21 November 2016

Populist politicians have spent the last few months taking pot shots at central bankers. Jill Rutter argues that the Office for Budget Responsibility may be next in the firing line – and Ministers will need to defend its integrity. 

Stressing Bank of England independence to the CBI today, Theresa May has recently been trying to defuse the argument with Mark Carney and the Monetary Policy Committee over low interest rates she ignited in her party conference speech.

In the US, Donald Trump accused the Chairman of the Federal Reserve, Janet Yellen, of playing politics with interest rates saying she should be “ashamed of herself” and that he would seek to replace her as “she is not a Republican”.  She used her testimony to Congress last week to confirm he would have to wait until her term expired in 2018.

Both appeared to be bringing into question the consensus on both sides of the Atlantic that monetary policy was best left to technocrats.

Indeed in a recent article, Ed Balls, who designed the original model for Bank of England independence in the UK, suggested that more political oversight of the wider financial stability role of central banks might be needed to preserve operational independence on monetary policy.

But Mr Carney is not just in the line of fire over the wisdom – or otherwise – of interest rate policy.  He has also come in for sustained criticism from pro-Brexit forces for seemingly allowing the Bank to be aligned with the Treasury and the former Chancellor over the so-called Project Fear – the threat to living standards and the economy from Brexit. 

The Bank’s initial gloomy forecast for near-term growth in the August inflation report had to be revised up in November – but as a case of gloom deferred not allayed.

The Bank’s forecast was interesting – but did not make much material difference to policy. Its big actions had been taken in the immediate aftermath of the vote when Mr Carney acted to stabilise the market reaction. This week we get to see the first post-referendum forecast from another set of technocrats - the Office for Budget Responsibility (OBR). 

The OBR is likely to forecast a significant worsening of public sector finances, and so the Chancellor (who will know perfectly well what is in the forecast) has been engaged in a softening up exercise over the weekend.  The good news for the Chancellor is that George Osborne’s institutional innovation means that it is no longer his name on the forecast.

The OBR will also be forced to chart a path for the economy to Q2 2019 – when on a 2 year timetable from a March 2017 Article 50 trigger (which is still government policy), we should be exiting the EU.

This would all make more of a difference to policy if there had not been a near emerging consensus that some fiscal slackening – at least on capital spending – was the necessary response to Brexit-induced uncertainty. But even if we avoid anything like a “Punishment Autumn Statement”, the OBR will still have to give its verdict of the impact of Brexit on the UK economy. Forecasting at any time is difficult – forecasting with such big unknowns and potential discontinuities is much harder.

The OBR is likely to find itself on the other side of the argument from many Brexiteers. At the party conference, the Foreign Secretary said, “I have to tell any lingering gloomadon-poppers that never once have I felt that this country would be in any way disadvantaged by extricating ourselves from the EU treaties”.

All the indications are that the OBR may emerge as “gloomadon-popper” in chief – even if, as the Chancellor has said, its forecast is less pessimistic than it was a few weeks ago.

If we are to hold on to independent fiscal forecasting, the whole government from the Prime Minister down, will need to defend the integrity of the OBR from potential attack.