As the Bank of England marks 20 years of independence from Whitehall, it may find its ability to curb future inflation jeopardised by the legacy of the mass money printing it has undertaken over the last decade
Threadneedle Street is celebrating 20 years of independence from government this week with a series of speeches and seminars from policy makers and economists. Giving his opening remarks on Thursday morning, the Bank of England’s governor, Mark Carney, described the difficulties of inflation management that led to the Bank’s independence, referencing the fact prices had risen “by 750% in the 25 years to 1992, more than over the previous 250 years”.
Unsurprisingly Carney went on to make clear he saw “price stability as the unambiguous aim of monetary policy,” before cautioning: “Now monetary policy isn’t best placed to address risks to financial stability – but the challenge is that the necessary financial policy decisions are also subject to time inconsistency problems.”
Carney attributed such “time inconsistency” to the competing aims of financial markets, saying lobbies are strong, and their temptations of a dash for growth are powerful. “Conversely, there are no obvious or immediate rewards to the tough decisions necessary to avoid future crises. In the world of financial stability, success is an orphan.”
In addition to these caveats, there were further potential red flags. The governor warned of the challenges of Brexit and against bringing inflation back to target too quickly. Likewise his statement that we should not confuse “independence with omnipotence,” sagely describes his task while admitting inflation could well be beyond his control.
In 2017 this matters because in the ten years since the financial crisis the Bank of England, along with the US Federal Reserve, the Bank of Japan and the European Central Bank, has been printing huge sums of money through quantitative easing, hoping to keep liquidity up and interest rates down.
Speaking to Citywire recently, Newton’s Paul Flood highlighted the unparalleled level of money creation. Saying the combined balance sheets of those four central banks was US$2.2 trillion in 1999. It is now US$14.4 trillion: a 650% rise in less than two decades. “This is not capitalism as we know it: it’s manipulation. The sheer scale of central bank intervention has been extraordinary. Even if QE were to stop tomorrow this would take decades to work through the system.” The below table illustrates the level of money creation through government bonds.
Sharing the stage with Carney, Theresa May credited his, and his predecessors’, efforts as having “successfully anchored inflation expectations”. However, with such high levels of money creation and inflation already moving prices well beyond pay-rises, the difference between “expectations” and reality could become more stark.
In a speech already framed as a repost to Labour leader Jeremy Corbyn’s calls for an end to austerity and more economic intervention, the prime minister praised the free market as the “greatest agent of collective human progress ever created”. She emphasised this by contrasting it with systems of central planning, “in countries such as Venezuela”, a state notable for runaway inflation and subsequent food shortages. (The price of a dollar was 31.45 bolivars four years ago, the official rate is 10 to the dollar, but black market rates are in the thousands: CNN quoted 9,787.75 in July).
For the reasons both May and Carney highlighted, the UK is unlikely to experience anything like that just yet. However, if growth continues to shrink we may see a contraction at a time when inflation, buoyed by a decade of unprecedented quantitative easing, is about to start climbing. We might then see every central banker’s worst nightmare: stagflation.
On marking 20 years of political independence, the Bank or England is now trying to determine what the next 20 years will look like. The prime minister credited the Bank’s independence with making levels of 22% inflation seem “outlandish to us today”. The money printing policies of the last ten years could now lead to the deluge that undoes that. More worrying than that though, could be that both government and central banks, having printed the money then admitted they are not omnipotent, are now unarmed to deal with such a threat.
Main image: Mark Carney addresses an inflation briefing in 2013, copyrite: Bank of England
Sign up to get the latest Glint news
Receive the GLINT newsletter with the most popular content, platform updates and software guides.