The Bank of England’s scorecard after 25 years of independence

The 6^th of May is the 25 year anniversary of the Bank of England being granted independence.

Over that time, CPI inflation has averaged 2.1%.

However there has been significant variation, with almost a third of monthly readings falling outside the range of 1% to 3%.

Markets are pricing in a rate rise next Thursday, but there is scope for a surprise. The Bank now faces a stern test of credibility, as it balances containing inflation against nudging the economy towards recession

Laith Khalaf, head of investment analysis at AJ Bell: “One of the first things Gordon Brown did on becoming Chancellor in 1997 was to grant independence to the Bank of England. He didn’t hang about either. The general election took place on 1^st May, and on 6^th May, Brown announced the Bank would become independent. Central bank independence is now so deeply engrained that it’s bizarre to think that not so very long ago, it was the Chancellor who tightened and loosened the strings of UK monetary policy.

“Over the last 25 years, CPI inflation has risen by an annualised a rate of 2.1% a year, in other words, almost bang on target. That suggests central bank independence has been a rip-roaring success, though that overall rate of inflation doesn’t reveal the considerable variations along the way.

“The Governor of the Bank of England is obliged to write to the Chancellor if CPI inflation deviates by more than one percentage point from the 2% target, which implicitly sets a level for what can be considered off-track inflation. Over the last twenty five years, almost a third of CPI readings since independence have been outside the 1% to 3% range. (CPI in fact became the measure for the inflation target in December 2003, prior to which the RPIX index was used. The RPIX target was 2.5%, broadly equivalent to 2% CPI in the long run, due to differences in the way the two indices are constructed).