Brown's base rate strategy under attack
Monday 21 July 1997
David Gowland, a respected professor of economics at the University of Derby, said there was no evidence that the Bank's new Monetary Policy Committee, which sets interest rates, would boost the credibility of the Chancellor's anti-inflation strategy. He also claimed that the strategy was undermined because Mr Brown retained the right to change the inflation targets and appoint the members of the committee.
Meanwhile, two new surveys highlighted increasing worries among businesses and exporters that rising interest rates were leading to an overvalued pound. Interest rates have risen by three-quarters of a point to 6.75 per cent since the election and most economists expect a further half- point rise this year.
The latest quarterly export indicator from DHL shows a decline in export confidence while the Chartered Institute of Marketing (CIM) reported that economic confidence had dipped in the last three months.
According to the DHL survey of 1,000 exporters, two-thirds cite exchange rates as a concern, warning the strong pound will have a negative impact on sales.
The CIM, meanwhile, said that there had been a drop in its confidence index with most manufacturing sectors reporting below-average growth plans because of the impact of the strong pound.
Professor Gowland's attack comes in a pamphlet published today by the right-leaning think tank, Politeia, which describes the dramatic changes introduced by Mr Brown at the Bank as "political showmanship".
The report marks the first academic judgement of the Chancellor's three key decisions since Labour came to power - giving the Bank the independence to set interest rates, collecting all financial regulation including banking supervision under one roof, and handing over responsibility for gilt sales to the Treasury.
Professor Gowland is most critical of the third of these, the least noticed, saying it is almost certainly a bad move since all the expertise at managing government debt lies with the Bank. Switching it to the Treasury will lead to a lack of co-ordination as the Bank will still oversee the gilt- edged market.
But Professor Gowland also expresses doubts about the creation of a super- regulator. He says there are overwhelming advantages in having a single regulator, but the Chancellor's plans have not been well formulated. In addition, there could be serious difficulties in the transition from one structure to another.
The report comes amid signs of increasing concern among Bank officials about the delays involved in setting up the new super-regulator. Its head, Howard Davies, leaves the Bank of England to start the new job at the beginning of next month.
Officials say that the practicalities are turning out to pose more difficulties than expected, and issues such as the location and the terms and conditions of staff remain to be resolved.
On interest rates, Professor Gowland argues that the Chancellor's strategy suffers because there is no mechanism for appointing members of the Monetary Policy Committee through a federal banking system. The US and Germany are both able to draw on regional bankers, whereas Mr Brown appoints the Bank of England's experts.
Banking on Change by David Gowland, Politeia, pounds 7
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