Alpesh Patel’s Political Sketchbook: Elections and Interest Rates

Alpesh Patel OBE Thursday 27th June 2024 03:37 EDT

There was a time when your class was the best predictor of your voting intention. (Notice how speaking about class is not shameful and backward, but ‘caste’ is).  Then it became interest rates in the 1990s the best predictor of the party to win.

As I sifted through my old Oxford University Politics and Economics papers this morning, I stumbled upon a fascinating essay on the history of monetary policy in the UK since 1870. Yes, I read British Economic History since 1870 (given I am a vegetarian and teetotal, you can imagine the number of party invites I used to get).

This discovery was particularly timely, given the current general election and the recent decision by the Bank of England to maintain interest rates. The convergence of these events offers a unique lens through which to examine the evolution and significance of monetary policy in the UK, especially considering the landmark decision in 1997 to grant the Bank of England its independence.

The history of monetary policy in the UK is a tale of evolution, marked by significant milestones that have shaped the economic landscape. From the gold standard era to the turbulent times of the World Wars, and from post-war reconstruction to the stagflation of the 1970s, each period presented unique challenges and necessitated distinct policy responses. However, it was the latter part of the 20th century that saw one of the most profound changes in the UK's monetary policy framework: the independence of the Bank of England.

This pivotal shift occurred in 1997 under the Labour government led by Tony Blair. The decision to grant operational independence to the Bank of England was a bold move, aimed at insulating monetary policy from political pressures and enhancing the credibility of the UK's economic management. The Monetary Policy Committee (MPC) was established, tasked with setting interest rates to meet the government's inflation target, a mechanism designed to ensure price stability and foster economic growth.

Fast forward to today, amidst a fiercely contested general election, the Bank of England's recent decision to hold interest rates steady underscores the enduring importance of its independent status. The MPC's choice reflects a careful balancing act, weighing the need to control inflation against the potential risks to economic growth. This decision is a testament to the prudence and foresight that the Bank's independence was intended to safeguard.

The context of the current general election adds another layer of complexity. As political parties vie for power, economic policies and their implications are at the forefront of public discourse. Yet, amidst the political noise, the steady hand of an independent central bank provides a reassuring constant. It serves as a reminder that sound monetary policy, free from short-term political considerations, is crucial for maintaining economic stability.

It’s just that, many would rather they did cut rates, saving people a fortune. If Labour win, and taxes rise, then cutting rates will actually happen sooner.

This continuity of policy and the stability it brings cannot be overstated. It is a cornerstone of investor confidence and economic resilience. In a world where political climates can shift rapidly, the independence of the Bank of England ensures that monetary policy remains focused on long-term economic health rather than the immediate demands of electoral cycles.

Reflecting on my old Oxford papers, it is clear that the lessons of economic history remain profoundly relevant. The UK's journey from the gold standard to an independent central bank illustrates the critical role of robust and adaptive monetary policy in navigating economic challenges. Today, as we stand at the crossroads of another general election, the wisdom of that 1997 decision is evident. It has provided the UK with a framework capable of withstanding political upheaval and ensuring that economic management remains guided by expertise and evidence rather than partisan agendas.

And you know why things evolved. Some clever economists worked out something called Game Theory. That unless it can be signalled that your policy is not open to wavering, you don’t have credibility and if you lack credibility, then well…Liz Truss. Basically, when you can’t trust politicians, then you need to give everything to third parties, preferably not subject to elections. Like the Office for Budget Responsibility. The irony. It’s why the House of Lords are a good thing. What, you want even more elected MPs?

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