Earlier this month the Bank of England celebrated its 25th anniversary of becoming ‘operationally independent’ from the UK government. The move was one of New Labour’s first acts in government in 1997, and was hailed by Tony Blair as “the biggest decision in economic policy making since the war”.
Underpinning this was a radical idea: that inflation management was a largely technocratic function that could be carved out from political decision-making. Because governments had a natural tendency to over-stimulate their economies, especially around election time, there was always an inherent “inflation bias”. By ceding control over interest rates to an independent entity, Labour wanted to guarantee that monetary policy would no longer be used to serve political ends.
For much of the following quarter century, it was viewed as a resounding success. Consumer price inflation hovered around the Bank of England’s target of 2% per year, leading many economists to declare runaway inflation as a thing of the past.
