Bank wins victory for openness: Minutes of Governor's meeting with Chancellor confirm split over rate cut

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The Independent Online
KENNETH CLARKE decided to cut interest rates in February despite the Governor of the Bank of England's belief that the move 'would run a risk of higher inflation and some loss of credibility', hitherto secret Treasury minutes show.

The split, revealed in the Independent, was confirmed as the Chancellor announced yesterday that he would regularly publish the minutes of the monthly meetings at which he discusses interest rates with the Governor, Eddie George.

The unprecedented decision to publicise debate between Mr George and the Chancellor was welcomed yesterday by the Commons Treasury Select Committee and some City analysts as one which would further increase the degree of autonomy enjoyed by the Bank.

The move is intended to increase confidence in anti-inflation policy by increasing the openness with which decisions are taken. The financial markets have become less and less convinced in recent weeks that inflation will stay low.

Minutes were released yesterday for the first three meetings of 1994, with those for February showing that the Chancellor decided to cut rates by a quarter-point to 5.25 per cent despite the fact that the Governor 'strongly advised against'.

The Governor conceded a quarter-point cut only after the Chancellor advocated a half-point cut, to which Mr George said he could not agree.

The minutes also reveal that Mr Clarke felt his decision to cut rates by half a point just before the Budget had 'erred on the side of caution' and that he thought the case for a cut in January had also been 'quite strong'.

February's move was badly received in the financial markets, which concluded that Mr Clarke was keener on stimulating economic growth and job creation than keeping inflation under control. Yesterday's publication of the minutes appeared to reinforce that view, depressing the price of government bonds.

The markets also concluded that an early rise in interest rates was less likely, as it was clear the Chancellor was prepared to cut them again if the Budget tax increases slowed the recovery and reduced inflationary pressure.

The Chancellor said yesterday that the publication of minutes six weeks after each monthly meeting would help the operation of interest rate policy, increase accountability and help people to understand how and why decisions on interest rates had been taken.

John Watts, chairman of the Treasury Select Committee, last night warmly welcomed the move - first proposed by the committee at the end of last year. It would be a 'valuable incremental step' towards greater 'operational autonomy for the Bank'. The policy of openness would 'give greater credibility to monetary policy' in future. It would make it more difficult for governments to cut interest rates for party political reasons.

Although the Treasury has not accepted the committee's other proposals for greater autonomy it has praised its report as 'substantial and helpful'.

Gavyn Davies, economist at Goldman Sachs and one of the 'six wise men' who advise the Chancellor, said the move would make it

increasingly difficult for Chancellors to overrule the opposition of Bank governors to interest rate changes. 'This greatly swings the balance of power in favour of the Bank of England.'

However, John Shepperd, economist at Yamaichi, said the regular publication of the minutes would make the markets nervous, especially if there was disagreement over when to raise rates to bear down on inflation.

'If they continue to disagree, they may come to regret it. The risk is that these minutes will paint disagreements in a starker light,' he said.

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