The Bank of England's mandate to solely target stable prices is under scrutiny as Andy Burnham's team takes the reins. This re-examination is not just about economics; it's about reshaping the very fabric of economic policy in the UK. The question on everyone's mind is: How can we better coordinate monetary and fiscal policy to address the challenges of the modern economy? The answer lies in a nuanced approach that balances the need for price stability with the imperative of economic growth. The current framework, established by Gordon Brown in 1997, has served its purpose, but it's time to evolve. The Bank of England's Monetary Policy Committee (MPC) has been tasked with achieving 'price stability', which is currently defined as an inflation target of 2%. However, this singular focus has led to unintended consequences, such as higher interest rates that stifle growth and increase the cost of borrowing. The recent Middle East war and the Iran conflict have highlighted the limitations of this approach, as supply-side shocks have driven up energy prices and inflation. The MPC's indecision to raise borrowing costs in the face of these shocks has raised concerns about the risks of setting rates too high, jeopardizing growth. The solution, according to many economists, lies in better coordination between monetary and fiscal policy. The Fabian Society's recent paper calls for a new Treasury-Bank coordinating committee to discuss the trade-offs. This committee would allow for a more holistic approach to economic policy, where the Bank of England and the Treasury work together to address the challenges of inflation and economic growth. One of the key challenges is the impact of extreme weather events on food prices. As climate change intensifies, these shocks are expected to become more prevalent, and the current framework is ill-equipped to handle them. The independent MPC member, Swati Dhingra, has argued that the Bank should be allowed to aim for a higher inflation rate during climate-related shocks to mitigate the impact on the economy. Another proposal is to give the Bank a 'dual mandate' that includes growth as well as inflation. This would be akin to the US Federal Reserve's duty to weigh the impact of its decisions against unemployment. However, the most likely scheme to be embraced by Team Burnham is to urge the Bank to re-examine its approach to quantitative tightening (QT). QT, the gradual sale of the £875bn of bonds accumulated during the global financial crisis, has been criticized for costing the Treasury twice over. The government indemnifies the Bank against the losses it makes on selling these bonds, adding to the budget deficit, and it also drives up the cost of borrowing by increasing the volume of bonds being sold into the UK market. The MPC is due to reconsider the QT program in the autumn, and a new chancellor could intervene. While Burnham and his neighbor at No 11, Shabana Mahmood, may be cautious about compromising Bank independence or rattling financial markets, taking a fresh look at the Bank's role would send a strong signal that a Burnham government is prepared to do things differently. In my opinion, the key to economic policy in the 21st century is to find a balance between price stability and economic growth. The current framework, while well-intentioned, has failed to address the challenges of the modern economy. It's time to evolve and create a more resilient and adaptable economic policy that can withstand the shocks of the future.
