The Bank of England should be more accountable and look to foster a wider array of views after making errors with monetary policy committee in recent years, an influential parliamentary committee has demanded.
The House of Lords Economic Affairs Committee has called for significant reforms to enhance the Bank's performance and strengthen its accountability to Parliament.
Operational independence, which was established in 1998, must be preserved, the committee said, but it said there was a need to improve performance in light of the recent inflation rise and the subsequent erosion of public confidence in the Bank.
Even though many economists acknowledge the causes of inflation were external and not under the Bank's control, the report critically notes that Threadneedle Street, like most other central banks, misjudged the 2021 inflation rates, predicting them to be "transitory".
One potential cause for these errors, the report suggests, is a "perceived lack of intellectual diversity" within the Bank.
This supposed uniformity in thinking has possibly "contributed to insufficient challenge as regards modelling and forecasts".
Furthermore, the report highlights concerns about the Bank's expanding remit, which could detract from its primary objectives of tackling inflation and maintaining financial stability, with the expansion not running in parallel with an increase in accountability and Parliamentary scrutiny, leading to a "democratic deficit".
Several steps are recommended in the report, entitled "Making an Independent Bank of England Work Better", which include:
- Pruning the Bank’s remit to focus on the number of matters it is expected to have regard to or consider, "to ensure that the Bank is focused on its primary objectives of tackling inflation and ensuring financial stability", with possibly streamlining of management.
- "Foster a diversity of views and strengthen a culture that encourages challenge", focusing on governance, hiring and appointments, especially to the Monetary Policy Committee.
- An overarching review from Parliament into the Bank's remit and operations every five years.
The committee's chair, Lord Bridges of Headley, said: “25 years after the Bank of England was made operationally independent, it is time to take stock. While we are of the strong view that independence should be preserved, reforms are needed to improve the Bank’s performance and to strengthen its accountability to Parliament.
“The Bank should learn from the errors it made – along with other central banks – in the conduct of monetary policy during the recent period of higher inflation. But that alone is not enough. The Treasury must prune the Bank’s expanded remit so the Bank can focus on controlling inflation and maintaining financial stability."
Additional recommendations in the report include addressing the blurred lines between monetary and fiscal policy due to the continued use of quantitative easing (QE), and establishing a memorandum of understanding between the Bank and the Debt Management Office.
The report also repeats its call for the need for clear accountability mechanisms if a Central Bank Digital Currency (CBDC) is introduced in the future.