Today’s blog post comes to you via Huddersfield Royal Infirmary so will be short and sweet. It’s also incredibly appropriate given the state of the UK economy. It was announced today that inflation has not fallen and remains at 8.7 per cent while core inflation actually rose from 6.8 per cent to 7.1 per cent. I will hopefully be able to write something on this tomorrow after the Bank of England announces its decision on Bank Rate but for now just let me say that it’s obviously very bad news.
Understandably, people want someone to blame for it all. Most fingers are pointing firmly at the Bank of England which, again, is quite understandable. What is unusual is the fact that one of Jeremy Hunt’s advisers has publicly criticised the Bank of England for not being bold enough and has called for interest rates to go even higher. There is certainly some truth to this with monetary policy being too loose during the pandemic and the Bank was too timid and slow when it came to tightening.
However, it is wrong to lay all the blame on the steps of the Bank. Again I’ll write more on this tomorrow but there is only so much the Bank can do to get inflation under control. Monetary policy is a blunt tool and can only tackle the demand side of the economy. Many of the drivers of inflation at present come from the supply side which the Bank of England can do nothing about and which the government most definitely can.
The finger pointing brings me onto the main point I want to make about a major failing of the Bank of England, namely that it’s really rubbish at communication. Part of this is because it’s constrained by what it can say. For example, while the Chancellor’s independent adviser can criticise the Bank, it would be deeply inappropriate (and incredibly funny) if in the MPC press conference tomorrow Andrew Bailey was to launch into a tirade against government policy for exacerbating inflation. As such, there is little that the Governor can say which doesn’t just sound like passing the buck (“It’s not our fault. There is nothing we can do. No, I can’t say why”).
However, the Bank has been woeful at communications during the cost of living crisis and Andrew Bailey has been part of the problem. He is not a naturally good communicator, especially when compared to his predecessor Mark Carney who – by the very low bar of central bankers – is pretty suave. This was actually seen as part of the appeal of Andrew Bailey by the Treasury. There was talk of giving the job to the relatively charismatic and unconventional Andy Haldane (an uncharacteristically sensible policy proposal from Dominic Cummings) but the top job was given to Bailey instead. Essentially the government wanted a dull technocrat who would keep their mouth shut about politics. There had also been a suggestion that Janet Yellen or Raghuram Rajan would be approached but the government wanted someone British in order to appease its backbenchers. So Bailey got the job as he ticked the three main boxes: led a large organisation; British and; dull.
This is important as communication really matters when it comes to central banking. Households, businesses, and the markets need to know that the central bank has a credible plan to tackle high inflation, provide financial stability, and act decisively in a crisis. Recent months have seen the Bank doing the exact opposite with muddled communication, mixed messages, and insulting pleas to not ask for a pay rise. What is more, the Bank’s shoddy communication caused panic in the UK’s tech sector as their response to Silicon Valley Bank going bust was a paragraph on their website saying that they were not worried and that everybody had gone home for the weekend. I’m no comms guy, but this seems like a sub-optimal way for the central bank of a G7 economy to communicate.
We know that good communication from central banks leads to positive outcomes. Communication really does matter. Take Mark Carney as an example, his speech on the morning after the Brexit Referendum helped to calm the markets which had been spooked – not least of all because the Prime Minister had resigned and his Chancellor was nowhere to be found. Calm and clear communication signalling that the Bank was taking the situation seriously, was well prepared, had a plan, and was prepared to do what was necessary to support the economy really did make a difference. Or take Mario Draghi and his speech that he would do ‘whatever it takes’ to save the Euro. There was serious talk of the Euro being scrapped and several Eurozone economies were in absolute freefall but Draghi’s reassurances gave confidence to investors and politicians and so helped to save the Euro.
It’s not just speeches which matter of course. The Bank does a pretty good job at explaining economic terms and concepts and makes good use of graphics, but it could be even more creative. Whatever your thoughts on the policy, the Thatcher government managed to explain monetarism in a surprisingly catchy song in an advert. Or, take the Bank of Jamaica for example. When the central bank switched to a policy of inflation targeting it released a series of rap videos setting out what this was and why it was important (you can watch one of them here, but tragically most of them are no longer available). Now, I’m not suggesting that Andrew Bailey and the rest of the MPC should release a rap video (although I’d pay good money to see it) but it shows that central banks can and should be creative in how they communicate. Monetary policy is important and it impacts all of our lives and so it’s important that the Bank does a better job at communicating exactly what it’s doing to all the people of the UK.
I’ve written before about how we can improve monetary policy in the UK. This would look something like strengthening accountability with the government being prepared to fire the Governor and other MPC members while also allowing the Bank to be more critical of the government. It would also involve inflation targeting being scrapped and replaced with nominal GDP targeting. However, it desperately needs to up its game when it comes to communication.