The recent appointment of Megan Green to the Bank of England’s Monetary Policy Committee (MPC) means that three out of the four external members of the Committee will be women. This is necessary to balance the Bank of England’s internal members who are on the committee by virtue of their positions – the governor, the three deputy governors and the chief economist. All five are men.

Despite this apparent commitment to diversity by gender, there appears to be little attempt to achieve the only important form of diversity that matters for a central bank – diversity of economic opinions. There has never, in the entire history of the MPC, been a monetarist appointed to it although Charles Goodhart, who was a member from the Committee’s inception in 1997 till 2000,  was and is a very distinguished monetary expert. The vast majority of appointments to the MPC have been academics and Keynesians.

It is tempting to think that the Bank of England’s current preoccupation with climate change and its attempt to force the allocation of finance towards projects countering climate change rather than towards economic objectives is in some way associated with its dismal recent track record over inflation. But in reality, although many of the policies associated with attempts to prevent climate change are inflationary, the causal link between the Bank’s interest in climate change and its failure to keep inflation down is missing. When the MPC meets, its members don’t think or talk about climate change. They just happen to be bad at understanding the dynamics of inflation.

In December 2020, just when inflation was about to take off, the MPC Minutes clearly misunderstood the nature of inflation stating: “The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”

A year later, with inflation already at 5.1%, the MPC minutes stated: “Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022, with that further increase accounted for predominantly by the lagged impact on utility bills of developments in wholesale gas prices. 

“Indicators of cost and price pressures have remained at historically elevated levels recently, and contacts of the Bank’s Agents expect further price increases next year driven in large part by pay and energy costs. CPI inflation is still expected to fall back in the second half of next year.”

By December 2022, with the latest inflation figure 10.7%, the MPC was still expecting a decline “CPI inflation is expected to continue to fall gradually over the first quarter of 2023, as earlier increases in energy and other goods prices drop out of the annual comparison.”

The latest inflation figure out this morning is for March 2023 and shows inflation still at 10.1%!

Why has the MPC been so awful at forecasting inflation? The clue is in the December 2020 MPC statement which makes it clear that it thinks that inflation is purely driven by capacity shortages. Obviously the Committee cannot entirely be blamed for failure to forecast the Russian invasion of Ukraine. But there has been a complete failure to understand the role of monetary influences on inflation, particularly for commodities and assets. 

The second problem is that the Committee has failed to understand the nature of inflationary momentum. Those of us who were practising economists in the 1970s saw that once inflation had embedded itself in expectations, it proved stubbornly resistant to counter inflationary measures including monetary measures. It took more than a decade of relatively tight monetary policy to bring down inflation from its double digit rates in the 1970s to the current target of 2% which was only reached in the early 1990s.

Core inflation today remains above 6% and seems not to be budging. Wage inflation is around the same level. My colleagues at Cebr expect a long hard slog to bring inflation back to target.

The Bank and the MPC should be held to blame for their forecasting mistakes. Correcting them will require a commitment to greater diversity of economic thinking. Sadly the latest appointment of Ms Green, though she appears to be a competent economist and rather better than the previous appointment of a somewhat inexperienced lady from the LSE, provides little evidence that the Treasury that recommends these appointments has such a commitment. Andrew Bailey, the Humza Yousaf of central banking, is likely to have to continue in his attempts to pin the blame for inflation on anyone other than the Bank.

The author is deputy chairman of Cebr and has been forecasting the UK economy for 49 years.

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