Fly on the wall is a win for the Governor

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The Chancellor's decision to publish, with a six-week lag, the minutes of his monthly meetings on monetary policy with the Governor of the Bank of England has been widely welcomed as a large step towards achieving greater transparency and credibility in this difficult policy area. So it may prove.

Kenneth Clarke has naturally taken the high ground, and says that his motivation for the move is driven by a belief in open government and a desire to enhance monetary credibility.

But there are those in the Bank who suspect that the Governor could anyway have forced this change simply by choosing to make public at regular intervals the nature of the advice he was giving to the Chancellor on interest rates.

The giant step of allowing the Bank to publish its Inflation Report without the Treasury's prior approval took place last year, automatically giving the Bank a public outlet that it could choose to use as it wished.

Furthermore, the Governor nowadays grants press interviews, as well as appearing before the House of Commons Treasury Select Committee. Since he could not be silenced, why not make a virtue out of giving him a voice?

Looking back, a determined Governor could probably have seized the intitiative and made public the Bank's view at any time in the past couple of decades, but neither Gordon Richardson nor Robin Leigh- Pemberton chose to do so.

In the environment of the time, which took for granted that the Governor would remain a petty officer to the Chancellor's ship's captain, the public would not necessarily have sympathised with a central banker causing trouble for elected politicians. For some intangible reason, it would not have been quite the done thing. Now, it very much is.


Apart from giving the Governor a regular outlet for his views, the reform changes very little. Although we can make the odd guess or two, we do not explicitly learn what Treasury officials have advised the Chancellor about monetary policy - in fact, we do not even discover who attends the meeting.

The minutes, which are fairly standard for internal government meetings, including Cabinet meetings, identify by name only the principal players - in this case the Chancellor and the Governor - while the views of the supporting cast are summarised only in an anonymous 'discussion'.

How accurate a fly on the wall will the minutes prove to be? It is probably safe to assume that the civil servants who produce the minutes will ensure that they remain a reasonably faithful record of what actually goes on at the meeting itself. There is a deeply ingrained Whitehall custom and practice concerning the doctoring of minutes, and officials know where to draw the line on this.

But of course no-one can guarantee that the behaviour of the participants will remain the same now that they know the minutes will be published. The watched kettle may never boil.

The Chancellor will inevitably be less than frank about his own thoughts and motivations. Already, he has been taken to task by Gordon Brown for arguing in private that the tax increases could dampen the recovery, while claiming the opposite in public.

It is simply too much to expect future Chancellors knowingly to place their necks in a political noose for the sake of monetary policy transparency.

What, for example, would Norman Lamont have done in the summer of 1992, when he was apparently contemplating whether to pull sterling out of the Exchange Rate Mechanism? Imagine the minutes:

'The Chancellor said that all domestic indicators pointed to the need for sharply lower interest rates, but that this could not be contemplated while sterling was fixed at its current parity against the mark. He hoped that the French and Germans could be persuaded to allow a general revaluation of the mark, in which case the question of a unilateral sterling devaluation would not arise. The Governor warned that market confidence in sterling was beginning to wane, and recommended a 2 per cent rise in base rates to steady the situation. In discussion, it was argued that sterling was clearly overvalued, and should be allowed to float.'

Perhaps such a meeting took place. It certainly could never have done so if the minutes were due to be published within six years, never mind six weeks. Instead, everyone would simply have rehearsed their well-known public views, and the real discussions would have been held elsewhere.

This of course is nothing more than the standard objection to any shift towards open government. On the whole, some advance is probably better than none, so let us not be too churlish about Mr Clarke's reform.

Provided that the Governor uses his new vehicle wisely and well, it should shift the British system quite close to having an independent central bank without actually taking the final decision away from elected politicians. Perhaps it will prove to be exactly the sort of messy compromise that the British political system thrives upon.

In practice, the system will probably evolve a little like that in the United States, where the minutes of the policy committee of the Federal Reserve are also published after a six-week lag.

Often, there is a lively disagreement about policy described (anonymously) in the minutes, but then the final vote on an agreed compromise is usually unanimous. In the UK context, there will be no final vote but, to avoid serious market disruption, decisions will have to be compromises that both sides can accept.


In February, for example, the minutes record that the Governor 'could accept' a quarter-point base rate cut, implying of course that he could not accept a half-point cut. Even the self-confident Mr Clarke must have decided it was not worth taking on the Governor as well as the markets in going for his desired half-point cut.

This sort of negotiation should have given the Governor a degree of regular influence that he could previously only have seized through assertive and risky public action, which is not quite in his nature.

Turning to more immediate issues, what have we learned from the minutes so far? On a detailed reading, two things struck me.

First, in the February meeting that decided on the quarter-point cut, absolutely no-one seems to have supported the Chancellor in his wish to cut rates.

The Governor gets a lot of credit from having seen in advance that the markets would be severely spooked by a rate cut, while the anonymous 'discussion' records no one agreeing with the Chancellor's line.

If senior Treasury officials expressed a view, it was not supportive of their boss. Hopefully, Mr Clarke will secretly recognise that his advisers were right about that one, despite his public pronouncements to the contrary.

Second, though, the minutes reveal a strong continuing bias towards more rate cuts at some point in the future. Even the Governor thought this would probably be appropriate. And no one has even mentioned the dreaded possibility that rates might actually need to rise in the foreseeable future.

I came away from the minutes believing that there was a greater chance of another base-rate cut, and much less chance of an American-style pre-emptive increase in rates, than I had previously believed - or hoped.