greater focus on economic growth alongside price stability. This idea is particularly relevant given the current economic landscape, where the UK has faced a series of supply-side shocks, including the COVID-19 pandemic, the Russia-Ukraine war, and the Iran conflict.
One of the key arguments for a re-evaluation is the potential for higher interest rates to stifle economic growth. Swati Dhingra, an independent MPC member, argues that the Bank's current approach to inflation shocks leads to higher rates, which not only slows the economy but also increases the cost of borrowing for businesses and consumers. This, in turn, can make the economy less resilient to future shocks.
The article also discusses the concept of a 'dual mandate', which would include growth alongside inflation. This approach is similar to the US Federal Reserve's duty to balance unemployment and inflation. However, a more radical proposal, known as 'adaptive inflation targeting', suggests temporarily allowing the MPC to aim for a higher inflation rate during climate-related shocks. This idea is supported by climate economists at the London School of Economics Grantham Institute.
Another potential solution is to urge the Bank to re-examine its approach to quantitative tightening (QT). Critics argue that QT costs the Treasury twice over, adding to the budget deficit and potentially driving up the cost of borrowing. This approach contrasts with other central banks, such as the Fed and the European Central Bank.
The article concludes by suggesting that a fresh look at the Bank's role could send a strong signal that a Burnham government is prepared to do things differently. However, it also acknowledges the potential challenges, including the need to maintain financial market stability and the legacy of the New Labour years. The article ends by emphasizing the importance of a balanced approach to economic policy, one that addresses the current economic challenges while also ensuring long-term stability.
