The Bank of England’s mistakes leave us trailing behind Europe

It has been a big week for inflation data across most of Europe, and for once the news has been surprisingly good. In Spain, the rate at which prices are rising has now fallen below 3pc, a level that should be regarded as completely normal, and even once volatile energy prices are stripped out of the calculations the core rate is still coming down sharply. In France and Germany the rate is hovering around the 6pc mark.

Even in Italy, not typically a country noted for its ability to keep rising prices under control, the rate has fallen by a third over the past six months and may well soon be close to the target rate set by the European Central Bank.

Amid those sharp falls in inflation, the UK is the sole exception. Last month the rate was stuck at 8.7pc, significantly more than the major European economies, and high enough to send jitters through the bond market.

True, the British inflation rate may well start to slow significantly from next month as soaring energy costs drop out of the index. But there will still be no escaping the fact prices are rising more steeply here than they are elsewhere.

It seems increasingly clear that the Bank of England is doing a far worse job than comparable central banks in the rest of the world. Until there is wholescale reform of this failing institution, we have little chance of getting our economy back on track again.

We are right back to where we were in the 1970s; the sick man of Europe, with inflation that has become deeply embedded in the economy, and far harder to control than in rival countries.

It should not be like that. We have long prided ourselves on having the most flexible labour markets in

Europe, which means that we should be able to avoid a wage price spiral. In the UK, unions are relatively weak – or at least they were until recently – meaning that labour had relatively little bargaining power, and there are always more workers on tap to replace any asking for extravagant pay rises.

And, in theory at least, we have more open and competitive product and retail markets than most rival countries, with plenty of big companies competing furiously for every customer, which means that they have to keep prices low if they are to stay in business.

Of course, the labour market may not be as flexible as it used to be, and some feel that the big supermarket chains are starting to look like a cosy oligopoly rather than real competitors. Even so, they can hardly be blamed for our inflation rate being higher than anyone else’s.

In reality, a simple fact is staring us in the face, even if the political establishment has hardly even begun to talk about it yet.

Over the past three years, our central bank has done a significantly worse job than any of its comparable rivals. Indeed, it is not just the eurozone, although that is the most obvious and painful comparison. In the United States, the inflation rate has dropped all the way below 5pc, despite a surge in government spending.

It is not hard to work out where it probably went wrong. The Bank of England kept interest rates too low for far too long, complacently assuming that inflation had been banished for good and completely missing the pressure on prices that the Covid lockdown would create. It printed far too much money, keeping the presses running and raising suspicions that it was monetising ballooning government deficits. It fuelled a run up in asset prices that was always going to feed through to higher prices in the shops one day. And it relied too much on failed models that predicted inflation was merely transitory, when in fact it would prove exceedingly hard to shift.

In reality, just because a central bank is independent that should not mean it is immune from criticism. In Australia, the Reserve Bank has launched a review of its operations to try and work out where it went wrong, and how it might learn from the mistakes of the past few years.

The report has resulted in what the

Financial Times described as “the biggest shake-up of the country’s central bank in its 63-year history”.

What have we heard from the Bank of England? There has been plenty about how the war in Ukraine is to blame, or greedy companies, or lazy workers. Andrew Bailey, the governor, has admitted that there are “very big lessons to learn”. But so far there has not been a single moment of serious public self-reflection. That is simply not good enough.

It is surely clear that the Bank of England requires wholescale reform. That should start, as a bare minimum, with a new governor, a new chief economist, and a revamped Monetary Policy Committee, this time made up

‘Just because a central bank is independent that should not mean it is immune from criticism’

of genuinely independent voices, preferably from industry as well as academia, to challenge and shape its decisions.

And there should be a commission of inquiry with far-reaching powers to examine both the inflation catastrophe of the last year, and more widely, whether the independence it was granted by Gordon Brown in 1997 has really worked. Nothing less will do. And until that process starts we will remain the sick man of Europe – and it will be an unreformed Bank of England that will be to blame.