Central bank, treasury cooperation key to successful policymaking

(MENAFN- The Peninsula) By Deepak John | The Peninsula

The relationship between the finance Ministry and the central bank is central to successful economic policymaking said an expert during the second day of annual conference of the Qatar Centre for Global banking and Finance at King’s Business School, London. 

Interim Principal and Provost (Arts & Sciences) of King’s College London, Professor Evelyn Welch, delivered the opening remarks during the virtual conference ‘Challenges facing Central Banks in the 2020s’. Professor Evelyn said, ''We are grateful to the Qatar Central Bank (QCB) for this strategic vision in setting up this centre and for their friendship, guidance, and investment in its development. Among the 250 to 300 virtual attendees, the conference has participants from over 70 different countries.” 

''Today’s challenges are truly global, the issues we face in society have crossed all the boundaries. We are recovering from the pandemic or tackling the climate emergency and facing up to these challenges will require global cooperation. We need to move beyond global competition which is through events and talks like this where we gain fresh ideas which will improve the lives of people around the globe,” she added. 

Lord Macpherson of Earls Court (Permanent Secretary to the Treasury, 2005-2016) discussed about ‘The relationship between HM Treasury and the Bank of England: the search for credibility’. Drawing on 25 years of working closely with the Bank of England, Nick Macpherson (pictured-right) examined how the relationship between the Treasury and the Bank of England has evolved.

He said, ''Over the last year Quantitative Easing has entered a new phase with apparently coordinated announcements of unprecedented increases in government spending and asset purchases. It has raised questions about how independent central banks are from government.”  

While examining the relationship between central bank and finance ministry by focusing on the institutional relationship treasury and the Bank of England, he noted, when the wider banking crisis struck in October 2008 the tripartite authorities worked well together and as solution to the crisis a three-point program involving recapitalization, special liquidity scheme, credit guarantee scheme became the model for resolving the banking crisis across the world.

Addressing the banking crisis, he pointed two critical changes in relationship between the treasury and the bank. Firstly, because the Bank of England’s balance sheet was large, it led to the widespread use of the treasury guarantees and indemnities to support central bank interventions whether to underpin emergency liquidity assistance with special liquidity scheme or Quantitative Easing. The second big change that came out of financial crisis was institutional. World Bank, world financial services authority, came well out of the crisis. The coalition reforms also provided an opportunity to create a new instrument of economic policy – macroprudential policy with the creation of financial policy committee. 

Macroprudential policy is not new, in earlier eras the bank had been happy to seek to influence banks behaviour through reserve asset ratios and intervention such as supplementary deposit scheme but the creation of the FBC made macroprudential policy more transparent. The post-crisis arrangements have changed the way the treasury and the bank work together, evolving more regular and intense dialogue.

The financial crisis gave rise to more mature relationship where the bank institutionally seems to recognize that there were number of issues where it might be able to secure better outcome if the institution cooperated more. Some countries have navigated the financial crisis without much tension between the central bank and finance ministry.

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