Clarke urged to give Bank control of rates: Panel calls for 'clean divorce' from the Treasury with target of zero inflation

THE Chancellor of the Exchequer was asked yesterday to hand control over interest rates to an independent Bank of England, charged with securing zero inflation free of interference from the Treasury.

The call came from a panel of academics, City figures and former Treasury and central bank officials assembled by the Centre for Economic Policy Research. The panel was chaired by Lord Roll, president of SG Warburg.

The Treasury Select Committee of backbench MPs is expected to share its enthusiasm for independence in a report next month. But Kenneth Clarke poured cold water on the idea this week, saying that he did not expect to announce any change while he was Chancellor.

The panel argued that central bank independence would help achieve and maintain zero inflation by improving the credibility of policy. It would reduce the worry among unions, employers and the financial markets that the Government might try to boost the economy in the short term to win votes.

The panel said that the Government had had an easy ride in anti- inflation policy since sterling was forced out of the European exchange rate mechanism, but that 'eventually a monetary framework with a stronger foundation will be required'.

The panel argued that the Bank of England should be given the single objective of achieving price stability in an Act of Parliament, with the power then to announce short- term targets for inflation. Giving the Bank control over interest rates might strengthen the case for removing its responsibility for supervising the banking system, although the Bank believes it could do both jobs. Either way, the panel argues that the Bank should no longer be required to act as the Government's banker, helping to manage the sale of gilts.

The panel said it would be important for the Bank to be democratically accountable if its control over interest rates was free of direct ministerial influence. It suggested that the Governor of the Bank should give regular evidence on the choice of inflation target and changes in interest rates to the House of Commons Treasury and Civil Service Select Committee. The Bank's inflation target should be conveyed by a statement to the Chancellor. The Government could override the Bank's responsibility to achieve zero inflation, but only by getting Parliament to vote on a six-month suspension of its powers.

The panel argues that neither the German Bundesbank nor the Reserve Bank of New Zealand - both regarded as successful independent central banks - provide an ideal model for Britain. The New Zealand central bank has its inflation targets set for it by the government, while the Bundesbank is unaccountable to parliament.

Critics of independence argue that the proposal is undemocratic and that it creates a bias towards higher interest rates and spiralling government borrowing, as the Bank and the Treasury each try to offset the actions of the other. They deny that an independent central bank necessarily causes low inflation.

Leading article, page 19