Bank gets its head

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The Independent Online
Shh, whisper it low, but the Bank of England has already become more independent. The French, true to their legal traditions, are making the Bank of France constitutionally independent, although it is not really clear how this will work in practice; we, in our pragmatic ways, are making our central bank in practice very much more independent, although we are for the time being at least making no legal change to its status.

There are several signs of this change, each one unremarkable in itself, but cumulatively of great significance - as significant as the gradual introduction of monetary targets during the second half of the 1970s, when the coalition between Gordon Richardson, the then-Governor, and Denis Healey, the then-Chancellor, rebuilt financial disciplines.

One sign of change is the way in which statements by the Bank's top brass are reported in the press. Take the speech a few weeks ago by Rupert Pennant-Rea, deputy governor, in which he endorsed an inflation target of 1 to 2.5 per cent, which compares with the Government's target of 1 to 4 per cent. Now all he was doing was putting a figure on the expressed intention of the Government that inflation should be in the lower half of the range by the end of this Parliament. So all he was really doing was repeating government policy.

But this has moved into public, and more importantly, market perceptions as the Bank pushing to get inflation below 2.5 per cent. The market liked it; the exchanges liked it. But making the figure explicit, the Bank can use the 2.5 per cent figure as a lever on policy, sure in the knowledge that if it were seen to abandon it, there would be serious consequences for the gilt market and for sterling.

Another sign of change came over the weekend when the Chancellor was interviewed on interest rate policy. He said he agreed with the Governor that there had been no need to cut interest rates - pretty self-evident, you might think, since if he had not agreed, he would presumably have cut them. This was interpreted, quite possibly wrongly, as meaning that there would be no cut in base rates associated with the Budget later this month. But by linking his own view now with that of the Governor, Mr Clarke is inviting public support from him next time he does want to cut rates.

Suppose that there is to be another 0.5 per cent off base rates before the year is out, and the market thinks there will be. There would be great danger to sterling and to gilts were the word to get about that the Bank was against it. The Governor would not need to make a speech saying that this was unwise: that would be unthinkable and in any case counter-productive. All he would need to do would be to say nothing, and for the Bank to click quietly its corporate tongue. In practice, Mr Clarke knows he would be unwise to cut rates if the Bank were advising against it.

Another sign of change is in the attitude of backbench MPs. The Commons Treasury and Civil Service Committee is examining the issue of the Bank's independence at the moment. It is still taking evidence - the deputy governor appears before it today - but it looks very much as though it will report in favour of giving the Bank independence when it reports, probably in December.

Of itself, this means little. Commons committees produce their reports and stories appear in the press, but in practice no one takes much notice of them. But it is useful for the Bank to have friends in Parliament, for it tends to be on the defensive in its relations with MPs: they are usually attacking it for some perceived failure of bank regulation.

These three bits of evidence pointing towards greater independence follow two other changes in the last year: the appointment of a new Governor, and the publication of the quarterly inflation report. The significance of the first is that Eddie George knows a lot about monetary policy and people are genuinely interested in his views. He is part of the intellectual debate, whereas his predecessor was really articulating the corporate view of the Bank staff.

The significance of the second is not only that the Bank has a specific platform for its views: the Treasury is no longer involved in its production. The report in the new Quarterly Bulletin, published today, is the first one that has not been drawn up in consultation with the Treasury, although out of courtesy it gets a sight of it a few hours before release. Do not expect anything particularly earth- shattering as a result, but look for changes in emphasis, for if the Bank wants to change the spin of its commentary, it is free to do so.

This is all very British. Do not make any grand gesture, like having a written constitution. Instead make a series of small procedural changes that let the country shift power cautiously, by degrees. It is probably a good way of giving the Bank its head. At some stage there will have to be a new Bank of England Act that will put the whole thing on a proper legal basis, but meanwhile let's suck it and see.