As Ben Chu reports, an ONS report by Paul Johnson has recommended that CPI be “replaced” with CPIH, which additionally includes imputations of the costs of owner-occupation. Replying to a tweet of mine saying that the BoE would keep out of this debate, Ben put me in my place. A Telegraph article he linked to reveals that Andy Haldane had explained to Treasury Committee that Bank staff were engaged in a working dialogue about the technical merits of the two measures, and that he preferred the more inclusive one. The article also pointed out that Carney had been similarly approving.
I worry about the BoE speaking out about this, or making public that even at a working level it was seeking to influence its target.
The essence of the current system is that the Bank has independence over the setting of its instruments, but is given its goals by the Treasury. This arrangement is a good one, because it is good for the government, which is directly elected, to retain control over the goals of the agents of policy. Getting involved in setting the goals corrodes this separation and sets a bad precedent. The Bank does not want to be accused of fixing its goals to make them easier to achieve. And there are distributional consequences to changing the target, both via monetary policy, and, potentially, through any effects on the remuneration associated with index linked gilts. As far as possible, the BoE should stay out of matters that have distributional consequences like this.
The dilemma is that through the Bank’s monetary policy making, it has accumulated a great deal of expertise in the matter. No doubt HMT and ONS are capable of marshalling resources to make this decision, but it would seem to be inefficient to ignore the deep pool of knowledge about inflation and monetary economics in the Bank.
Is there a way out of this?
How about this: in future, if required, the Bank seconds out of its building experts to work on reports like those by Johnson, and into HMT if necessary to help with the decision-making process. While those staff are out of the Bank they don’t work with or consult their former colleagues at the Bank. And the Bank itself – particularly its most senior officials – avoid commenting.