Bank of England official tells UK Conservatives to leave their policy alone

A senior Bank of England official on Monday pushed back on suggestions by a leading candidate to become Britain's next prime minister that the government should set a "clear direction of travel" for monetary policy.

Michael Saunders, one of nine members of the Monetary Policy Committee, which sets interest rates, said the fundamentals of Britain's monetary policy framework were best left untouched by the Conservative Party's leadership candidates. Since 1997, the BoE has had "operational independence" to change interest rates as it sees fit to achieve the inflation target set by the government, which does not usually comment on monetary policy. But Foreign Secretary Liz Truss, one of Boris Johnson's expected replacements, said at the weekend that the BoE would reconsider its powers to "make sure it is tough enough on inflation" and "set a clear direction of travel" on monetary policy. Former equality minister Kemi Badenoch, a candidate to become Britain's next prime minister, also said the BoE was not being sufficiently overseen by the government at a time when inflation of 9.1% was well above the 2% target. Saunders said more government involvement would make it harder rather than easier for the BoE to control inflation. "I think the fundamentals of the UK monetary policy framework are really important and best left untouched," Saunders said, speaking at an event organized by the Resolution Foundation in London. "The government is very clearly not setting the course of monetary policy," he added. Saunders said Britain's monetary policy credibility was at stake. Speaking in a question-and-answer session after his final speech before leaving office next month, Saunders said interest rates could exceed 2% within a year. "The MPC's ability to ease monetary policy quickly and effectively during the 2008-09 recession and pandemic ... rests on the credibility of this policy framework." Saunders also said the greater focus on money supply suggested by Truss would not help. The BoE was already looking at money and credit growth and explicit targets had failed when tried in the 1980s. It is rare for rate-setters to criticize politicians, but in 2016 Governor Mark Carney said he would not "take instructions" from politicians after then prime minister Theresa May said the BoE's policies had "bad side effects" and needed to change. Last week, Governor Andrew Bailey stressed to MPs the importance of central bank independence - including regulation - but did not mention the Conservative candidates' plans for tax cuts. But Saunders warned that tax cuts would mean extra interest rate hikes would be needed to curb inflation while the UK economy has little spare capacity. Truss has offered to reverse more than £30 billion ($36 billion) in tax increases announced by his leadership rival Rishi Sunak when he was finance minister. "Truss' policy platform still poses the biggest risk to the economy in our view, with an inappropriate combination of pro-cyclical tax cuts and corporate distortion," said Benjamin Nabarro, chief UK economist at US bank Citi.