The BoE and the Brexit debate

Written in haste during a visit to South Africa, talking about fixing monetary and fiscal policy after the crisis [slides here], and recapping on recent tweets for those who don’t do Twitter.

Yesterday, Carney appeared before Treasury Select Committee and was grilled about the risks posed by Brexit.  If we take it as a given that the questions had to happen, and that there was no alternative to answering them, a great job was done putting over the salient points of the BoE’s work on this.

However, the BoE’s prominent role in these discussions seems highly risky to me.  To recap on what one commenter on my blog dismissed as mere ‘concern trolling’, the problem is this:  if Carney or other senior officials talk on matters of political controversy, this increases the chance that the next appointment will be made partly on the grounds of political acceptability, and not wholly on the grounds of monetary and financial expertise and leadership skills, or even that there arises a perception that this is what will happen.  At that point, the delegation of monetary and financial policy, which is supposed to create the expectation that the BoE’s instruments will not be abused for electoral purposes, breaks down.

The meeting included harsh words exchanged between Rees-Mogg and Carney, concluding with the latter saying that Rees-Mogg was being ‘selective’ in picking out pro-Remain points in the BoE’s contributions.  Whatever the rights and wrongs of that exchange, the fact that it happened at all, and the motives and competence of a committee member is called into question, is not great.

Carney explained:  ‘We will not be making, and nothing we say should be interpreted as making, any recommendation with respect to that decision.’  This sentence was a good try.  But, unfortunately, in its excellent work sifting the economic facts of the Brexit decision, the BoE has made its own recommendation completely transparent.  You can tell because there are no politicians on the side of Remain scolding the BoE for risking its independence and acting in an impartial and political fashion.  On the other hand, one has Peter Bone, a Tory MP, saying:  ‘The Bank of England is notionally independent but does anyone really think it will produce figures the government doesn’t agree with?’

I’d offer the following thought too.  Treasury Select Committee might also be considered joint guardians of the quality of our central banking, which means being a guardian of central bank independence.  And in a context where there is a limit to how much one can engineer institutional detail of this sort that may mean restraining oneself from asking questions which risk the BoE harming its own independence.

Knowing what the BoE think about this, Remain is tempted to tease out more scary words from BoE officials about Brexit.  Just as the SNP responded to the MacPherson analysis of currency options for an independent Scotland, Leave are bound to respond by questioning the BoE’s impartiality.  The result is that the campaigning objectives of those immersed in the Brexit debate are put above the objectives of nurturing independent monetary and financial policy.

For me this limits the force of the defence that it’s ok for the BoE to speak on these matters ‘when asked’.  They should not be asked.  The Bank is not an expert think tank.  It may well have the best concentration of expertise on this subject.  But if that’s the case, there is another model to exploit it.  When the Treasury were writing the ‘5 tests’ paper on whether the UK should join the Euro, they took on secondment Peter Westaway, one of the Bank’s foremost experts on international macro and monetary policy at the time, and other junior staff too.  Senior management kept out of it.   Why could that model not have been deployed this time?

You might well argue that, strictly speaking, the questions and comments were on matters that are relevant for its mandate.  This is true enough.  But one has to weigh this against the damage done.  If it is so important to do scrutinise to ensure that the Bank is as on top of these issues as it needs to be, hold hearings in private session, to be broadcast once the referendum is done.  Or substitute them for a public report written by an outsider, who is inserted into the BoE in the run up to Brexit, and writes after the event about whether preparations were adequate, with a mandate to ring alarm bells somehow if things look like going greatly astray.