Truss backs off from reviewing interest rate mandate of Bank of England

British Prime Minister Liz Truss after delivering her keynote speech at the Conservative Party annual conference in Birmingham

British Prime Minister Liz Truss backed the Bank of England’s authority to set interest rates independently, dropping previous mentions of a review into the central bank’s policy-making.

In her highest-profile speech on the economy since she took office in September, Ms Truss didn’t mention themes she touched on during her Conservative Party leadership campaign —including the prospect of setting a new target for the central bank. 

Instead, she offered robust support for the Bank of England's Monetary Policy Committee to rein in inflation, which is lingering near a 40-year high. The remarks leave open the question whether Ms Truss and her chancellor Kwasi Kwarteng will follow through on a promise to review the bank’s work, a suggestion that had unsettled markets in the past month.

Her comments also echo the line taken by ministers in recent days as they try to distance themselves from a surge in mortgage costs.

“It’s right that interest rates are independently set by the Bank of England and that politicians do not decide on this,” Ms Truss said in a speech to the Conservative Party conference in Birmingham. “The chancellor and the governor will keep closely co-ordinating our monetary and fiscal policy, and the Chancellor and I are in complete lockstep on this,” she told party members. 

Global rates concern

Ms Truss expressed concern about the scale of increases in interest rates around the world, pledging that her government will do what it can to soften the blow on households. She blamed Russian President Vladimir Putin’s attack on Ukraine for adding to pressures on inflation. She noted the UK Treasury already has cut stamp duty on property purchases to bolster the property market.

“We are seeing rising interest rates worldwide in the wake of Putin’s war and Covid, the Federal Reserve has been hiking rates in America and has signaled more rises to come,” she said. “Inflation is high across the world’s major economies, we will do what we can as a government to support homeowners such as cutting stamp duty. 

During the leadership campaign, Ms Truss’s allies called for a review into the Bank of England's current framework, which was set up in 1997 by Labour Prime Minister Tony Blair and his chancellor Gordon Brown.

“Its about reevaluating the role of the Bank of England and whether the remit is suitable enough for the economic situation,” Gerard Lyons, a senior fellow at Policy Exchange and supporter of Ms Truss’s plan for the UK, said in early August.

Ms Truss said little about the matter herself but didn’t discourage her allies from criticising the central bank. Since taking office, the Bank of England review slipped from the agenda, with the government focusing on aid to households struggling with spiraling energy bills and tax cuts for workers and businesses.

Mr Kwarteng may revisit the issue in his budget statement later this year, when the UK Treasury usually confirms or adjusts the Bank of England's remit. The central bank currently is told it should keep inflation based on the consumer price index to 2% at all time. It’s currently running about five times that level.

 Bloomberg