Monetarists needed to fix the Monetary Policy Committee

“Large overshoots or undershoots on the inflation target should result in the automatic resignation of the Governor and the Deputy Governor for monetary policy.” Thus Prof Tim Congdon, in a paper for Politeia raging against the incompetence of the Bank of England’s Monetary Policy Committee.

It’s hardly surprising that he’s cross. As a passionate believer in monetarist economics, he was warning against the Bank’s money-printing spree well before the MPC’s members noticed the tsunami of inflation that was about to overwhelm them. Unfortunately for the rest of us, there was not a single monetarist on the committee, as they danced down the primrose path of constant near-zero interest rates.

More to Congdon’s point, there still isn’t. The nearest they had to a dissenting voice was Andy Haldane, who eventually got so fed up in being a minority of one that he left. The latest reshuffle of personnel, with Megan Greene replacing Silvana Tenreyro, promises more of the same. As if Congdon’s proposal is not enough to concentrate minds at the Bank, he has more: “All members should be free to refuse their signature to the MPC majority Monetary Policy Report and such refusal should not lead to their resignation from the MPC.”

The root cause of the groupthink is the power to appoint new members, and the ground gets stickier here. In the last resort, the Bank cannot be independent of the government. Congdon’s suggestion of a nominations committee merely pushes the problem one step back, to a sort of monetary Quis custodiet ipsos custodes? If the government of the day is too scared or ignorant to appoint a wide variety of members, an external committee, appointed by the government, is unlikely to do any better.

However, double-digit inflation is the clearest possible indicator that the current system has failed. One obvious reason for this is the way the original mandate had been progressively diluted, asking that members take into account the impact on growth and employment. Fortunately, we were spared a demand to consider global warming or first-time buyers, and the latest letter, from chancellor Hunt is mercifully short and to the point.

Sadly, the credibility of the current governor is probably beyond repair, and the chance to rebalance the MPC members has just been missed, which does not say much for the real views inside the Treasury. It has never been much of a fan of monetarism, preferring instead to seek excuses in unexpectedly rising commodity prices, supply and demand mismatches or new paradigms to explain why near-zero interest rates were the new normal. Let us hope they know better now. Let us also hope they take Congdon’s proposals seriously, even if they stop short of a Stalinist automatic execution for the governor for missing targets.

An unfashionable share

Sugar and fast fashion are not an obvious mix, and investment bankers have been trying for years to “unlock value” from Associated British Foods by demerging Primark from the foods business. Since ABF is the UK’s biggest family-controlled, stock exchange listed, company, the barbarians have been told (politely) to go away. This week saw another decent set of results, greeted by a markdown in the share price, and almost no coverage in the press.

On sales just short of £10bn in the first half, pre-tax profits were £667m, despite problems in the sugar market. Primark seems to be succeeding in that graveyard for British retailers, the United States. Understandably, investors see this as a high-risk project, while sugar is a volatile business, another factor that keeps the buyers at bay. This might explain why ABF is valued at just £15bn with the shares at £19.40.

That’s the same as a decade ago, just as the market was spotting the potential of Primark. The management/owners clearly think them cheap today, and have been buying back the shares. This is a long-term business, investing for future decades. One day, those shares will take another great leap forward – as long as the barbarians do not breach the gates.

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