Monetary policy errors are rarely obvious in real time. More often, they emerge slowly – the product of frameworks that persist beyond the conditions that once justified them. Britain now risks drifting into precisely such a moment.
The Bank of England spent the better part of two years extinguishing the most severe inflation shock in a generation. That response was necessary. When consumer prices peaked at 11.1%, forceful action was required to restore credibility. Yet central banking is not an exercise in institutional resolve alone. It is a discipline grounded in judgment, calibration and the continuous reassessment of risk.
Today, that risk profile has materially changed.
Inflation is down – but jobs are weakening
Inflation fell to 3% in the year to January. Meanwhile, the labour market – historically the economy’s most reliable shock absorber – is continuing to weaken. Unemployment has climbed to a five-year high of 5.2%, while youth unemployment has reached 16.1% – a level not seen in over a decade. Business confidence is fragile, hiring continues to cool and growth remains anaemic.
Central banks rarely notice when prudence quietly becomes excess. The danger is not that policymakers act, but that they continue acting long after the balance of risks has shifted.
Much of the political criticism has focused on Rachel Reeves – and rightly so. Higher payroll taxes, increases in the minimum wage and a more demanding regulatory environment have undoubtedly weighed on hiring. But to attribute Britain’s slowdown solely to fiscal policy is to see only half the picture. The reality is more uncomfortable: fiscal and monetary policy are now leaning against growth simultaneously. That is unlikely to end well.
Britain is not suffering from a single policy mistake. It is experiencing cumulative restraint.
Policy is tightening into weakness
Monetary tightening operates with long and variable lags – a lesson economists have long understood but policymakers still relearn the hard way. By the time the full effects are visible, the economy is frequently already slowing sharply. Put bluntly, an excessive focus on yesterday’s inflation risk may already have engineered today’s stagnation.
A jobless rate above 5% does not yet constitute a crisis. What should concern policymakers is the direction of travel. Labour markets tend to weaken gradually – and then suddenly. By the time the turn is formally acknowledged, much of the damage is already embedded.
None of this diminishes the achievements of inflation targeting. Over the past three decades it restored monetary credibility, anchored expectations and helped inoculate Britain against the policy errors of the 1970s. But frameworks are meant to guide judgment, not substitute for it. Price stability pursued too rigidly can become its own form of instability.
Is inflation targeting still fit for purpose?
The question confronting policymakers is therefore no longer whether inflation targeting once worked. It plainly did. The question is whether a regime designed for the disinflationary battles of the late twentieth century remains sufficient for a structurally weaker, supply-constrained economy.
Robert Jenrick, Reform UK’s newly-appointed shadow chancellor, argued today that the Bank has ‘taken its eye off the ball’ on inflation and borrowing. Under a Reform government, he said, the Bank would remain operationally independent, but its focus would narrow: ‘We will strip the Bank of distractions which have been loaded on to it – including the requirement to support the transition to net zero.’
When monetary frameworks migrate into frontline political debate, it is usually because the intellectual centre of gravity is beginning to shift. Regimes come under scrutiny only when the status quo starts to strain.
The case for a dual mandate
Britain need not search far for an alternative framework. The US Federal Reserve operates under a dual mandate that pairs price stability with maximum employment. This does not render the Fed indifferent to inflation; rather, it reflects an institutional recognition that economic health cannot be inferred from a single indicator.
By comparison, Britain’s regime can appear almost single-minded in its focus on inflation.
The balance between growth and stability in a contemporary economy might be better captured by a framework that tracks the development of nominal demand rather than just prices. It would recognise that recessions rarely begin because central banks tolerate too much growth, but because policy tightens into weakening conditions.
The risk is subtle but increasingly visible: a framework designed to prevent complacency about inflation may inadvertently foster complacency about growth. This is not an argument for abandoning discipline. Credibility, once lost, is painfully difficult to rebuild. The ghosts of the 1970s still cast a long shadow – and rightly so. But credibility should never harden into rigidity.
When momentum falters and labour markets soften, flexibility becomes the essence of competent central banking.
There is also a growing danger that monetary and fiscal policy are beginning to pull in opposite directions. The Government speaks of unlocking investment and raising the economy’s potential, yet restrictive financial conditions quietly dampen the very activity ministers claim to champion. Without alignment, growth risks becoming an aspiration rather than a strategy.
Price stability is not an economic strategy. It is a precondition for one.
Price stability isn’t a growth plan
The Bank of England has earned its operational independence. What it must now demonstrate is adaptability. A mandate that gives overwhelming primacy to inflation is becoming harder to justify in an economy where weak demand increasingly poses the greater threat.
The greater danger for the Bank is not that it repeats the mistakes of the past, but that it remains so focused on the last war that it fails to see the next one approaching. Central banking is ultimately an exercise in timing – and the most consequential policy errors are invariably the ones policymakers do not yet recognise.
