Twenty-five years ago today, just five days after New Labour’s 1997 landslide victory, the new chancellor of the exchequer, Gordon Brown, announced that he and the Treasury would no longer control monetary policy, but instead allow an “independent” Bank of England, working to a target established by government, to set its own interest rates. Kept secret even from the prime minister, Brown’s audacious move was heralded at the time as a master stroke and framed New Labour’s agenda for the subsequent decade. Previously, interest rate setting had been left to the chancellor, which attracted criticism from mainstream economists that this automatically introduced an “inflationary bias” into policy. The decision to delegate monetary policy to an independent central bank drew on the best available thinking in orthodox economics, supported an extraordinary decade of financial services growth and cleared the path to the catastrophic failure of the British economy in 2008, ten years of austerity, the evisceration of New Labour’s public spending programme and a lost decade for pay.
It is tragic, not laudable, that one of New Labour’s few robust economic legacies is an independent Bank of England, whose rate-setting Monetary Policy Committee (MPC) can today be found gawping at inflation driven not by domestic monetary factors but a series of global price shocks beyond the reach of the central bank – from failing wheat harvests to rising gas prices – yet still pushing interest rates upwards, seemingly for lack of any better ideas. Bound to and judged by its target for inflation, the central bank has to be seen to be doing something – even when that something risks a recession.
Content from our partners
