A House of Lords' economic affairs committee report into the Bank of England has argued reforms are needed to increase the central bank's accountability to parliament.
The Making an independent Bank of England work better report, released today (27 November), found that the BoE, alongside other central banks, has made "errors in the conduct of monetary policy in recent years".
Bank of England looks to other central banks in forecasting review
It added that a "perceived lack of intellectual diversity" at the BoE contributed to insufficient challenging of its modelling and forecasts; and with its remit growing, there are risks jeopardising the central bank's ability to focus on its primary objects and drawing it into the government's wider policy agenda.
This was due to the fact that its remit expansion was not met with an increase in accountability and scrutiny by parliament.
Although the report reiterated the BoE should remain independent to reassure markets and so that "critically important economic decisions" are delegated to unelected officials, the committee shared concerns over a "democratic deficit" within the central bank, putting confidence in the bank and its independence at risk.
Additionally, the report found the continued use of quantitative easing has "blurred the lines between monetary policy and fiscal policy".
As a result, the economic affairs committee put forward three key recommendations.
It suggested the Treasury should "prune" the BoE's wider remit, focusing on the matters it is expected to consider, to ensure the central bank prioritises tackling inflation and financial stability, alongside a review of the BoE's management structure in a bid to streamline it.
Former Fed chair Ben Bernanke to lead Bank of England forecasting review
The second recommendation called for greater efforts to foster a "diversity of views" and for strengthening a culture that "encourages challenge". Some of the areas in need of reform, the report found, include governance, hiring practices and appointments, especially within the monetary policy committee.
The committee added that Ben Bernanke's review into the BoE's forecasting practices and models should also consider whether appointments are creating "sufficient diversity of thought".
The third recommendation argued parliament should conduct an overarching review of the central bank's remit and operations every five years, to enhance parliament's ability to hold the BoE to account, especially on its performance and leadership.
George Bridges, chair of the economic affairs committee, said that, 25 years after making the BoE operationally independent, it is now time to "take stock" of the situation.
"The Bank should learn from the errors it made - along with other central banks - in the conduct of monetary policy during the recent period of higher inflation. But that alone is not enough. The Treasury must prune the Bank's expanded remit so the Bank can focus on controlling inflation and maintaining financial stability," he added.
"Given the powers that unelected Bank officials wield, parliament should conduct a review of the Bank's remit, performance and operations every five years. Independence and accountability should go hand in hand. At the moment, we are suffering from a democratic deficit."
