Instead, the Bank of England’s announcements are being seen so far as refreshingly direct and honest. They are also acting as a catalyst for serious discussions and analysis and, as important, deeper consideration of what is being proposed by the two candidates for prime minister.
The Bank of England is reminding the world what a politically independent central bank can and should do: act as a “trusted adviser”, willing to share analytically honest views that other more politically sensitive institutions are either unable or unwilling to do.
Of course, this is not a risk-free approach. Such honesty – rather than catalysing appropriate responses from policymaking agencies that lead to better economic and social outcomes – can provoke household and corporate behaviors that accelerate the bad outcomes.
Yet the risks involved are worth taking, especially when the alternative is a central bank that loses institutional credibility, sees the effectiveness of its forward policy guidance erode and becomes even more vulnerable to political interference.
It should also be noted that the UK’s situation differs in some important way from those of other countries. The country’s economic challenges are complicated not only by the energy price catch-up but also by the political transition and the changing nature of the country’s relations with its trading partners.
This is not to say that the implications for other countries do not go beyond the importance of analytical directness and intellectual honesty. they do. Indeed, I can think of four others:
Illustrating the elusiveness of “first best” policy responses in a world in which central banks fell behind in responding to inflation. Acting as a reminder that, in such a world, the prospects of high inflation and recession can coexist.
Highlighting the need for central banks to act relatively aggressively despite the likelihood of inflation destroying demand. Stressing the need for productivity and multilateral institutions to assist in efforts to contain inflation, promote and growth, and protect the most vulnerable segments of the population.
I suspect that, in the next few days, the Bank of England will again discover that it is not easy to be the messenger of unpleasant news, no matter how honest and well-intended the approach is. Yet the example it sets for other central banks is an inspiring one, as is the possibility of acting as a catalyst for a more holistic response to the UK’s economic and social challenges.
Mohamed A. El-Erian is a former chief executive officer of Pimco, he is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; and chair of Gramercy Fund Management.