LONDON — The Bank of England's current remit risks it becoming entangled with wider government policy aims and jeopardizes its ability to focus on bringing down inflation, a scathing report by senior U.K. lawmakers released Monday says.
The Economic Affairs Committee, part of the House of Lords which is the unelected upper house of parliament, said changes were needed to "improve the Bank's performance and to strengthen its accountability to Parliament."
The report also said the BOE and other central banks are suffering from a lack of "intellectual diversity" that have led to forecasting failures.
The BOE's core objective is to maintain price stability by bringing inflation to 2% and, following on from that, it has a secondary mandate to support government economic policy, including in areas such as growth, employment and energy security. The BOE also considers wider factors that could risk financial stability, including the banking sector and climate change.
The report was launched after U.K. inflation soared to a 41-year high through fall 2022, hitting a peak of 11.1% year-on-year in late 2022, one of the most severe levels of all developed economies. Inflation has also fallen at a slower rate and was 4.6% in October 2023, versus 2.9% in the euro zone and 3.2% in the U.S.
The BOE hiked its key interest rate from 0.1% to 5.25% between December 2021 and August 2023, and is now widely considered to have hit a peak.
The Lords report, which was compiled through the collection of written evidence and panel interviews, notes that all central banks made mistakes in characterising inflation in 2021 as "transitory."
"Possible reasons for this include a perceived lack of intellectual diversity in the Bank of England and other central banks, which contributed to insufficient challenge as regards modelling and forecasts," it says.
The growth of the BOE's remit over the years "risks jeopardising the Bank's ability to prioritise its primary objectives, and risks drawing the Bank into the Government's wider policy agenda," it continues.
The Economic Affairs Committee said it was concerned a "democratic deficit" had emerged due to a lack of accountability and parliamentary scrutiny of the bank, as "critically important economic decisions" were "delegated to unelected officials."
"The continued use of quantitative easing has blurred the lines between monetary policy and fiscal policy," it added.
Recommendations offered include trimming down the BOE's remit to just a few matters it should "have regard to" or "consider," reviewing its management structure to see if it can be streamlined, and holding a parliamentary review of its remit and operations every five years.
The committee also said the central bank should do more to "foster a diversity of views and strengthen a culture that encourages challenge."
A Bank of England spokesperson told CNBC via email: "We'd like to thank the Lords EAC for this report and will be giving the recommendations careful consideration. We'll respond formally in due course."