Since the global financial crisis of 2007/8, the role of central banks in underpinning and regulating the financial system has been brought into question. The inability to mitigate the large financial crash has resulted in many central banks, including the Bank of England, having financial stability added to their mandates. While this addition is welcome, it has not been accompanied by stronger provisions to keep the Bank’s exercise of power democratically accountable. Furthermore, the financial crisis highlighted a broader lack of legitimacy of the Bank’s remit and objectives, which remains to be addressed.
During the decade after the 2008 global financial crash, many central banks have been grappling with a profound legitimacy crisis. The Financial Times described a ‘crisis of confidence’ in monetary policymakers in late 2017, escalating to a ‘global backlash’ a year later.
Building and maintaining public trust is paramount for central banks, for both economic and political reasons. Trust prevents bank runs and inflation scares. At a more fundamental level, it sustains the payments system and keeps the unit of account stable. And it allows central banks to operate free from political interference or disruption. Trust among the public in central banks fell following the crash. The public appears divided over whether the Bank has an appropriate amount of power and freedom from government. More broadly, trust in institutions and experts seems to have fallen in the UK post-financial crisis. This breakdown of the conventional social contract, which assumed the public’s trust and consent, is in large part caused by central banks’ own flaws. Governments must act to free central banks from the illegitimacy trap.
The Bank of England is one of the most powerful public economic institutions, so it is vital that it works in the public interest to the best of its ability. We look at several areas that could improve legitimacy, asking the following questions:
How are appointments made to the Bank’s most senior positions? How do we ensure that central banks are scrutinised sufficiently by Parliament, with input from experts in academia and civil society?
Can we get the Bank of England to better understand the lived experience of people living and working in the UK economy? How do we get the Bank to work more coherently with the Treasury?
This paper takes no position on the question of a new mandate for the Bank. However, we do look at an area of policy that needs to be addressed for central banks to perform their stabilising role to full effect. Outlined in the report are starting points for proposals which, if adopted, would set the Bank of England on course for greater legitimacy and accountability.