<p>The BoE has a explicit mandate to promote “financial stability” which is how they would justify the recent gilt intervention.  One could argue that they were backed into a corner by irresponsible fiscal policy, but this is presumably moot</p>
<p><a href="https://web.archive.org/web/20090711104617/https://www.bankofengland.co.uk/financialstability/index.htm" rel="nofollow noreferrer">https://web.archive.org/web/20090711104617/https://www.bankofengland.co.uk/financialstability/index.htm</a></p>

CC BY-SA 4.0
2022-09-30T08:19:51.480Z
2022-09-30T08:19:51.480Z
dm63
<p>In 1962, <a href="https://en.wikipedia.org/wiki/Milton_Friedman" rel="nofollow noreferrer">Milton Friedman</a> dismissed the notion of &quot;central bank independence&quot; as a polite fiction, saying &quot;it would not survive the first real conflict with government.&quot; Since then, we've seen some evidence stack up on either side.</p>
<p>On paper, it would seem the the Bank of England has nearly all the trappings of an independent central bank (<a href="https://www.imf.org/external/pubs/ft/fandd/2020/05/paul-tucker-unelected-power-on-central-bank-independence.htm" rel="nofollow noreferrer">though there has been some leeway as an IMF economist explains)</a>. But not only that, a variety of practitioners have been using more charged language lately: invoking the term &quot;fiscal dominance&quot; for the UK, in light of the recent gilt melt up. See links below for interviews with bond fund managers:</p>
<ul>
<li><a href="https://www.ft.com/content/59c5779c-db15-4ace-a0cc-f6b8d3b03ba1" rel="nofollow noreferrer">FT</a></li>
<li><a href="https://www.axios.com/2022/09/29/uk-bond-market-turmoil-economy-inflation" rel="nofollow noreferrer">Axios</a></li>
</ul>
<p>In part, the sensitivity over this issue seems to stem from the UK's QE program following the GFC and the inflationary legacy it left. In its defense, had the BOE not intervened, then there were strong signs that institutional portfolios would start to fall apart: namely pension funds. A climb of over 150bps in a week must be a 8 sigma move or thereabouts. An economist at Abrdn (don't ask me what happened to their vowels, <em>sigh</em>):</p>
<blockquote>
<p>Bringing back bond purchases in the name of market functioning is
potentially justified; however, this policy action also raises the
specter of monetary financing which may add to market sensitivity and
force a change of approach.</p>
</blockquote>
<p>To sum up, on paper, a central bank may have <strong>operational independence</strong> but that doesn't mean it can do <strong>whatever it wants</strong>. A corollary of this is that central bank independence does not guarantee financial stability: fiscal prudence is part of the equation as well. And so as long as the central bank's mandate is price stability and the ministries can materially influence prices (transmission channel = gilts) then (in)dependence resembles a false dichotomy. Of course, the BOE may very well have a <strong>preference</strong> to not repeat the heavily criticized debt monetization policies of previous regimes, however, the interventions the BOE has taken would seem to suggest that it nonetheless faces a <strong>constraint</strong> when it comes to execution and upholding its &quot;independence.&quot;</p>
<h2>Question</h2>
One could argue that risking pension fund insolvency and the civil unrest sets a high mark to beat: so what, if any, theoretical grounds might the BOE lean on to uphold "independence" when faced with incongruous fiscal policy? (i.e. excessively expansionary fiscal policy) 

<monetary-policy><central-banking><fiscal-policy><united-kingdom>
UK gilt yield melt up - fiscal dominance - preferences versus constraints
Arash Howaida
# UK gilt yield melt up - fiscal dominance - preferences versus constraints

(Asked by: username_0 on 2022-09-30)

In 1962, [Milton Friedman](https://en.wikipedia.org/wiki/Milton_Friedman) dismissed the notion of "central bank independence" as a polite fiction, saying "it would not survive the first real conflict with government." Since then, we've seen some evidence stack up on either side.

On paper, it would seem the the Bank of England has nearly all the trappings of an independent central bank ([though there has been some leeway as an IMF economist explains)](https://www.imf.org/external/pubs/ft/fandd/2020/05/paul-tucker-unelected-power-on-central-bank-independence.htm). But not only that, a variety of practitioners have been using more charged language lately: invoking the term "fiscal dominance" for the UK, in light of the recent gilt melt up. See links below for interviews with bond fund managers:

* [FT](https://www.ft.com/content/59c5779c-db15-4ace-a0cc-f6b8d3b03ba1)
* [Axios](https://www.axios.com/2022/09/29/uk-bond-market-turmoil-economy-inflation)

In part, the sensitivity over this issue seems to stem from the UK's QE program following the GFC and the inflationary legacy it left. In its defense, had the BOE not intervened, then there were strong signs that institutional portfolios would start to fall apart: namely pension funds. A climb of over 150bps in a week must be a 8 sigma move or thereabouts. An economist at Abrdn (don't ask me what happened to their vowels, *sigh*):

> Bringing back bond purchases in the name of market functioning is
> potentially justified; however, this policy action also raises the
> specter of monetary financing which may add to market sensitivity and
> force a change of approach.

To sum up, on paper, a central bank may have **operational independence** but that doesn't mean it can do **whatever it wants**. A corollary of this is that central bank independence does not guarantee financial stability: fiscal prudence is part of the equation as well. And so as long as the central bank's mandate is price stability and the ministries can materially influence prices (transmission channel = gilts) then (in)dependence resembles a false dichotomy. Of course, the BOE may very well have a **preference** to not repeat the heavily criticized debt monetization policies of previous regimes, however, the interventions the BOE has taken would seem to suggest that it nonetheless faces a **constraint** when it comes to execution and upholding its "independence."

## Question

One could argue that risking pension fund insolvency and the civil unrest sets a high mark to beat: so what, if any, theoretical grounds might the BOE lean on to uphold "independence" when faced with incongruous fiscal policy? (i.e. excessively expansionary fiscal policy)

**Tags:** monetary-policy, central-banking, fiscal-policy, united-kingdom

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## 1 answers

### Answer by username_1 on 2022-09-30. Score: 1

The BoE has a explicit mandate to promote “financial stability” which is how they would justify the recent gilt intervention. One could argue that they were backed into a corner by irresponsible fiscal policy, but this is presumably moot

<https://web.archive.org/web/20090711104617/https://www.bankofengland.co.uk/financialstability/index.htm>


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