Bank's code of omertà broken (really?)

Bank's code of omertà broken

Edmund Conway and Angela Monaghan report on a dramatic breach of the secrecy fostered by the Bank of England.

Telegraph, 12 Sep 2009

It was, until a few days ago, one of the big unanswered questions of the economic crisis.

Last November, the Bank of England cut interest rates by the biggest amount since it was granted independence in 1977, reducing them by 1.5 percentage points in one fell swoop. The decision triggered chaos in the City. It sent the pound lurching lower, caused economists to tear up their forecasts and suddenly made the prospect of near-zero interest rates a close reality. But how on earth did the Bank engineer such a dramatic monetary policy move?

The real story emerged last week in a remarkable column written by David Blanchflower, the former Monetary Policy Committee (MPC) member, in the New Statesman.

Blanchflower, regarded as the lone member of the committee to see the scale of the recession from an early point, became the first MPC member to recount the full, gritty, behind-the-scenes struggle that occurred at the Bank as it scrambled to determine monetary policy. He revealed how he "pumped the air with my fist on the way back to my office after the meeting", how he had been called into Governor Mervyn King's office for a dressing down as the crisis worsened and he raised questions over the Bank's comparatively sanguine forecast, and how he considered quitting as the rift between himself and the rest of the committee widened.

The account is all the more remarkable because of the shroud of secrecy the Bank has managed to sustain, despite its 12 years in the spotlight since being granted independence. Of all the impenetrable institutions of state – the Kremlin, the inner recesses of Number 10, the Secret Intelligence Service – few can rival the Bank when it comes to secrecy.

Monetary policy decisions are usually carried out in complete secrecy and presented later as a fait accompli. About the minutiae of day-to-day life, the battles between separate factions over how to run the economy, the gossip about what happens behind the scenes, we knew next to nothing. Until Blanchflower.

One former MPC member, who did not want to be named, says Blanchflower's decision to speak out now was "tacky". "I'm slightly dismayed. It makes him look small and it's unfortunate. He must feel very bitter and hurt that he wasn't taken more seriously while he was at the MPC."

Blanchflower has accused the Bank of adopting a "group think" approach which was dictated by Mr King, "the old iron fist of the Bank of England". Alternative opinions, he said, were given "short shrift".

The former MPC member disagrees: "Mervyn does have a forceful and bullying personality but that's not the same as 'group think'. It's always a risk on committees, but the structure of the MPC makes it the least likely to suffer from 'group think' because it has such a rapid turnover of external members."

Erik Britton, director at Fathom Consulting and an economist at the Bank until 2000, has some sympathy with Blanchflower's description, but does not feel it fully reflects reality.

"A lot of what Blanchflower says rings true from my experience at the Bank. There was certainly a house view of how you look at the world and that view was consistent with Mervyn's. It wasn't autocratic though. He took a much subtler, hearts and minds approach. Mervyn had a very persuasive and beguiling way of arguing. I don't really agree with his characterisation of Mervyn as an 'iron fist', though I do think the Bank should be more open to new ideas."

Finally, however, Blanchflower's moment came. In his column he revealed how he and a select group of policymakers helped push the Bank towards the dramatic rate cut. "Professor Tim Besley, one of the more hawkish members of the MPC, who had been adamantly opposed to rate cuts in previous months and had even voted for a rate hike as recently as August 2008, came to see me to say that he realised he had been wrong and to ask what he could do to help turn things around on the committee... I told him I wanted us to cut rates by 150bps. He agreed and said he would talk with the two other external members of the MPC, Andrew Sentance and Kate Barker. I wanted to persuade them to join in our plan. I said I would go to see the Governor and tell him what we wanted. I did that the next day, and thankfully he, too, signed up to the idea and agreed to speak with the other four, internal MPC members. At our rate-setting meeting a few days later, on November 6, we were unanimous in voting for 150bps."

The account is a far cry from the somewhat dry official minutes to the meeting, but then the minutes to each meeting are a censored account, edited of all traces of personal opinion or argument.

However, this was not the only piece of unreported drama that took place in the Bank in those fervent days last autumn. For the previous week, as the Bank drew up the Inflation Report forecasts that are the foundation for its policy decisions, Blanchflower threatened, in a meeting with key Bank policymakers and economists, that unless the forecasts were downgraded massively, he would refuse to sign up to them – something which has never happened before in Bank history.

Moreover, he threatened if necessary to hold a press conference explaining his decision to go up against the Bank's own Inflation Report press conference, the quarterly occasion when the Governor faces reporters. The threats were made over the videolink between the Bank and his work at Dartmouth University in the US, and Blanchflower discovered, when he arrived in the UK the following week, that the forecasts for both growth and inflation had been sharply downgraded in the intervening period.

At the MPC meeting itself, the Governor took the unusual stance of suggesting the 150 basis point rate cut at the very start of proceedings, so there could be no doubt about the direction he was heading in. The meeting was wrapped up so quickly that various MPC members had time to head upstairs to their offices, switch on the television and await the stunned expressions of the reporters in front of the Bank as they learnt the news. The Bank declined to comment on Blanchflower's account, but insiders say no deal was struck.

Throughout the MPC's history various members have fought battles either with each other or with the Bank's own executives, but for the most part these campaigns have been fought behind closed doors. For instance, early in the MPC's history, a number of external members, including Sushil Wadhwani and Willem Buiter, led a rebellion on the Bank for not providing them with enough in the way of staff or resources. In the same era there were tales of stand-up rows in the committee room between two particularly forthright members, of members dozing off mid-briefing or humiliating bank staffers and eliciting tears.

That these stories have tended to make it no further than the Bank's own water coolers – and certainly not into print – is a testament to the institution's fearsome protection of its reputation. Emails and messages from journalists, even to senior Bank figures, are routinely scrutinised by the press office, which exerts a degree of control over communications that most other organisations can only dream of. In Blanchflower this policy came up against its most difficult obstacle yet.

The Bank, which has remained tight-lipped following the Blanchflower revelations, hopes that in future MPC members will revert to their wonted reticence over the monetary policy process.