If you pick up today's FT the front page has an intriguing story about the role of the Bank of England. As you will know back in May 1997 the then new Labour Government caused a major surprise by granting the Bank of England operational independence from the Treasury in terms of monetary policy. This came into action with the passing of the Bank of England Act in 1998 which stated its primary aim was to maintain price stability while supporting the government’s other objectives such as employment and growth. As a result of the government giving up the power to use monetary policy to influence economic activity they were left with just fiscal policy. This can be defined broadly to cover any decision made by the government in relation to public spending or taxation. Just like monetary policy it too can be used to influence the level of economic activity with the aim of keeping unemployment at a low level while at the same time ensuring that there is no significant risk of excessive inflation. It is clear that the Bank of England is not expected to have any influence over the government’s decisions in relation to fiscal policy. This became an issue yesterday with the Governor of the Bank of England, Mervyn King, seeming to endorse the new coalition’s public spending cuts. This is so unusual because since being granted independence the Bank of England had generally not commented on fiscal policy. The latest minutes from the Monetary Policy Committee have also caused much debate in financial markets. They show a sharp division with one member wanting an increase in interest rates while another favoured for a further round of quantitative easing. This still left a clear majority in favour of the "no change" decision. However, in the months to come these divisions could get to be a serious problem.
Nov 10, 2010
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