George warns against 'political' interest rate cuts: Late rally rescues gilt auction from disaster as new Governor tells Government 'I'll blow the whistle'

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The Independent Online
ON THE eve of his installation as Governor of the Bank of England, Eddie George yesterday warned the Government that he would publicly expose persistent attempts to cut interest rates for political reasons.

Interest rates could be lower if the Government did more to keep its borrowing under control, he told the House of Commons' Treasury select committee. 'Reduction of the public sector borrowing requirement would help take some of the load off monetary policy'.

The new Governor also repeated his call for the Bank to be given statutory responsibility to achieve price stability - and control over interest rates to do so. But he said it was important that this institutional change was accompanied by a public and parliamentary consensus in favour of low inflation. Without that consensus, independence could be a 'poisoned chalice'.

Mr George said the timing of some interest rate cuts had been 'adjusted for reasons which have little to do with monetary policy'. He warned that doing so frequently could have a 'corrosive effect' on the credibility of policy. Norman Lamont, the former Chancellor of the Exchequer, said in his resignation statement that the last base-rate cut in January had been motivated by short-term political reasons rather than the needs of the economy.

Mr George warned he would blow the whistle on the Government if it made rate cuts that were inconsistent with the broad strategy of price stability. However, it would be counter- productive to 'make a song and dance' about minor disagreements over timing. Immediate re-entry to the European exchange rate mechanism would not boost the credibility of anti-inflationary policy, he added.

Meanwhile the Bank's largest-ever auction of gilt-edged stock appeared to be a disaster yesterday morning, but in an astonishing change of sentiment the market turned round within a few hours. Rather than retreating in disarray, the Bank was able to take advantage of a sharp recovery in prices to announce an pounds 800m tap stock to go on sale this morning to add to the pounds 3.25bn sold in the auction.

Analysts estimate that the Bank has now funded about pounds 20bn of the pounds 50bn public sector borrowing requirement after only three months of the financial year.

After several days in which gilts prices had been rising strongly, the auction was expected to be heavily oversubscribed. But it only attracted bids of pounds 3.575bn making it a miserable 1.1 times subscribed. The 'tail' or spread between the highest and lowest yields was the second highest on record at 0.07 percentage points, confirming the poor market reception. But buyers piled in after the auction, and gilts ended half a point up on the day and a full point above their lowest level.

Robert Thomas of NatWest Markets described it as a remarkable performance after an auction that appeared to have the makings of a disaster. Roger Bootle, of Midland Global Markets, called the day's events 'bizarre' and said it was the result of a game of 'bluff, double bluff and counter-bluff in the markets'.

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