For those of us who think central banks are a destabilising blight on the economy, responsible for encouraging malinvestment and engines of inflation, it’s tempting to lump them all into the same boat. But just as in George Orwell’s ‘Animal Farm’, “All animals are equal, but some animals are more equal than others.”
This is particularly apparent when it comes to keeping inflation down. Putting aside the inherent problems with inflation targeting, price stability is typically the primary objective for most modern central banks. But as the UK endures a further round of above-target inflation at 3.8% for yet another gruelling month, when you pit the Bank of England against its contemporaries around the world it has a terrible track record that goes beyond the basic problem of knowledge that faces all central banks.
The Swiss National Bank (SNB) has been the poster child for low inflation in an advanced economy. Since 1990, Switzerland’s Consumer Price Index (CPI) has spent most of its time in the 0 to 2% range, with only minor blips along the way. Its most recent figures show inflation at 0-1% and this is projected to remain at circa 0.4-0.8% over the next few years.
The Bank of Japan (BoJ) has ensured Japan has had decades of ultra-low inflation and outright deflation. Since the early 1990s, CPI inflation has averaged 0-1% with multiple deflationary stretches.
The Monetary Authority of Singapore (MAS) has run an exchange-rate based regime that has produced low, stable inflation for decades. Since 1990, Singapore’s CPI inflation has mostly sat in the low single digits, 1-3%.
Likewise, Oman has quietly been one of the more stable price-level stories in the world. The Central Bank of Oman (CBO) has ensured a long-term average of 1.8% with CPI inflation as low as 0.6% in 2024. This has been helped by a conservative fiscal and credit policy, and a hard US dollar peg.
It’s easy to be critical of the US Federal Reserve, but a US dollar peg or near-peg constrains money creation and is often a persistent theme amongst countries with relatively low single-digit inflation in recent years. Several Gulf central banks such as Saudi Arabia, UAE, Qatar and Bahrain maintain such a peg and have seen much lower inflation than the UK in the post-pandemic period, with Bahrain at 0.3%, Oman at 0.9%, and the UAE at 1.6%.
As Milton Friedman put it, “Inflation is always and everywhere a monetary phenomenon”. It is central bank policy which causes it to get out of control. Of the top performing central banks above, major spikes in inflation – where CPI goes higher than 5% for several months – have been very rare. Switzerland and Japan have had none in 30 years.
Compare this record with the abysmal Bank of England (BoE). Since 1994, there have been repeated cycles of 3-10% inflation and two double-digit inflation episodes. Multiple multi-year breaches of its own target, persistent forecast bias (where the BoE keeps thinking inflation will go down or is ‘transitory’ only for it to shoot up) and a consequent extremely sluggish response to bring inflation under control have completely undermined confidence in the organisation.
Contrary to the myth that central banks ensure inflation stability, the BoE has instead delivered high volatility, with spikes in 2008, 2011 and 2022. The latter blew the doors off at 11.1%.
Each spike has followed largely the same pattern, with the BoE ignoring money supply growth and allowing it to soar into double digits. Between 2020 and 2021, money supply growth surged at the fastest pace in UK history (outside wartime) with hundreds of billions in Quantitative Easing injected directly into financial system reserves, while the Bank kept its interest rate at 0.1%. As Friedman might put it, central banks that ignore money supply growth guarantee inflation surprises. Inflation quickly rose from 1% to 5% to 11.1%, the worst since the 1970s.
Every time the BoE has failed on inflation, it has blamed external factors rather than look to the root cause – its own policy mistakes. Essentially, the Bank’s external explanations haven’t changed in any meaningful way in the past 20 years. In 2008 it was energy, commodities, and import prices that caused the inflation – not the BoE’s excess credit and loose money. In 2010-12 it was VAT, energy and global price shocks. In 2021-23 it was the Ukraine War causing an energy crisis, supply chains and wages. In 2023-25, you guessed it, it was energy, supply chains and services wages.
Such flimsy explanations for letting inflation run rampant start to wear thin when you look globally and see that there are other central banks doing a much better job than the BoE, most of them without the long history that you’d think would guide the BoE to better outcomes. If Switzerland and Japan can avoid having a single major, sustained inflation spike in 30 years why can’t the UK?
