Liz Truss has been accused of being “deeply irresponsible” for threatening to tinker with the Bank of England’s mandate on the brink of a recession.
The shadow chancellor, Rachel Reeves, attacked the Tory leadership frontrunner after Truss and her allies repeatedly questioned the performance of the Bank’s governor, Andrew Bailey, and said she would review the institution’s remit.
“This is deeply irresponsible from a Conservative leadership candidate. It creates huge uncertainty that will hold back vital investment in our economy,” Reeves said.
“Families are seeing the bills pile up while their ability to pay shrinks. Meanwhile, the Conservatives are once again playing the blame game instead of taking responsibility for the past 12 years of economic mismanagement that has left the UK uniquely exposed to shocks.”
Labour pointed out that the average inflation rate from 1979 to 1997, when the Bank was made independent, was 6%, peaking at 19%. In the 25 years since, it has averaged 2%.
The Bank’s monetary policy committee increased interest rates by 0.5 percentage points on Thursday, and published dire economic forecasts pointing to a recession lasting five quarters until the end of 2023. Inflation, already at a 40-year high of 9.4%, is expected to hit 13% and remain elevated through 2023.
The business secretary, Kwasi Kwarteng, widely viewed as a potential chancellor under Truss, told Sky News on Friday: “The job of the Bank was to deal with inflation. They’ve got a 2% inflation target, that’s actually their mandate. And now inflation is getting [to] double digits. So clearly, something’s gone wrong.”
When asked if the Bank would keep its independence, he said “absolutely” but also described potential interventions.
“We need to look again at what the mandate is and how best they can actually fulfil that mandate,” he said, adding: “You’ve got to look at how the Bank is organised and what the targets are.”
Truss has also said her planned tax cuts are a better way to help families deal with the cost of living crisis than “handouts”.
When asked, during an interview with the Financial Times, what measures she intended to use to help families manage their escalating fuel bills this winter, the foreign secretary insisted tax cuts were the way to go, adding: “I would do things in a Conservative way of lowering the tax burden, not giving out handouts.”
Under the legislation that underpins the Bank’s independence, the chancellor confirms the remit annually. If Truss becomes prime minister, this would give her new chancellor the opportunity to review it before the emergency budget she has promised to hold.
However, the former Labour minister Ed Balls, who drew up the plan for Bank independence when he was Gordon Brown’s economic adviser, rejected the idea of changing the target.
“We can confidently say that the current inflation and growth challenges are not in any way caused by the Bank’s remit, that the Bank has all the tools, powers and flexibility it needs within the current remit and that changing the remit would do no good and almost certainly a great deal of harm,” he said.
Some Tory MPs have claimed that the Bank acted too slowly in increasing interest rates to choke off inflation, but Bailey denied that on Friday.
“I’m sorry, I don’t agree with that point,” he said. Instead, he told BBC Radio 4’s Today programme: “What has happened is there has been a series of big supply-side shocks, most of which were outside … I would challenge anybody to be sitting here two years ago saying ‘there is going to be a war in Ukraine’.”
One Truss supporter, the attorney general, Suella Braverman, suggested earlier this week that the Bank’s independence should be re-examined. But Bailey insisted: “Central bank independence is critically important in our view. Our job is to get inflation back down to target.”
Another Truss backer, Lord Frost, published a paper for the rightwing thinktank Policy Exchange on Friday, claiming that the “most significant underlying economic problem” facing the UK is “the malign consequences of low to negative interest rates over a prolonged period”. In the 28-page report, Frost stresses the importance of gradually “normalising” rates – though does not mention the Bank of England explicitly.
The Bank’s gloomy forecasts underlined the grim backdrop against which Truss or her leadership rival, Rishi Sunak, will take power next month.
New polling by IpsosMori showed that just 27% of voters believe the government has done a good job of managing the economy – the lowest level since the pollster began tracking it in 1998.
Both the chancellor, Nadhim Zahawi, and the prime minister, Boris Johnson, were away from Westminster when the rate rise was announced on Thursday. Zahawi is accompanying his family on holiday, but insisted he is not on holiday himself.
The CBI director-general, Tony Danker, said given the scale of the looming increase in energy bills the government should be taking more action now to mitigate the crisis. “I have no problem with people having short holidays. My fear is much more profound, which is that there will be a vacuum from now until 5 September [when the new prime minister will be announced],” he said.
“We need the current prime minister and the current chancellor to fill that vacuum. We need them to make decisions. We need them to make plans. We need them to reassure firms, markets and households that we are gripping this. We cannot wait until 5 September for action.”