We've celebrated a lot of 10th anniversaries recently the 10th anniversary of Tony Blair being in office, the 10th year of Gordon Brown helming the economy, and of course, a decade of independence for the Bank of England.
Many people argue that liberating the Bank of England from political control in 1997 was the best thing that Gordon Brown has ever done. It's ironic to be most fondly remembered for the parts of policy you have no control over, rather than the ones you do, but we certainly won't argue with that general sentiment.
The main questions are has an independent Bank of England actually done much for us over the past 10 years? And what is the next decade going to be like?
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Bank of England independence - off to a good start
First of all, independence was definitely a good thing. Taking control of anything away from politicians and handing it to experts who may at least be looking further than the next election is generally a good thing. We should do it for taxation and pension policy too, two areas where we could all have been far better off if Mr Brown's hands had been kept firmly off the tiller.
The system is also more transparent and more accountable than the old system. In fact, as Roger Bootle of Capital Economics recently pointed out in The Telegraph, 'it is striking' that the weakest aspects of the Monetary Policy Committee's operations 'are the bits still under political control' the appointment of new MPC members, and the setting of the inflation target.
And in economic terms, certainly, the decade since the MPC began its first deliberations has been very pleasant, with solid growth, low inflation and a broadly stable exchange rate. As Mr King has dubbed it, this has been the NICE decade non-inflationary constant expansion.
The UK even managed to avoid a recession after the dotcom bubble burst no mean feat, considering that the FTSE 100 stock market more than halved in value in the process, and is yet to fully recover its peak. But this golden age hasn't all been down to the team at the Bank of England; the reality is a little more complicated.
Did the Bank of England avoid recession through luck or judgement?
For a start unless you have the misfortune to live in Zimbabwe - inflation has been low practically everywhere in the world. To a great extent, this has been down to the massive growth in the global labour pool, as manufacturers have taken advantage of low wage rates in economies like China. Cheap goods from emerging markets have kept prices down in UK high streets, despite soaring oil prices. Exports have fallen in price, which has offset strong growth in the cost of things you can't import from abroad, like haircuts, private education and healthcare, and of course, housing.
And as Mr King readily says himself, the next 10 years may not be quite so nice. The Bank ended its 10 years at the helm by having to write its first ever letter of explanation to the Chancellor, discussing why inflation overshot the 2% target rate by more than 1% in March, rising to 3.1%.
Mr King argues that the Bank's biggest achievement has been 'to have anchored inflation expectations'. But he might be being over-optimistic there. The breach of target has undermined the Bank's credibility to an extent, and unfortunately, part of the blame for the breach can also be laid at the Bank's feet.
How the Bank kicked off the property bubble
The Bank's biggest mistake was cutting the base rate by a quarter point to 4.25% in August 2005. The move came just as the annual rate of growth in the housing market was slowing to near zero. The cut was passed by the narrowest margin of five votes to four, and to his credit, the Governor voted against it. But it had the effect or certainly contributed to the reigniting of the property bubble, and a feeling of confidence among the general public that the Bank and the Government would never let property prices fall.
Inflation is now creeping into every part of our lives it's not just petrol prices rising anymore, now food and shop prices are heading higher too, as the China deflation effect seems to be wearing off. And interest rates, which many had expected would already have peaked by now, could now be heading towards the 6% mark, or even higher. With consumers and householders carrying massive amounts of debt, every rise in interest rates adds to the pressure on the housing market and consumer spending. More repossessions tends to mean lower house prices, while lower consumer spending means lower profits and rising unemployment.
Independence for the Bank of England was undoubtedly a good thing but the past 10 years have been remarkably forgiving. We might be better placed to pass judgement if the next 10 years go equally smoothly.
First published on MSN Money (9/5/07)
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