Shake-up at Bank will give City a pointer to Government's stance on the euro

Changes on the MPC may see the Bank move to a more hawkish position on rates
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The Bank of England's Monetary Policy Committee is about to embark on its most radical shake-up since it was set up five years ago.

Five of its nine members – including the Governor and his two deputies – will either be replaced or have their terms renewed over the coming year.

Add to that last week's announcement that Ian Plenderleith, the Bank's executive director and MPC member, would be replaced by career Bank official Paul Tucker and two-thirds of the MPC could have changed within the space of 14 months.

The potential scale of the changeover means that the MPC could be a very different beast by next summer.

"This is going to be a fascinating time for monetary policy," says Danny Gabay, an UK economist at the investment bank JP Morgan. "We would be dealing with a completely different animal than the one we have got used to."

But the timing of the process and the fact that the power to decide the appointments rests with the Chancellor has caused some people to link it to the debate over the euro.

At the heart of this conspiracy theory is the decision on who should take over as Governor when Sir Edward George retires on 30 June.

This changeover will coincide with the June 2003 deadline for the Government to declare whether the UK economy has passed the Treasury's five tests on the UK's readiness for euro membership.

Therefore, the theory goes, the Government would want a pro-euro Governor if it were going to call a referendum, and vice-versa.

The favourite to replace Sir Edward is one of his deputies, Mervyn King, whose is known for his scepticism about the euro. Mr King is known to be particularly critical of the structures of the European Central Bank, its membership and its lack of transparency and accountability.

This would leave him in a tough position if he were tasked with handing over the keys to UK monetary policy to the ECB.

This has led commentators to speculate about whom New Labour would want to give the Governorship to if it was focused on joining the euro.

Mr Gabay said Mr King was the most obvious candidate for the job, crediting him with pushing through measures such as the regular Inflation Report that had helped build the Bank's global reputation on monetary policy.

"But there's a perception – I would say no more than that – that he is sceptical about the benefits to the UK economy of joining the euro," he said.

But if Mr King did not get the job some think he might be tempted to find a new challenge within the global economic set-up, perhaps for the International Monetary Fund in Washington.

Shamik Dhar, another ex-Bank economist now working at Morley Fund Management, said the euro debate could be overplayed in the issue of the succession but he added the markets would see it as a key indicator.

"But we may get other indications about euro policy over the next year which will make things clearer," he said.

"If Mervyn King were brought in I don't think it would absolutely undermine the euro project. My feeling is that that won't be the determining factor.

"It will have much more to do with who the Treasury thinks it can get on with and who the markets will trust and it is clear King is a strong possibility."

John Butler, the UK economist at HSBC and another ex-Banker, said Mr King was in a strong position within the Bank as the people in charge of the economic forecasts and the Inflation Report are both former permanent secretaries to Mr King.

"You might see an exodus of the people who do the actual research if he didn't get it," he said.

Mr Butler added that Mr King has made noticeably fewer speeches and those that he had made were more balanced, which could be seen as an attempt to slough off his reputation as an extreme hawk on monetary policy.

If Mr King were to miss out, the main contender is Sir Howard Davies, the chairman of the Financial Services Authority and a former deputy governor at the Bank. Cantor Index, the spread-betting firm, recently gave him odds of 4/1 compared with 2/9 for Mr King.

Sir Howard is seen as having done a good job in setting up the FSA and seeing through a number of challenges.

He recently agreed to take an 18-month extension to his contract, which some see as a favour he may be able to cash in for the top job at Threadneedle Street.

According to Cantor the other candidates are Gus O'Donnell, the managing director of macroeconomics at the Treasury (25/1) and DeAnne Julius, a former MPC member (20/1) – both of whom have robustly critical opinions of the euro system.

Rachel Lomax, a permanent secretary at the Department for Work and Pensions is 50/1 as is Lord Browne, the chairman BP. Martin Taylor, the ex-Barclays chief executive and Gavyn Davies, the chairman of BBC, are both 66/1.

David Clementi, 53, the other deputy governor of the Bank of England is given odds of 16/1 but his own five-year term comes up for renewal this August and he may decide to stand down. However, the City believes he could stay on if he wanted to.

Another Bank-watcher pointed out that with Sir Edward and Messrs King, Plenderleith and Clementi up for renewal, four out of the five "internal" members of the MPC could be replaced.

The only one out of the five left would be Charlie Bean, the former London School of Economics professor who is now the Bank's chief economist.

Last week he seemed relaxed about the change, telling one interviewer: "Changes in personalities change the exact dynamics, but I would be surprised if the changeover at the top would lead to any major change."

Some of the four external members – non-Bank employees – are up for renewal. The first decision will be over Sushil Wadhwani, the outspoken member of the Monetary Policy Committee, whose term expires next month.

Speculation is mounting that the Treasury is about to make a decision over what to do. The Treasury has not yet offered an extension to any external member and sources close the MPC indicate Dr Wadhwani is keen to return to the private sector.

Some believe the decision could be made as soon as next weekend to coincide with the spring meetings of the International Monetary Fund in Washington, where the Chancellor, Gordon Brown, chairs the IMF's powerful financial committee.

The speculation has been fuelled in part by the fact that Dr Wadhwani's appointment was announced at the same event three years ago. In any event, the decision has to be made before his terms expires on 31 May.

The decision will be keenly watched, as the former hedge fund manager has grabbed the headlines during his three years on the MPC.

Next year, the terms of Christopher Allsopp, who has recently voted for rate cuts and Stephen Nickell, who stance is less easily discerned, expire on 31 May.

Aside from the euro debate the welter of replacements will fuel the ongoing discussion of the underlying stance of MPC members.

This is colloquially known as whether they are "doves" – if they tend to feel inflationary fears are overstated – or "hawks", who believe rates should rise early to nip inflation in the bud.

Dr Wadhwani and Mr Allsopp are both in the dovish camp – Dr Wadhwani strongly so – so the markets would be on the look-out for hawkish tendencies in the replacements.

HSBC's Mr Butler said Martin Weale, the director of the National Institute for Economic and Social Research, was frontrunner to succeed Dr Wadhwani if he were not reappointed.

"That would clearly tip the balance of the committee towards the hawkish-centre, as it is hard to believe anyone could be more dovish than Dr Wadhwani," he said.

However, the markets have been wrong with that judgement in the past. When Kate Barker replaced DeAnne Julius analysts saw one dove being replaced by another, especially based on Ms Barker's interest-rate calls when she was the chief economist at the CBI.

But since her appointment she has tended to vote with the Governor and has spurned obvious opportunities to declare any dovish predisposition. Mr Bean and Ms Barker do not come up for renewal until 2004.


Belgium yesterday dropped its opposition to the appointment of Lucas Papademos of Greece as vice-president of the European Central Bank.

The Greek central bank governor was approved by 14 European finance ministers on Sunday but Belgium has abstained rather than withdraw its own candidate, academic and politician Paul De Grauwe. But Belgium switched to endorsing Mr Papademos at a meeting of foreign ministers yesterday.

Mr Papademos, who has worked at the Boston Federal Reserve Bank in the US, will replace Frenchman Christian Noyer, who steps down at the end of May after a four-year term as ECB vice-president.

It will be the first change of leadership on the ECB board since the bank's birth four years ago when it took charge of setting interest rates in the 12-nation eurozone.

The euro showed little reaction to the widely expected appointment, although the currency rose after the Chinese central bank predicted a rise in demand for euros.

Analysts were also supportive of Mr Papademos. Julian Callow, an European economist at CSFB, said the dispute was "unwelcome" at such a late stage.

But he added: "He is an orthodox central banker, well versed in the ECB's strategy, and seen as unlikely to rock the boat.

"He is seen as somebody who could help to communicate the ECB's strategy effectively and within a consistent and rigorous framework."

EU leaders are expected to pick a successor to the ECB President, Wim Duisenberg, next year, after the Dutchman announced he would step down from the post in July 2003.

Jean-Claude Trichet, the Governor of the Bank of France, is widely considered to be the front-runner to succeed him, but his future is clouded by an investigation into his alleged role in the failure of Credit Lyonnais a decade ago while he was head of the French Treasury.


Mervyn King
The bookies' favourite because of his reputation on monetary policy. Perceived as a eurosceptic.

Sir Howard Davies
High-level experience within and without the Bank. Has close links to Gordon Brown, the Chancellor.

DeAnne Julius
Robustly critical of the euro system. A former CIA official who has just taken British citizenship

David Clementi
Former merchant banker and a safe pair of hands. Has steered clear of euro debate.

Gus O'Donnell
Admired for economic forecasts at the Treasury. On message with Gordon Brown.

Rachel Lomax
Dark horse who has had a 26-year career at the Treasury. Odds recently cut from 100-1 to 50-1