Truss to Guarantee Bank of England Independence

Image © Gov.uk, picture by Tim Hammond / No 10 Downing Street.

The next Prime Minister will guarantee ongoing Bank of England independence, easing fears held by economists and analysts Liz Truss might meddle with the central bank.

Writing in the FT, Kwasi Kwarteng, who is heavily favoured to be the country's next Chancellor, said "we also remain fully committed to the independence of the Bank of England".

Analysts have made much of Truss' commitment to look at the Bank of England's mandate, with some suggesting it's a sign the incoming Prime Minister wants to take a more direct approach to managing UK monetary policy and compromise Bank of England independence.

"For the first time since it was granted the freedom to set interest rates by Gordon Brown in 1997, the Bank’s independence looks to be under threat," said Larry Elliott, Economics editor at The Guardian in a recent op-ed.

It is implied that threats to the Bank's independence are to be seen as a risk to the UK economic outlook, and by extension, the Pound.

"We expect a coming War of Independence over the Bank of England. This potential tussle and the politicisation of the UK's central bank is likely to create considerable uncertainty which will spook financial markets," says Nigel Green, chief executive and founder of deVere Group.

"We can expect the pound and the gilt market to react badly to any sense of growing political interference," he adds.

But Kwarteng's intervention on the day Truss is expected to be announced as the next leader of the Conservative Party confirms fears some have over indulged in speculation about what a Truss premiership means.

Kwarteng acknowledged "the important job" the Bank "have in the months ahead to bring down inflation. We believe co-ordination across monetary policy and fiscal policy is crucial."

What this coordination looks like, however, unclear.

"Forecasts are not destiny," adds Kwarteng. The Bank of England dominated newspaper front pages in August when it released forecasts showing inflation would rise to "around 13%" before the end of 2022.

They also forecast the UK would slip into a recession by year-end and it would not escape the clutches of 0% growth until at least 2025.

Above: BoE staff forecasts for the UK economy. Source: Bank of England.

But Kwarteng says the new Cabinet would be bold in addressing UK's anaemic growth rates and that the government under Truss would target trend growth of 2.5%.

"That means focusing on how we unlock investment and growth, rather than how we tax and spend. It is about growing the size of the UK economy, not burying our heads in a redistributive fight over what is left," says Kwarteng.

"We will create the conditions for business investment and innovation to flourish, which in turn will provide jobs and wealth to all of our citizens, and reduce our debt-to-GDP ratio in the long term," he adds.

UK sovereign debt yields have spiralled over recent weeks amidst ongoing fears that the UK economic slowdown and surging inflation will make it harder for the government to pay back its debt.

It also suggests the market is uncertain as to whether Truss' proposed economic policy mix will lead to a further deterioration in conditions.

Coming days will see many of the outstanding questions regarding the near-term fiscal and monetary outlook answered, and this could in itself calm market fears.