MPs attack ministers for meddling on rates

THE GOVERNMENT's new policy arrangements, which give the power to set interest rates to the Bank of England, have "shown signs of strain", according to MPs.

A report from the Treasury Select Committee, charged by the Chancellor with monitoring the Bank's Monetary Policy Committee (MPC), raps ministers for appearing to pressure the Bank into cutting interest rates during the autumn.

The MPs expressed concern about suggestions that Chancellor Gordon Brown had tried to pressure the Bank into cutting interest rates by revealing, on a trip to Washington in early October, that the Treasury would be slashing its growth forecast.

Yesterday's report concludes: "We welcome assurances by the Treasury and the Bank that the Treasury is not attempting to pressurise the MPC. We believe that if the credibility gains of the new monetary framework are to be maintained it is important that the MPC should not only act independently but be seen to act independently."

However, it adds: "It is also important that neither the Treasury nor the MPC should feel itself constrained from making its views publicly known."

The MPs say the turbulence in the world economy has tested the new economic framework, which includes rules for the Government's fiscal policy as well as the monetary arrangements. "In practice the new framework has shown signs of strain."

The world economic slowdown is bound to affect the UK, according to the report. But the MPs recommend that even if the Chancellor's Budget plans for spending and borrowing turn out to be over-optimistic because of the slowdown, he should not try to tighten fiscal policy to make up for it.

They also back reform of the International Monetary Fund and better regulation of speculative hedge funds.

The Chancellor is due to give evidence next week to a House of Lords committee monitoring the work of the MPC, as is Eddie George, Governor of the Bank of England, the following week.