Liz Truss’s supporters have stepped up their attack on the Bank of England’s handling of inflation, as the foreign secretary blamed the BoE and the Treasury for failing to avert the economic crisis facing Britain.
Truss says she will change the mandate of the BoE to toughen its focus on inflation, while she claims that the Treasury — until recently run by her rival Rishi Sunak — made matters worse by raising taxes.
If Truss becomes prime minister on September 5 — polls suggest she is the clear frontrunner in the Tory leadership contest — she will inherit one of the bleakest economic situations of any incoming British leader.
Andrew Bailey, BoE governor, set the backdrop for the run-up to the next general election, due by 2024, forecasting inflation of 13 per cent, a recession stretching into 2023, rising interest rates and higher jobless rates.
While Bailey pinned the blame squarely on Vladimir Putin for his invasion of Ukraine, Truss and her backers are casting some of the blame closer to home with what they say is outdated thinking at the BoE and Treasury.
Suella Braverman, a key Truss ally tipped as a future home secretary, told Sky News: “Interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard.”
Braverman said Truss would look at whether the BoE was “fit for purpose in terms of its entire exclusionary independence over interest rates”. Truss’s team later insisted the BoE’s independence was safe.
Instead Truss’s campaign said the foreign secretary would be “more directive in setting its mandate”. Truss has said the BoE mandate, set down by Labour chancellor Gordon Brown in 1997, is ripe for review.
It is not clear exactly what she has in mind. This week, at a Tory hustings in Cardiff, she said she wanted the BoE’s mandate to match “some of the most effective central banks in the world in controlling inflation”.
She has previously mentioned the Bank of Japan, which has spent years battling the spectre of deflation. But she has not specified what precise changes to the UK monetary policy framework she would seek.
Bailey noted on Thursday that Brown had set a statutory target of “price stability” but that the precise inflationary value was set by the government of the day.
It has been reviewed in the past: in 2003 Brown changed the BoE target to 2 per cent on the consumer price index — it had previously been based on a 2.5 per cent target for the retail price index.
George Osborne, Tory chancellor, in 2013 gave the central bank more discretion on how fast to return inflation to target.
Dave Ramsden, BoE deputy governor, noted that from the moment the bank was given operational independence in 1997 until April 2022 the average CPI inflation rate was exactly 2 per cent: precisely on target.
But Truss, who is running an insurgent-style campaign against “stale groupthink” in the establishment, is clearly looking for targets to blame should she become prime minister.
By attacking the record of the BoE and Treasury, she is also anticipating likely attacks from the economic “establishment” over her plans to cut taxes in an immediate emergency Budget, if she becomes prime minister.
This week at a hustings in Exeter, she declined to rule out breaking up the Treasury, saying: “I do think the Treasury needs to change. And it has been a block on progress.”
The BoE’s forecasts are based on existing government policy, so any tax cuts that served to support consumer spending could make the period of high inflation it is predicting even more prolonged — something policymakers will have had in mind when they voted for the biggest rise in interest rates for 27 years at this week’s meeting.
Mel Stride, Tory chair of the Commons Treasury committee and a Sunak backer, said it would be “really quite dangerous” to cut taxes this autumn, warning it could make inflation even worse.
Truss’s team countered: “Modest tax cuts aren’t inflationary — how can cancelling a corporation tax rise that hasn’t even gone ahead yet and reversing a national insurance rise that only came into effect in April be inflationary?”