(Bloomberg) -- British lawmakers should review the role and operation of the Bank of England every five years as part of reforms to improve accountability at the central bank and make it “work better” after a string of “errors” that let inflation surge.

That’s according to the House of Lords Economic Affairs Committee, whose members include former BOE Governor Mervyn King. In a report marking 25 years of BOE independence, the panel says the bank’s remit needs to be trimmed, management should be streamlined and greater “diversity of thought” encouraged. 

The BOE has denied accusations it was too slow to get a grip of inflation, which soared to a four decade high of 11.1% last year and is still more than double the 2% target. Public confidence in the institution has crashed to a record low, with two in five Britons saying policymakers have handled the shock poorly.

Interest rates have risen from 0.1% to 5.25% in the most aggressive tightening cycle since the 1980s, deepening the cost-of-living crisis for millions of homeowners as mortgage rates soar.

George Bridges, chair of the Lords committee, warned of a threat to BOE independence if the public loses faith, “given the powers that unelected bank officials wield.”

“While we are of the strong view that independence should be preserved, reforms are needed to improve the bank’s performance and to strengthen its accountability to parliament,” he said. “Independence and accountability should go hand in hand. At the moment, we are suffering from a democratic deficit.”

The committee stressed that stronger oversight would protect the bank’s independence, which was established in 1998 under the then-Labour government and was widely credited with keeping inflation under control until 2021. Its proposals include:

  • Changing the appointment process for the Monetary Policy Committee and Financial Policy Committee to encourage greater “diversity of thought.” The process is currently run by the Treasury, where all four deputy governors once worked.
  • Pruning the monetary policy and financial stability remits after secondary objectives on climate change and energy security were added. The committee said an enlarged mandate jeopardises the bank’s ability to prioritise its primary objectives, draws it into government, and increases the potential for conflict between objectives.
  • Streamlining the management structure. Having four deputy governors is unwieldy.
  • Having a memorandum of understanding with the Debt Management Office to clarify how monetary policy and debt management interact when the bank expands its balance sheet under quantitative easing. It should also report on the risks, including to “perception of independence,” caused by QE.

The committee acknowledged that the BOE was not the only central bank that failed to anticipate high and persistent inflation, which revealed “a lack of diversity of view in the wider central bank community.” 

But it said the BOE made “errors in the conduct of monetary policy, including an over-reliance on inadequate forecasting models.”

An independent review into forecasting errors has been set up to be led by Ben Bernanke, the former US Federal Reserve chair. The committee welcomed the review and said it hoped it would “address shortcomings in modelling and forecasts.”

It said the bank should give greater attention to rates of money supply growth in its forecasting process, which many economists now argue foreshadowed the looming inflation shock.

Responding to the report, a BOE spokesperson said: “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.”

©2023 Bloomberg L.P.