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Renewed focus on Bank of England mandate under a potential Burnham govt

The Bank of England’s mandate, set by the chancellor and centered on a 2% inflation target, would be a key point of debate for any new UK administration as energy-driven inflation and supply-side shocks test policy.

Reported · Written up by our desk · Central Banks

A Guardian Business analysis says Andy Burnham’s team could seek changes to the Bank of England’s mandate, an approach that would carry implications for how the central bank sets interest rates and how policymakers balance inflation control with economic stability.

The article notes that the Bank of England’s Monetary Policy Committee, which includes five senior Bank figures and four external members, sets borrowing costs to achieve “price stability,” defined by the chancellor’s inflation target, currently 2%. It also highlights that the remit is reaffirmed each year in a letter from the chancellor to the Bank’s governor, currently Andrew Bailey.

The piece points to language in the remit that allows for inflation to miss the target at times, citing concerns about “undesirable volatility in output” if rate rises are used too aggressively. It also references Bailey’s explanation from last month for why the MPC had not yet raised borrowing costs amid the Middle East war, which has pushed up energy prices.

Economists cited by the outlet argue that the UK faces repeated supply-side shocks, including impacts from Covid, Russia’s invasion of Ukraine, and now the Iran conflict. They warn that if rates are set too high, higher borrowing costs for consumers and businesses could jeopardize growth, especially when inflation is driven by shortages rather than strong demand.

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