Transcript

MARTIN UPTON

Well, we’re here at the Bank of England. And Andy Haldane is the Bank of England’s chief economist. Good morning, Andy.

ANDY HALDANE

Good morning. Good morning.

MARTIN UPTON

Several questions I wanted to ask, but the first one is about monetary policy. In 1997, the government handed the Bank of England responsibility for monetary policy. Is it better for the bank to run monetary policy rather than the government?

ANDY HALDANE

So I think, yes. I think it’s better for the economy. I think it’s better for society. I think it’s better for the government as well, actually, for something like monetary policy to be put into the hands of the central bank.

Now, why do I say that? Well, what we found in the past in the UK, and what many other countries have found, historically, is that leaving monetary policy, interest rates, in the hands of politicians leaves it rather at the whim of elections. So the pattern we sometimes saw in the UK and elsewhere was, for example, monetary policy being loosened, interest rates being lowered, in the run-up to elections, which might not have suited the needs of the economy. It might have generated bouts of inflation, the sort of thing we saw during the 1970s and parts of the 1980s.

So emerging best practise, internationally, over that period, was to delegate responsibility for the setting of interest rates to a central bank, arm’s length from elections, from the political process. And that way, there’s less chance of stoking up inflation pressures ahead of elections.

And as best we can tell, on the basis of experience both in the UK and internationally, those countries that have handed monetary policy to the central bank have better been able to keep inflation under control. In the UK since 1987, when the bank was given operational independence for interest rate setting, inflation has averaged the target of around 2%. So I think that’s been a good outcome for the economy, for society, and ultimately it’s good for the government, as well.

MARTIN UPTON

You mentioned the target for inflation of 2% and how the MPC, the Monetary Policy Committee, when setting interest rates, has its eye on that. And I think now you also look at something called excess capacity within the economy, as well, and how that might impact on inflation. But what about the poor old savers? I mean, do you think about them when you’re setting interest rates? Because after all, a lot of people with savings, particularly in later life, rely on interest for income.

ANDY HALDANE

Yeah, absolutely we do. So when setting monetary policy, when setting interest rates, you’re right, we have an inflation target of 2% to hit. But that’s not the only thing we have a weather eye on. We also have objectives to support the economy and to support the government’s objectives for employment and growth.

So all of the time, we are looking not just at price pressures in the economy, but levels of employment and levels of activity and how our interest rate decisions are affecting both borrowers and savers. Now, of course, we can’t keep everyone happy with one interest rate. If you’re setting the interest rate low, you are benefiting borrowers somewhat to the expense of savers and vice versa when interest rates are high. What we have to do is balance those interests and ask ourselves what is best for the economy as a whole. And that’s what we do.

MARTIN UPTON

OK.