Awkward moment Mads Mikkelsen is stunned to be asked about lack of diversity in the cast for his film set in 1750s Denmark

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By Katie Hind

Published: 11:02 EDT, 8 September 2023 | Updated: 15:16 EDT, 8 September 2023

Labour is eyeing sweeping changes to the way the Bank of England’s Monetary Policy Committee sets interest rates if it wins the next election.

The party said it is fully committed to the Bank’s independence, pioneered by former Chancellor Gordon Brown within days of Tony Blair moving into Downing Street in 1997.

But shadow chancellor Rachel Reeves is believed to favour reforms to the MPC following its lamentable performance in controlling inflation.

Reeves, a former Bank of England economist, is widely expected to endorse the two per cent target for consumer price inflation, and the Bank’s independent mandate would be maintained.

There is also recognition that Andrew Bailey, who will be four years into an eight year term as governor at the time of the next election, cannot be moved.

Despite the disappointing response to the cost of living crisis, Bailey is viewed as a safe pair of hands by Labour.

He has earned trust internationally as a result of the UK’s so far careful navigation of recent banking instability.

He was also applauded for his rapid response to the Truss-Kwarteng gilts market trauma in October 2022. 

The Bank had to intervene to protect the UK pensions systems after it became over-exposed to risky derivatives known as liability driven investments (LDIs).

But the nine-strong MPC is seen to be dominated by group-think, with like-minded individuals transferred from the Treasury, lacking diversity of gender, race and economic views. 

There is no one such as Dame Kate Barker, the former chief economist of the CBI, who was a strong advocate for manufacturing when on the MPC between 2001-10.

Reeves is thought to be a great admirer of the Federal Reserve System in the US with its strong network of voices from the regional Fed presidents. 

They are senior bankers, economists and industrialists deeply embedded in local communities, from Philadelphia in the North East and San Francisco in California. 

This is seen as a far superior to the Bank’s web of regional agents. Agents’ reports to the MPC are regarded as lacking intellectual rigour and the roles of agents are filled by Bank of England officials who have failed to make the grade on Threadneedle Street.

The Tories will have some opportunity to steal Labour’s clothes this year with the expected retirement of Sir Jon Cunliffe, the deputy governor responsible for financial stability, and Ben Broadbent, the deputy governor for monetary policy. Both are former Treasury insiders.

Reeves is understood to think the Bank’s data-driven and highly statistical approach, which determines rates and quantitative easing, is too formulaic. 

And far too much time is spent at MPC sessions interpreting the graphics and there is a lack of open discussion on behavioural economics, forward-looking surveys and on-the-ground manufacturing and industrial trends, including regional voices.

Also missing is the kind of outsider financial market wisdom once offered by economist and hedge fund guru Sushil Wadhwani.

Labour believes that the Bank’s communications are appalling. Bailey for all his merits has failed to explain why the Bank has been so wrong in its forecasts and has been clumsy in the way he has expressed himself on the wage-prices spiral and other issues.

Huw Pill, the chief economist, has also had to admit that the Bank’s economic model has been misfiring, which is hardly comforting with headline inflation running at 8.7 per cent, core inflation running at 6.8 per cent and food inflation 19 per cent.

Both the US authorities and bigger eurozone economies, such as France, have been more successful in taming inflation.

Labour recognises that when it comes to the Bank of England, it has limited room to manoeuvre without being accused of tampering with the independence it earned from Brown and upsetting financial markets.

More diversity of opinion and sharpened input from the regions, by updating the current moribund system of agents, could potentially make a real difference, insiders say.