City warms to Labour's stance on the Bank

ECONOMICS: Tory reforms expected to stay in place
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The City has given a broad welcome to Labour's new policy on the Bank of England and on monetary issues,.

"The general idea that it is in favour of openness and clarity in monetary policy is excellent. Tony Blair and Gordon Brown have done a very good job," said a leading banker.

But this positive response had more to do with the perception that Labour would continue existing Conservative policy, rather than make any startling departure.

"If there is a risk premium, it has less to do with Labour taking power and more with fears the present government will run a loose policy to save itself," said David Walton, UK economist with Goldman Sachs.

A senior merchant banker noted: "The politics of Labour's new proposals is more significant than the substance. Stripped down, Gordon Brown is indicating he will continue the monetary policy changes made by the Tories, which is to be welcomed."

Labour would avoid upheaval, according to a prominent City financier. "Relations between the Treasury and the Bank are one of the few areas where this Tory government has shown great progress. I think Labour has understood that it cannot tamper much."

Gordon Brown, the shadow Chancellor, portrayed his proposals as a strengthening of current arrangements, which have made the conduct of monetary policy much more open, giving the Bank of England greater influence. While ruling out independence for the central bank, Mr Brown said Labour intended to make Bank of England decision-making more objective, representative and accountable.

He wants the timetable of interest rate meetings between the Chancellor and the Governor of the Bank of England set a year in advance, to avoid any sense of politically motivated switches, and for interest-rate decisions to be announced immediately.

Calling for the Bank to explain itself more frequently before Parliament, Mr Brown also proposed the formation of an eight-man monetary policy committee, going beyond Bank of England officials, to advise on interest rate moves.

The idea of the Chancellor and the Governor fixing their diaries a year in advance met with scepticism. "These are both busy men in a fast-moving business. Frankly, you run more risk of switches and an even greater mess by trying to fix too far in advance," said a senior clearing banker.

The proposal to make interest-rate decisions public immediately divided opinion. David Barker, group investment director at Royal Insurance, thought it could stop the "deafening silence" of market uncertainty after meetings between the Governor and the Chancellor. Others felt it essential to retain flexibility over timing.

"The Bundesbank is the only central bank that can move rates at meetings. Others have to move rates when they have to move rates," said a senior banker.

There was also doubt about the idea of regular central bank explanation to Parliament.

"It is most important that a central bank can play its cards close to its chest - it must be able to use the cloak of secrecy from time to time," another banker noted.

Bringing outsiders on to a monetary policy committee found little support. "The Governor already trawls widely before forming a view on monetary policy - so what is new apart from the packaging," a banker commented.