Central bank independence 'threatened by QE, nationalism, and loss of trust in globalisation' – as it happened

Graeme Wearden

from on 2017-09-28 15:59 (#33FGB)

All the day's economic and financial news, as the Bank of England holds a conference to mark 20 years of setting UK interest rates

Earlier:

4.58pm BST

Time for a recap.

The Bank of England has marked its 20th year of independence by hearing a string of warnings that central bank autonomy is at risk.

Instrument independence was good when people understood what the instrument was and how it worked.

Once you go from buying government bonds to buying corporate bonds to loosening credit through things like funding for lending, and mixing that up with what's going on on the macroprudential side - where it can look like the bank is pushing lending with its interest rates policy but pulling it back with its regulatory policy - things get much more complicated.

I'm surprised by today's Theresa May speech. I'm all for open markets. But championing 'The Free Market' feels bad economics & bad politics

4.45pm BST

Costas Milas, professor of finance in the University of Liverpool's Management School, has co-authored some interesting research into inflation targeting - a key theme of today's Bank of England conference.

This work examined whether adopting inflation targeting has made a significant difference to the persistence and variability of inflation.

Our results do not argue against inflation targeting policies. Rather, we view the quality of central banks and institutions as a vital element in ensuring economic and financial stability in the aftermath of the recent financial crisis and the current attempt by Central Banks to gradually raise near-zero policy rates in order to return to economic 'normality'.

4.27pm BST

Over in Athens, there is relief that the IMF has signalled that it will not take such a tough position on Greek banks as expected.

Helena Smith reports:

"On the subject of the Greek banking system, let me emphasize that we see no financial stability concerns at all in Greece."

#IMF: Statement on Greek Banking System by Poul Thomsen, Director of IMF European Department pic.twitter.com/rJiEwXEA5d

Can you remember many cases when the IMF changed course on a policy relating to Greece so openly, or so publicly? https://t.co/qpZDClaakM

4.23pm BST

Stanley Fischer takes a few questions:

Q: How does a central bank maintain its independence?

4.19pm BST

The watchword of a central banker should be be "Semper Vigilantes', Fischer concludes.

Always be vigilant.

Because history and financial markets are masters of the art of surprise, as we have found out to our cost more than once.

4.12pm BST

Fischer also warns his audience against assuming that laws can be changed quickly if a crisis breaks out.

He reminds them that the US House of Representatives dramatically voted down TARP (the Troubled Asset Relief Program, created to rescue Wall Street).

4.03pm BST

Stanley Fischer says it's important not to underestimate the importance of reversing the stimulus measures introduced after the 2008 crisis.

3.42pm BST

After a long career in central banking, Stanley Fischer is retiring from the Federal Reserve next month.

And to celebrate his career, Mark Carney is presenting Fischer with a rare figurine of a pink-coated Bank of England doorman.

Stanley Fischer nu bij de BoE https://t.co/w1DrWd2sYI

3.03pm BST

Back at Fishmonger's Hall, Otmar Issing, the ECB's first chief economist, is warning that central banks should resist launching 'helicopter money' operations.

"Once you start with helicopter money, you will never get back control from politicians." Typical German view from Otmar Issing #20YearsOn

2.51pm BST

Mark Carney was correct to warn today (see 9.21am) that Brexit is the most important factor on the UK economy, says Mihir Kapadi, CEO of Sun Global Investments.

He adds:

His statement indicates perhaps that the Bank of England no longer feels it has the full autonomy it has been enjoying over the last 20 years in determining the monetary policy. It now feels constrained by an external factor - the EU's relationship with post-Brexit Britain...

As the BoE marks 20 years of political independence today, the current Brexit period points to new period of great uncertainty for the Bank

2.18pm BST

In other economic news...

Ireland remains on track to be the fastest-growing economy in the European Union for the fourth year in a town, according to Investec Economics.

"We see this progress continuing over the coming years, with unemployment on course to fall to just 4.5% by 2019."

2.00pm BST

This pick-up in US growth to 3.1% per year is a boost to Donald Trump, argues Alex Lydall, Head of Dealing at Foenix Partners.

He writes:

After a more bullish Federal Reserve meeting this month the tide appears to be turning at a crucial point, with Mrs Yellen and Trump seemingly singing to the same chorus.

With growth on the upward trajectory and inflation perhaps not causing the headache some Fed officials cited earlier in the year, the US is firing on almost all cylinders coming into year-end.

The most encouraging news of the day is that the advance indicators report suggests wholesale inventories increased by a very strong 1.0% m/m in August, with retail inventories increasing by an even bigger 1.2%. The latter was driven by a 1.7% m/m increase in motor vehicle inventories.

Vehicle sales were hit by Harvey in late August but, according to preliminary estimates, it appears that the destruction of vehicles during the storm has led to a sizeable rebound in vehicle sales in September.

1.37pm BST

Just in: America's economy grew a little faster than previously thought this summer.

US GDP grew by an annualised rate of 3.1%, the Commerce Department reports, up from a previous estimate of 3.0%.

Q2'17 US GDP reading in at +3.1% vs +3.0% exp. Final readings rarely prove to be market moving; $DXY barely changed on release.

Non-Farm Payrolls & Jobless Claims (easy to see the storm impact) pic.twitter.com/1kSVqZNH7c

1.26pm BST

Here's the full text of Gordon Brown's warning that government's risk "sleepwalking" into another financial crisis, unless they create a better early-warning system.

"While there is now improved supervision of financial standards, reform must be intensified to prevent a future financial crash.

"If, for example, the next financial crisis comes out of Asia - and if, as likely, because of problems that arise from a shadow banking system in commercial and industrial lending, we will ask ourselves next time: Why did we not act after 2008 to create a better global early warning system and make our financial regime more fully-co-ordinated globally?

1.17pm BST

Breaking away from the Bank of England conference.... Ryanair is in hot water after announcing a second series of flight cancellations yesterday.

"I have serious concerns about the decisions taken by Ryanair in the past couple of days. These will cause disruption to many passengers travelling to and from Scotland to London and indeed to other destinations in Europe."

"We fully support the CAA's launch of enforcement action because it is vital at the time of disruption that airlines provide full and accurate information about the rights that they have."

1.07pm BST

Gordon Brown ends his session by defending his tripartite system (which was found wanting in 2007).

And he does it with another pop at the Bank of England under Mervyn King's leadership, insisting that the BoE was still responsible for spotting a crisis.

The bank was still in charge of strategic financial thinking.... What failed was the implementation of the regime.

Gordon Brown says that after 1997 Bank of England was still in charge of financial stability and it didn't issue warnings

Also - Gordon Brown has a book coming out.

12.55pm BST

Brown also warns that laws introduced to avoid a new financial crisis are being pushed back in America:

Gordon Brown warns @bankofengland conference that regulatory measures in the US are in retreat #Trump #doddfrank

12.54pm BST

Chris Giles of the Financial Times's isn't impressed by Gordon Brown's criticism of the Bank of England in 2007.

Gordon Brown blames UK financial crisis depth on @bankofengland being slow to cut rates in 2008 and then criticising fiscal activism

It shows the depths to which the relationship between the BoE and Govt plunged in the financial crisis

The BoE's criticism of fiscal policy was really in 2009 ahead of the election and reflected plans for austerity not fiscal activism

Those were excessive. But Mr Brown protests a little too much with the benefit of hindsight

12.45pm BST

Brown is now criticising the Bank of England for failing to cut interest rates faster when the financial crisis began in 2007, when he'd become prime minister.

He says he thought interest rates were too high, but kept his mouth shut because he didn't want to undermine independence.

12.42pm BST

Brown says that a joint "strategic oversight group" should be set up, with officials from the Treasury and the Bank of England.

That would look for economic problems and issues where the government needs to act, such as in the housing market.

12.39pm BST

Gordon Brown claims that granting the Bank of England independence in 1997 helped to keep Britain out of the eurozone.

He says that pre-independence, the debate about the euro was that Britain should give up on the relatively unstable regime in the UK, and go for the anchor provided by the euro and particularly the Bundesbank.

Independence for the Bank of England has been not just been a technical success, but also avoided many of the problems that might have taken us into the euro early, and pushed us out of the euro very quickly afterwards.

Gordon claims the stability that @bankofengland independence generated meant that UK stayed out of the euro. Didn't need Buba credibility.

12.32pm BST

Gordon Brown is enjoying his trip down Memory Lane.

He says he had to phone the press after his historic announcement to make sure they understood it (apparently reporters were more interested that he'd also raised interest rates).

12.28pm BST

Brown explains that Labour kept their plans secret until after the 1997 general election, to avoid interest rates becoming politicised.

He says that the Conservative government had resisted raising interest rates before the election, even though the Bank was recommending tightening monetary policy.

12.24pm BST

Gordon Brown then explains how the Labour government decided to hand independence to the Bank of England, in an attempt to end short-term planning in the UK.

Gordon Brown also describes two years of secret planning for independence for Bank of England, introduced as 'bolt from the blue' in 1997.

Bank independence was the start of sofa government says Gordon Brown as Blair gave agreement in his living room #20yearson

12.18pm BST

Gordon Brown, the man who gave independence to the Bank of England, is now giving his views.

Brown homes in on one of Andrew Tyrie's points - that public concerns over globalisation threaten central bank independence.

If we do not understand that in an democratic system you've got to get the right balance between expertise, accountability and leadership, then anti-globalisation protests will rise.

And those people who are taking decisions, perhaps even the right decisions, will be blamed as "take back control" movements gain even more support in the years to come.

Gordon Brown: need to balance expertise, accountability and leadership in context of globalisation many see as failing them.

11.28am BST

Andrew Tyrie, the former (highly regarded) chair of the parliament Treasury committee, is now speaking at the BoE's conference on bank independence.

The Bank failed us when the crash came. There was groupthink. They were part of the same groupthink as everyone else.

It's parliament's job...to make sure that groupthink does not take root, and hack away at it when they see it.

11.14am BST

Frances O'Grady, head of the TUC, says there has been a rise in the number of "pretty poor quality employment, and underemployment" in UK since the financial crisis.

There's also been a rise in unsecured household debt, everyone should pay a lot of attention to that.

One of the risks for the Bank is there are unrealistic expectations for the bank's role in dealing with a much bigger set of problems.

There's also a problem that politicians sometimes use central bankers as human shields, rather than facing up to the political choices they should be making.

11.06am BST

Dame DeAnne Julius, a founder member of the Monetary Policy Committee of the Bank of England, warns that central bank independence is being threatened by policies such as quantitative easing.

Instrument independence was good when people understood what the instrument was and how it worked.

10.54am BST

If you missed Mark Carney's speech, here's a clip of the BoE governor explaining how the Bank will steer the economy through Brexit.

10.46am BST

Guy Debelle concludes by pointing out that central bank independence can be improved, and that government policy also has an important role to play in balancing the impact of monetary policy.

Debelle summary: 1. Central banks can't do everything. Fiscal policy must play its part.

2. Monetary policy frameworks still a work in progress. Particularly, relationship of inflation and financial stability.

10.42am BST

Guy Debelle then takes a swipe at critics of central bank independence.

The deputy governor of the Royal Bank of Australia argues that central bankers are in the dock for issues that aren't really their fault.

My view is that inflation targeting and central Bank independence are being blamed for economic outcomes that are not a consequences of either of them, but rather those outcomes are a consequence of our understanding or misunderstanding of how the economy operates.

Legitimate criticism of central bank's understanding of the economy can be made, but that does not delegitimise the overall economic framework.

Guy Debelle: CB independence does not mean complete delegation of responsibility for demand management to central banks.

Debelle says the number of central banker speeches has dramatically risen. He seems to think this is a good thing.

#20YearsOn @RBAInfo Dep Gov Debelle outlines factors that may have contributed to threats to central bank independence pic.twitter.com/QvWBUcvMd8

10.34am BST

But has central bank independence worked?

RSA deputy governor Debelle points out that inflation has certainly been low since the 1990s - ironically, inflation is now "too low" in some places.

10.30am BST

Here's Guy Debelle explaining how central banks moved towards independent inflation targeting in the 1990s.

#20YearsOn @RBAInfo Dep Gov Debelle highlights importance of distinguishing between goal and instrument central bank independence pic.twitter.com/HiFgXWxDqM

10.24am BST

Guy Debelle, Deputy Governor of the Reserve Bank of Australia, is now discussing the road to central bank independence.

Back in 1994, he and Stanley Fischer cowrote a paper examining how independent a central bank should be.

10.14am BST

The next question is about the Bombardier-Boeing trade dispute, following the shock news that America is slapping a 219% tariff on Bombardier jets (partly made in Northern Ireland).

May says Boeing's behaviour isn't acceptable.

We have a long-term partnership with boring, in various parts of government.

This is not the kind of behaviour we expect from a long term partner, and it undermines that partnership.

10.10am BST

Onto questions.

Our economics editor Larry Elliott asks Theresa May about her criticism of the Bank of England's ultra-low interest rates and quantitative easing. What will she do about it?

Low interest rates are good news for borrowers, but not savers.

10.05am BST

Here's a video clip of Mark Carney explaining how the Bank will use all its powers to mitigate the risks created by Brexit (as covered here).

Bank of England 'can't be expected to nullify the likely hit to the economy from Brexit, but could influence how it's spread' - Mark Carney pic.twitter.com/hdaqIngxCP

10.03am BST

As predicted, Theresa May is now defending free market economics - but also admitting that it doesn't work as well as it should.

For too long, too many communities have not seen the benefits of prosperity, she says. That waste of potential is bad for the economy as a whole..

If you don't, you risk a return to the 'failed ideologies of the past'

9.57am BST

Theresa May is now speaking. She jokes that when she applied to the Bank, as a geography graduate, she'd asked to work in its international department.

Instead, they put her in the economic intelligence department! (this doesn't get much of a laugh, unfortunately).

Tripartite regulation did not prove a success. It failed the country during the financial crisis and we've had to live with the consequences ever since.

9.50am BST

Mark Carney wraps up by welcoming Theresa May - and joking that she gave up the chance of a good career at the Bank to enter Westminster.

As some of you may know, the Prime Minister began her career as a new graduate at the Bank before leaving after six years to pursue other interests - ultimately politics. Whilst at the Bank, the Prime Minister worked in the Economic Intelligence Department - then the cutting edge of our activities.

During her time she accomplished great things and was destined for much more. Just imagine what could have become of your career, Prime Minister, if you had stayed at the Bank: you could have been in Fishmongers Hall...

After the formation of the coalition government in 2010, she would become the longest- serving Home Secretary in over 60 years. During that period, she confronted many of society's biggest challenges - for example introducing legislation to tackle domestic violence, to eradicate modern slavery and to counter terrorism.

Never afraid of a challenge, she stepped into the breach to become Prime Minister following the referendum.

9.48am BST

Carney then warns that Brexit is the biggest single issue facing the UK economy (see earlier post for the full quotes)

9.47am BST

Mark Carney then points out that independence gives central bankers the freedom to deviate from their inflation targets in times of trouble.

That includes today, as Britain plots its exit from the EU.

In exceptional circumstances like today when the economy is facing profound structural change, the MPC can extend the horizon over which it returns inflation to target from above in order to balance the effects on jobs and activity. After all, even though monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU, it can influence how this hit to incomes is distributed between job losses and price rises.

9.44am BST

Carney also acknowledges that the Bank was "fundamentally reformed after the crisis", creating a new Financial Policy Committee to address financial stability issues.

[That's because the collapse of Northern Rock shows the weaknesses in the 'tripartite' system set up by Gordon Brown]

9.41am BST

Mark Carney then declares that the gains from independence since 1997 have been "enormous".

He argues that the Bank played a vital role in the financial crisis, and can now help the UK get through its exit from the European Union.

In the two decades that followed independence, inflation averaged just under 2% compared with over 6% in the preceding two. It's been one-fifth as volatile. Crucially, independence allowed monetary policy to respond boldly and effectively to the biggest financial crisis in a century.

And it leaves the Bank well placed to address a range of possible developments around Brexit.

9.39am BST

9.38am BST

Carney then hails Gordon Brown's 'bold decision' to give the Bank of England operational control for setting monetary policy in 1997.

He reminds his audience of The Bank of England Act of 1998 which clarified the Bank's responsibilities - for the first time and only time in three centuries.

9.36am BST

Carney reminds his audience of Britain's economic travails since World War Two. Achieving low inflation is easier said than done.

Prices were anything but stable during the 1970s and 80s. With the collapse of Bretton Woods in 1971, UK monetary policy lost its nominal anchor. There followed a series of botched experiments, with targets for incomes, monetary aggregates and the exchange rate. The costs of such failures were enormous, with prices rising by 750% in the twenty-five years to 1992, more than over the previous two hundred and fifty years. Unemployment was high and growth volatile.

The inflation target rose from the ashes of the ERM debacle twenty five years ago this month, marking the point when price stability became the unambiguous objective of UK monetary policy.

9.34am BST

And we're off! Governor Mark Carney is speaking first.

Carney begins by explaining how price stability (ie, stable inflation) is the best contribution that monetary policy can make to the public good.

High inflation hurts the least well off in society the most. It distorts price signals, inhibits investment, and ultimately damages the productive capacity of our economy.

Equally, deflation imperils growth and employment, and, in the extreme, leads to financial ruin and economic collapse.

9.32am BST

Attendees are gathering in Fishmongers' Hall for the Bank's conference, which is running a little late.

I guess Theresa May's late addition to the schedule may be causing a few problems....

9.21am BST

As well as defending Bank independence, Mark Carney is also warning that Britain's economic prosperity depends on the deal to leave the European Union.

Here's the key section from his speech, which will be delivered shortly.

The biggest determinants of the UK's medium-term prosperity will be the country's new relationship with the EU and the reforms it catalyses. Most of the necessary adjustments are real in nature and therefore not in the gift of central bankers.

The Bank will do everything it can to support adjustment consistent with its statutory obligations. We will continue to assess and express our independent assessment of the risks associated with Brexit. We will also use all our powers, consistent with our remits, to mitigate those risks and to smooth the adjustment to new opportunities.

*CARNEY: BREXIT PROGRESS MOST IMPORTANT FACTOR FOR U.K. OUTLOOK

8.55am BST

Labour MP Rachel Reeves, who chairs the Business, Energy and Industrial Strategy Select Committee, tweets:

Twenty years of Bank of England independence - a bold and wise decision by Blair and Brown in 1997.

8.54am BST

Correction, it seems that Mario Draghi isn't taking part in the BoE's conference (the ECB president was initially scheduled to close the event on Friday afternoon).

Mario Draghi was on the original Agenda for the Friday PM session....No longer #BankOfEngland20 #POETSDay pic.twitter.com/HK0wbkdo52

8.53am BST

The Bank of England has been rather reluctant to heave away at the levers of monetary policy in recent years.

They've been on hold for over a year, at 0.25%, after almost a decade at just 0.5%.

This would be a sign of the economy healing, and therefore adjusting to that healing process. So rather than being a source of fear or trepidation, this ought to be a good news story about the economy proving resilient."

8.42am BST

The Bank of England's remit is to keep UK inflation under control. Originally the target was 2.5%, later cut to 2%.

As this tweet from the Treasury shows, the BoE did well for the first decade, but then struggled once the financial crisis struck....

20 years ago the government granted independence to @bankofengland. Here's why that matters https://t.co/171wv6S6Rb pic.twitter.com/YJpZc35FG5

Bringing inflation under control-20 years of Bank of England independence https://t.co/wr4f0CenXm pic.twitter.com/tYlsQNRdSO

8.34am BST

Helpfully, the Bank of England are streaming their two-day conference:

8.30am BST

Prime minister Theresa May will kick off the Bank of England's conference this morning, with a full-throated defence of free markets.

"A free-market economy, operating under the right rules and regulations, is the greatest agent of collective human progress ever created.

It was the new combination which led societies out of darkness and stagnation and into the light of the modern age. It is unquestionably the best, and indeed the only sustainable, means of increasing the living standards of everyone in a country."

8.15am BST

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Mr Brown said last night that the objectives of policy were 'high and stable levels of employment and growth', the same as they had been in the 1940s when the Bank was nationalised, but added: 'It is right in the 1990s to deal with them in modern ways.'

"I think the case for independent central banks is as strong as it's ever been. At a time of economic uncertainty but also great political risk, we need the [US] Fed and the Bank of England to play these roles.

But the reforms we've seen over the last few years have hugely concentrated power in central banks. I think it's unfinished business."

Those who value numeracy in their central bankers will wonder why @bankofengland is holding this 145 days away from the 20th anniversary pic.twitter.com/2r3dGURFzP

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