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Analysis
When the Bank must speak out

When the Bank must speak out

UK central bank and EU home truths

by John Nugée in London

Fri 11 Mar 2016

The Bank of England has faced criticism from eurosceptics in the UK parliament and elsewhere for allegedly having unduly supported the government’s bid to keep Britain in the European Union. Mark Carney, the governor, told MPs this week that the prospect of leaving was the ‘biggest domestic risk to financial stability’.

The chief executive of a London property group said in a letter to the Financial Times that, by announcing it would pump cash into the banking system in the event of Brexit, the Bank was joining ‘the UK prime minister’s Project Fear’, which ‘undermined its independence’.

This is the latest in a line of attacks. Lord (Nigel) Lawson, the former chancellor of the exchequer, claimed as long ago as last October that Carney had ‘overstepped the mark’ in making favourable statements on EU membership. Lawson said no other Bank governor would have taken a ‘political’ stand on such an issue.

However not Carney but his critics have gone too far. When the truth conflicts with their cherished opinions, politicians sometimes conclude that the truth must be wrong.

There is no great ambiguity about the Bank of England’s constitution, set down in acts of parliament dating back to 1694. Technically it is a company with (since nationalisation in 1946) one shareholder, the Treasury, which can direct it, to a large extent, any way it chooses. Section 4(l) of the 1946 Act enables the Treasury ‘from time to time to give such directions to the Bank as, after consultation with the Governor, they think necessary in the public interest’.

The 1998 Act gave the Bank operational responsibility for monetary policy, establishing the monetary policy committee, amending Section 4 (I) of the 1946 Act accordingly. However, the Treasury retains reserve powers to direct monetary policy if ‘required in the public interest and by extreme economic circumstances’.

The Bank might like to give the impression of independence, but this goes much less far than that of the Federal Reserve or the European Central Bank. A better word describing its position would be ‘autonomous’. Carney’s support for the government’s EU stance appears reasonable. It is in keeping with the legislation establishing the Bank’s position and, crucially, its analysis of economic (rather than political) circumstances.

How the governor of the day interprets his powers is largely a matter of judgement. Robin Leigh-Pemberton, governor between 1983 and 1993, had even less nominal independence than today’s governor, yet he had the backbone to take sides rather publicly in the debate over economic and monetary union, handled in the Delors Committee of which he was a member (on a personal basis) in 1988-89.

Leigh-Pemberton’s successor between 1993 and 2003, Eddie George, who was outmanoeuvred by Gordon Brown, the incoming chancellor, in 1997 over the stripping of the Bank’s banking supervision powers, was a steely markets practitioner who resolved to avoid politics as far as possible.

Mervyn King (2003-13) weathered waxing and waning relations with the government, the banks, other central bankers and his staff. But he was not loath to weigh in with some fairly political statements at times (on the UK’s deposit insurance scheme, for example).

So the idea that the Bank is constitutionally forced to be silent on anything that may be thought of as ‘political’ is not entirely correct. If developments threaten to destabilise sterling or the financial system, the governor has not only a right but also a duty to speak out.

Like the Scottish National Party in the 2014 Scotland referendum, the ‘leave’ camp in the EU debate may try to undermine anyone who points out a few home truths. It is so much easier than trying actually to win the argument.

John Nugée is a Director of OMFIF and a former Chief Manager of Reserves at the Bank of England. This is No.9 in the series.

OMFIF's series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the 23 June poll. We will be assuring a healthy balance between many different points of view, in line with OMFIF’s overall neutral stance on the issue.

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