The decision to take control of interest rates away from the politicians was popular while it seemed to work. But in the space of just three months, the Bank of England has gone from tackling the highest inflation rate for 15 years to warning of the dangers of deflation. At each stage, it has appeared worryingly behind the curve.
Now some critics suggest that rate-setting should once more be the job of politicians, either directly or by manipulating the Bank's target from Whitehall. The perceived threat appears to strengthen the case: after all, deflation is difficult to deal with using just rates. Once prices start falling, even zero interest rates become ineffective, as the consumers hold on to their cash and wait for things to get cheaper. And since the threat of deflation demands concerted political action from the government – massive public spending and a close coordination with monetary policy – there is a certain logic then to giving Whitehall control of monetary policy once again.
This would be a huge mistake. First, it is wrong to say that the blip in inflation proves central bank independence did not work. In any other decade, a few months of inflation at above 4% would have been a fantastic performance. Although expectations of future inflation rose, they were kept from spiralling out of control by the decision to stand firm in the summer (and also with some help from the credit crunch). Very little could have been done to prevent the massive commodity boom that was the cause of rising prices.
Second, the Bank's remit is well designed to deal with deflation. It has a symmetrical target, and the risks of falling beneath the target are taken just as seriously as the risk of rising above it. In fact, the way the Bank guides expectations is the best way to avoid deflation, because it can signal that higher prices will be achieved in a way that has much greater credibility than a politician. Furthermore, as Ben Bernanke recognised long ago, central banks have plenty of tools to deal with deflation once rates have hit zero.
Finally, monetary policy needs to be designed for the long term. The once-a-century risk of deflation is certainly serious, although probably exaggerated. But every one of the UK's regular bouts of inflation has required a deliberately engineered slowdown to bring prices to heel again. In the 1980s, rising unemployment was the only way of achieving price stability. Letting politicians take the reins again would ensure that controlling the next inflationary spell will be much, much more painful.
There are all sorts of ways the Bank could be reformed in the light of the extraordinary events of the past year. But none should compromise its independence. This is not the same as defending the current monetary policy committee, whose performance has been poor. But nobody can guarantee perfect price stability. The best method ever found - and still Gordon Brown's greatest idea - was to delegate this fundamentally non-political task to the Bank of England. That's why, at CentreForum, the liberal thinktank, we argue the Bank's independence should be strengthened by giving it full control over its inflation target. That is the best, indeed the only, way to avoid both deflation and soaring inflation.