The Bank of England is plagued by groupthink

“Whichever party is in office the Treasury is in power”. So said Harold Wilson when Prime Minister. He was right, and the situation has deteriorated since. There is a need for a fundamental rethink of the way economic policy is implemented in this country.

Groupthink dominates. This is highlighted by the abysmal outcomes of policymaking over the last year. While the Treasury has pushed for higher taxes at every available opportunity, despite an improving budget deficit, their partners in crime at the Bank of England have been so far off the ball in fighting inflation that they have become an embarrassment.

The outcome is that people and businesses are now suffering under higher taxes and rising inflation - and what is left of this Government’s economic policy is in tatters.

It is not too late for the Prime Minister to act. He is, after all, the First Lord of the Treasury. In addition to immediate policy changes such as cutting taxes to address the cost-of-living crisis, he needs to tackle the groupthink that dominates in policy circles.

It is vital to understand the scale of the challenge. Uniquely the Treasury combines both controlling public finances and managing the economy. In other countries these functions are separate. The Treasury’s focus usually is on balancing the budget, which it often mishandles. Growth comes second.

Under New Labour this problem was exacerbated. The Treasury became a super-ministry. Its tentacles spread, and micro-economic management dominated. Distrust of the market mechanism held sway.

Yet, the troubles are more widespread than just Whitehall. The Bank was made independent in 1997. Yet, the Chancellor, supervised by mandarins, nominates the Governor while the Treasury oversees the selection process of deputy governors and outside members of the Bank’s policy committees.

The Bank is independent in the sense that Parliament does not hold it to proper scrutiny – but the way it thinks and acts is hardly independent of the Treasury at all.

Last year, when the economy was recovering and it was inevitable that inflation was set to rise, the Bank ignored its job and kept printing money. The scale of its extra £450 billion of money printing was identical to the increase in government spending. Independent? Who are you trying to kid? It fanned the fuels of the inflation fire.

The push back is supply shocks were outside the Bank’s control. That’s obvious. But they should have anticipated the feed-through and acted. A year-ago I asked which ‘p’ would it be? Would inflation pass-through, persist or be permanent. The Bank thought it would pass-through and arrogantly dismissed those of us who were convinced inflation would persist. It has.

Over the last decade, cheap money policies have also fed rampant asset price inflation, including property, and led financial markets not to price properly for risk.

We must learn from these mistakes. Addressing groupthink requires confronting how institutions are run and the people appointed to them. That means changing both processes and people.

Process change is necessary but takes time. The Treasury should be split into two: a finance department and a new economics ministry. Enabling not strangling the private sector should be central to their thinking. Alongside this should be a reassessment of the remit of the Bank to make it fit for purpose.

Personnel changes are also critical. There is a need to bring in more outsiders, with global, regional, and finance and business experience.

This also relates to the Bank’s governance, overseen by its Court which is rarely held to account and pays only lip-service to diversity, not least in thought. Does the Bank’s historic underrepresentation of those from working class backgrounds in senior positions hinder how it sees its policies affecting those on low incomes? Most definitely.

Economic policy in the UK is plagued by groupthink. Change cannot come soon enough.

Dr Gerard Lyons is chief economic strategist at Netwealth