Ed Barker is the CEO of Conservative Way Forward. He was formerly a parliamentary researcher and George Michael’s saxophone soloist.
When Gordon Brown handed over responsibility for controlling inflation to the Bank of England in 1998, it sounded sensible on paper. Why not ensure that interest rates could be controlled by independent experts, in our long term economic interests, rather than politicians who may make decisions that favoured their short term political interests?
But if we choose to hand over political power to experts and institutions, they must then be held to account for their performance – just as forcefully as we do for politicians. It’s in that spirit that Conservative Way Forward has produced its report “The Bank of England: An International Outlier”.
The central finding is stark: by the end of 2025, the Bank of England will have cost every British household a “Bank of England Surcharge” of £5,546 for the preceding four years. This is a cost being imposed on British households that no other major Western central bank is imposing on its population.
Our methodology was simple: we compared the Bank of England’s record with that of the world’s major central banks, and those with similar mandates: the US Federal Reserve, the European Central Bank, and the central banks in Sweden, Australia, New Zealand, and Canada.
On inflation, between 2022-2024, the Bank of England failed in its central mandate by more than two times the failure of the US, almost two times the failure of Canada, and by 30-50 per cent worse than Australia and New Zealand.
Controlling inflation is the Bank of England’s central goal – the entire reason for its existence. The world economy has experienced several significant shocks since 2020, and all central banks have failed and overshot their inflation targets.
But the Bank of England missed its target by much, much more. In 2022, it oversaw an average inflation rate of 9.05 per cent, compared to the average across the other central banks of 6.47 per cent; in 2023 UK inflation was 7.38 per cent, compared to 5.35 per cent.
Even if we take the second worst performer, the European Central Bank, we still managed to fail by 25 per cent more. So much for taking back control over our money and economy!
The Bank of England’s failure over the last two years has burdened British citizens with a surcharge of £1,185 (based on Office of National Statistics household expenditure numbers). And remember, this amount isn’t a cost of inflation; that figure would be much higher. It’s a cost of the Bank’s failure on inflation in relation to the other central banks, its peers around the world.
That’s why we call it a Bank of England Surcharge: this failing is specific to the UK, and this cost has only been incurred by British citizens.
Little surprise that Mervyn King, the former Governor, said recently that “groupthink” at the Bank had fuelled the inflation crisis, and that a lack of “dissenting voices” and “intellectual diversity” at the Bank meant it failed to stop inflation from surging to a more than 40-year high.
The larger aspect of the Bank of England Surcharge revolves around the Bank’s policies on “quantitative tightening” (QT), which is costing the average British household £4,361 between 2023 and 2025.
Quantitative tightening is the reverse of quantitative easing (QE). In the QE years the Bank of England bought government debt to give it the money it needed to fund its promises; in the QT years, the central bank is getting rid of those bonds by selling them back into the market, or waiting for them to expire.
As almost 48 parliamentarians wrote in their letter to the Chancellor last month, the Bank of England has decided actively to generate losses on these bond sales – and then make British taxpayers liable for up to £190 billion of losses.
During the pandemic, in 2020-21, almost all central banks around the world purchased short-term debt from their governments, which expired automatically in one to three years. The Bank of England, on the other hand, accumulated in its own words “a relatively long duration stock”, with most of its bonds having a 20-year lifespan.
Because of this, the Bank has been forced to pursue “aggressive” QT, which means it sells off its bonds rather than letting them expire at the end of their term (“passive” QT), as other central banks are largely doing. This is creating exorbitant losses: the bonds bought in July-September 2021, for example, are today being sold at a 57 per cent loss.
And once these losses are generated, Threadneedle Street is then billing taxpayers for its losses. No mainstream central bank is doing this – only countries like Albania and Azerbaijan.
What does the Bank know that gives it the confidence to go it alone and ignore international central bank practice? Why is one of the world’s oldest central banks adopting the practice of the central banks in Albania and Azerbaijan, instead of those of the US and EU states?
Forcing British taxpayers to bail out the Bank is unprecedented amongst the world’s advanced economies; a “leap in the dark”, as the Treasury Select Committee put it. The world’s other major central banks are shielding their populations from these losses, and in most cases not generating losses in the first place.
In what will probably go down as the understatement of the decade David Ramsden, the Deputy Governor of the Bank, said in a speech in February that “our approach to this issue differs from other central banks”.
On 21 September 2022, the Bank announced its new “aggressive QT” plans, spelling out its intention to sell £80 billion worth of bonds, beginning on 3 October 2022. This announcement occurred just 48 hours before Kwasi Kwarteng delivered the “mini budget”.
Accountability in politics really matters. I hope our report can play a part in shedding some light on this opaque and often misunderstood area.
As the 48 parliamentarians said in their recent letter to Jeremy Hunt: the Bank of England is “out of step with the central banks of most major economies”; its approach is “saddling our constituents with entirely avoidable bills, and this is being done with no public or parliamentary debate or consultation.”