The Bank of England’s independence should not be compromised, but reforms are needed to improve performance and accountability to parliament, the report says.
The resulting rise in inflation has led to a widespread loss of public confidence, according to a report by the House of Lords Economic Affairs Committee. However, the bank’s independence from government, introduced 25 years ago, has worked well and boosted economic confidence in the UK, the bank said.
The bank, like other central banks, has made monetary policy mistakes in recent years. In 2021, high inflation rates were incorrectly forecast as “transitional.”
The report criticized the bank for being overly reliant on “inadequate” forecasts. However, it also said that her responsibilities should be reduced so that she could concentrate on her main goals: fighting inflation and maintaining financial stability.
But the Lords warned that a “democratic deficit” had arisen because the bank had not been properly vetted.
Lord Bridges Headley, chairman of the Lords Economic Affairs Committee, said: “25 years after the Bank of England became independent, it is time to take stock. We believe that independence must be maintained, but reforms are needed to improve the Bank’s performance and strengthen its accountability.
“The Bank must learn from the mistakes it made in conducting monetary policy during the recent period of high inflation. The Treasury should limit the Bank’s expansionary mandate so that the Bank can focus on controlling inflation and maintaining financial stability.
“Given the powers vested in the bank’s unelected officers, Parliament must review the powers, performance and performance of the bank every five years. We currently suffer from a democratic deficit.”
The report said the bank’s failed inflation policies led to a decline in public confidence. The report said the bank relied too heavily on inaccurate economic forecasts to predict what was happening in the UK economy. Bank representatives argued that Russia’s invasion of Ukraine was impossible to predict.
The Lords Committee noted that “the persistence of inflation above target over this period also reflects failures in the implementation of monetary policy, including over-reliance on inadequate forecast models.”
It has been noted that the lack of intellectual diversity in the banking industry has contributed to insufficient prevention of inaccurate economic models and forecasts.
In July, the bank ordered Ben Bernanke, the former chairman of the Federal Reserve, to revise its forecasts.
The Lords also called on the Treasury to limit the bank’s powers so it could focus on inflation and financial stability.