Bad news for home owners? Not in the long term

Gordon Brown's surprise present of its independence to the Bank of England looks, on the face of it, like good news for traders in the City of London and bad news for home- owners. A higher level of interest rates means more expensive mortgages, and an independent Bank is likely to increase rates several times more before it is satisfied that inflation is on target.

But this is one of those moments where to focus on the short-term cost ignores very real long-term gains. Yesterday there was already some sign of these in the fact that the long-term interest rates the Government has to pay on its own debt had fallen sharply. That means an immediate saving for the taxpayer, with debt interest the fifth biggest component of government spending.

The real benefit, and the one that makes yesterday's announcement a turning point in the history of British economic policy, is the fact that inflation is lower and growth more stable when central banks, and not politicians, set interest rate policy. If we truly want to end the pattern of boom and bust, this is one of the most effective means of achieving it.

For all Ken Clarke's improvements to the policy machinery, Britain still has one of the most volatile economies, and one of the highest inflation rates, in the industrialised world. There is little doubt that this is in large part due to a greater proneness to using both levers of economic policy, monetary and fiscal, for political ends.

Giving the Bank its independence has made it all but impossible for politicians to manipulate interest rates in a narrow, short-termist way in future. It is unthinkable in practice that a future Chancellor would be able to reverse Mr Brown's decision. This will mean, over the course of many years, lower and more stable interest rates, and lower mortgage costs.

Eddie George, Governor of the Bank of England, said the Chancellor's prudence would extend to setting taxes and spending for the long-term. "I would hope the commitment to the responsible policy he has shown today on the money policy side, I would hope that will carry over into the fiscal side too," he said in central banker-speak. Mr Brown has sent the strongest possible signal of his long-termism. It is worth pounds 10 a month on the mortgage for now for the likely savings later.