The Bank of England is losing its invincibility

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Later this month, Richard Tice, deputy leader of Reform UK, will meet Andrew Bailey, Governor of the Bank of England. Whether it happens before or after the next interest rate decision on September 18 hardly matters, for it is the symbolism that counts. A party still dismissed by many has become the only political force willing to challenge the Bank directly. That should unsettle Westminster.

When Labour granted the Bank operational independence in 1997, the bargain was clear. The Bank would keep inflation close to an agreed target, now 2%, politicians would step back from day-to-day rate setting and investors would draw confidence from Britain’s new fiscal discipline. For a time, the arrangement worked. Inflation was subdued, debt manageable and credibility intact.

The environment today looks very different. Inflation overshot badly after the pandemic, public debt has ballooned and policies once considered technicalities now impose eye-watering fiscal costs. Independence remains valuable, but independence without accountability has become complacency.

Start with interest on reserves. The Bank pays commercial lenders the full policy rate, currently 4%, on deposits parked with them. When balances were small, the sums involved were trivial. But after years of quantitative easing those reserves have swollen to vast proportions. The annual bill now runs into tens of billions, effectively transferring taxpayer funds to banks. Bailey insists this is unavoidable, warning in a five-page reply to Mr Tice that without such payments the Bank could lose control of short-term interest rates. Yet this is not the whole story. The European Central Bank employs a tiered system, paying the full rate on only part of reserves. Reform wants to go further, arguing that payments should be scrapped altogether, and claiming £35 billion could be saved. That is unrealistic. Any such change would amount to a selective tax on banks, with knock-on effects for lending and households. But the point is that choices exist, and only Reform are pressing for debate.

Then consider quantitative tightening. Last September, the Bank pledged to reduce its gilt holdings by £100 billion over the following year. Rather than simply let bonds mature, it is actively selling them into markets already jittery about debt levels and fiscal discipline. Each sale crystallises a loss that the Treasury must cover, while also pushing up yields and raising borrowing costs across the economy. Bailey argues this speeds a return to ‘normality’, yet the benefits are minimal while the costs are obvious. Pausing active sales at the September meeting would still shrink the balance sheet by £50bn over the next year, while also easing market pressure and potentially shaving up to 25 basis points off ten-year borrowing costs. For a Government with no fiscal room, such a saving would be a welcome relief.

These issues highlight how much has shifted since 1997. Then fiscal and monetary policy could still be treated as separate spheres. Today, with swollen central bank balance sheets and a mountain of government debt, the two are tightly intertwined. Pretending otherwise only undermines credibility.

What is remarkable is that only Reform seems willing to say so. Labour’s big economic pitch centres on wealth taxes and self-imposed fiscal rules – policies that generate headlines but little revenue, discourage investment and do nothing to fix Britain’s structural problems. The Conservatives, still haunted by the gilt-market rout of 2022, prefer silence. Into this vacuum has stepped Reform.

This is not simply a party of protest. Reform now present themselves as the real opposition to Labour, and polling puts them regularly ten points or more ahead of their nearest rival. That is not the behaviour of a fringe movement but of a party positioning itself as a government-in-waiting. Taking on the Bank is a deliberate way of demonstrating seriousness about the hardest questions in economic management.

None of this is to argue for scrapping independence. The dangers of politicised rate-setting are obvious. In America, Donald Trump has turned Jerome Powell, chair of the Federal Reserve, into a political punchbag. He has branded him ‘clueless’, accused him of bias and even mused about sacking him before his term ends. At rallies he has promised to pack the Fed with loyalists who would ‘do what’s right’ for him, in other words cutting rates to boost his business credentials. That is not accountability, but politicisation, and it corrodes credibility. Britain must avoid that trap.

But silence is just as corrosive. Independence cannot mean immunity. The framework requires recalibration. Repeated policy failures should have visible consequences for members of the Monetary Policy Committee. The mandate itself is too narrow and should reflect employment and growth as well as inflation. And transparency must be enhanced, because policies that cost taxpayers tens of billions must be explained openly and convincingly to the public – not disguised in jargon.

Reform do not have all the answers, but at least they are asking the questions that others avoid. Their boldness exposes Labour’s gimmicks and Conservative caution.

As for the Bank, it cannot go on pretending to be untouchable. Announcing a pause to gilt sales on September 18 would be an obvious place to start, proof that Bailey and his colleagues on the MPC recognise their responsibility not only to financial markets but also to taxpayers. If it refuses, the danger is clear, more unnecessary losses, higher borrowing costs and a growing suspicion that Britain’s most powerful unelected institution has drifted badly out of touch, while the political class lacks the courage to say so.

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