A seismic shift in the Bank of England's core mandate is being mooted by Labour's Andy Burnham government-in-waiting, sparking heated debate among economists about whether the institution's sole focus on price stability should be broadened to include economic growth. At the heart of this discussion lies a policy prospectus penned by Louise Haigh, a key figure within Mr Burnham's team, who argued that with the 30th anniversary of the Bank's operational independence approaching, it is time to assess whether better coordination and a greater emphasis on economic growth should be incorporated into its mandate.
The Bank's current remit, established in 1997 by then-Chancellor Gordon Brown, remains firmly entrenched in achieving 'price stability', defined as a 2% inflation target. This framework is reaffirmed annually in a letter from the Chancellor to the Bank's Governor, Andrew Bailey. However, with the UK economy facing unprecedented supply-side shocks – including the COVID-19 pandemic, Russia's invasion of Ukraine, and the ongoing Middle East conflict driving up energy prices – some experts warn that relying solely on interest rates to combat inflation may be detrimental to economic growth.
Independent MPC member Swati Dhingra has cautioned that using higher interest rates to counter these shocks not only slows the economy but also increases the cost of vital investments needed for the transition to net-zero emissions. Moreover, as extreme weather events become more frequent due to the climate emergency, food price shocks are expected to become increasingly prevalent, adding to these inflationary pressures.
A growing number of economists now suggest that monetary policy alone cannot be the sole defence against inflation. Think tanks such as the New Economics Foundation have warned that the current framework risks creating a 'doom loop' of economic self-harm in an era of frequent shocks. Proposed solutions include enhanced coordination between monetary and fiscal policy, with some advocating for a new Treasury-Bank coordinating committee to discuss necessary trade-offs and interactions between these policies.
While such a shift would require careful implementation to avoid unsettling markets, it could represent a significant evolution in the UK's economic policymaking landscape. As the Burnham government navigates this complex policy terrain, it will be crucial to balance the need for price stability with the imperative of promoting economic growth and investing in a sustainable future.