Liz Truss has been accused of being “deeply irresponsible” for threatening to tweak the Bank of England’s mandate on the brink of recession.
Shadow chancellor Rachel Reeves hit out at the Tory leadership leader after Truss and his allies repeatedly questioned the performance of Bank governor Andrew Bailey and said he would review the institution’s powers.
“This is deeply irresponsible from a Conservative leadership candidate. It creates huge uncertainty that will hold back vital investment in our economy,” Reeves said.
“Families are watching bills pile up while their ability to pay is reduced. Meanwhile, the Tories are once again playing the blame game instead of taking responsibility for the last 12 years of economic mismanagement which has left the UK exposed only to shocks.”
Labor noted that the average rate of inflation between 1979 and 1997, when the Bank became independent, was 6%, with a peak of 19%. In the following 25 years, it has been 2%.
The Bank’s monetary policy committee on Thursday raised interest rates by 0.5 percentage points and issued dire economic forecasts that point to a recession lasting five quarters until the end of 2023. Inflation is expected, which has already reached a 40-year high of 9.4%, will be achieved. 13% and will remain high until 2023.
Business Secretary Kwasi Kwarteng, widely seen as Truss’ potential chancellor, told Sky News on Friday: “The Bank’s job was to deal with inflation. They have an inflation target of 2%, that’s actually his tenure. And now inflation is rising [to] double digits Clearly something has gone wrong.”
Asked whether the Bank would maintain its independence, he said “absolutely” but also outlined possible interventions.
“We need to look again at what the mandate is and how they can actually deliver on that mandate,” he said, adding: “You have to look at how the Bank is organized and what the objectives are.”
In accordance with the legislation that supports the Bank’s independence, the chancellor confirms the assignment annually. If Truss becomes prime minister, it would give her new chancellor a chance to review it ahead of the emergency budget she has pledged to keep.
However, former Labor minister Ed Balls, who drew up the plan for the Bank’s independence when he was Gordon Brown’s economic adviser, rejected the idea of changing the target.
“We can state with confidence that the current inflation and growth challenges are in no way caused by the Bank’s competition, that the Bank has all the tools, powers and flexibility it needs within the current competition and that changing the competition will not would be fine and almost certainly a great deal of damage,” he said.
Some Tory MPs have claimed the Bank was too slow to raise interest rates to quell inflation, but Mr Bailey denied this on Friday.
“Sorry, I don’t agree with that point,” he said. Instead, he told BBC Radio 4’s Today programme: “What has happened is that there have been a number of big supply-side shocks, most of which have been overseas… I would challenge to anyone who was sitting here two years ago saying “there is going to be a war in Ukraine”.
A Truss supporter, Attorney General Suella Braverman, suggested earlier this week that the bank’s independence should be re-examined. But Bailey insisted: “Central bank independence is critically important in our view. Our job is to get inflation back on target.”
Another Truss backer, Lord Frost, published an article for the right-wing think tank Policy Exchange on Friday, claiming that the “biggest underlying economic problem” facing the UK is “the dire consequences of the of low to negative interest rates for an extended period.” In the 28-page report, Frost stresses the importance of gradually “normalizing” rates, although he does not explicitly mention the Bank of England.
The Bank’s gloomy forecasts underlined the grim backdrop against which Truss or his leadership rival, Rishi Sunak, will take power next month.
A new IpsosMori poll showed that only 27% of voters believe the government has done a good job of managing the economy, the lowest level since the poll began tracking it in 1998
Both the chancellor, Nadhim Zahawi, and the prime minister, Boris Johnson, were away from Westminster when the rate hike was announced on Thursday. Zahawi is accompanying his family on holiday but insisted he is not on holiday himself.
CBI director general Tony Danker said that given the scale of the looming rise in energy bills, the government should take more action now to mitigate the crisis. “I have no problem with people having short holidays. My fear is much deeper, which is that there will be a gap between now and September 5th [when the new prime minister will be announced],” he said.
“We need the current prime minister and the current chancellor to fill that gap. We need them to make decisions. We need them to make plans. We need them to reassure businesses, markets and households that we are taking this. We cannot wait until September 5 to act.”