Independence for the Bank of England was seen as a masterstroke when Labour first came to power.
By taking control of interest rates out of the hands of politicians, the Government removed the temptation to make political short-term decisions, such as lowering rates to help mortgage payers and boost house prices, at the expense of long-term prosperity.
But the reality is that this temptation was unlikely to exist anyway when the economy was strong. The test of the Bank’s independence is whether it is maintained when times are tough, as they are now.
Of course, independence does not mean that the Bank is free to do whatever it wants. Specifically, it is charged with adjusting the cost of borrowing in order to meet the Government’s inflation target.
This raises fears that the Monetary Policy Committee will see controlling inflation as not just its first priority but its only priority, leading to higher interest rates regardless of the other economic consequences.
The result could be stagflation – in which inflation remains relatively high while the economy grows slowly, with consumers spending less and industry unable to borrow to invest.
Concerns raised by the Chambers of Commerce in Birmingham and the Black Country are legitimate, and should be heeded.
While the Government should not interfere in the Bank’s decision-making, the Bank itself should consider the full context of the decisions it makes and the effect they could have.
In particular, it must ask itself whether any interest rate rise will have a significant effect in inflation at this time.
Rising food prices, for example, are not caused by too much money entering the system in the UK, but are largely a product of increased demand from a growing number of middle-class consumers in newly-developed nations.
In a similar way, there is no need to check consumer spending. Homeowners who are worried about the value of their property are already far less likely to take out loans or second mortgages to fund purchases, or to go on a spending spree with their credit card.
There is probably little, if anything, the Bank can do to solve the problems facing the British economy. In the circumstances, the most prudent course of action may simply be to wait for conditions to improve – and to ensure businesses are in as strong a position as they can be to take advantage of that improvement when it comes.