The architect behind Independence Day
Tuesday 30 September 1997
"We have come a long way from Black Wednesday to Independence Day in less than five years," says Mervyn King, just back from the annual meeting of the International Monetary Fund in Hong Kong.
Having joined the Bank as its chief economist from the London School of Economics after that fateful day, 16 September 1992, when the currency markets forced the pound to nosedive out of the European Exchange Rate Mechanism, he got the inflation target on its feet and introduced the Quarterly Inflation Report. "This has been my main achievement at the Bank. It made it possible for the government to contemplate independence," he says.
Many observers would go further and describe Mr King as the principal architect of Bank of England independence. The former professor, who has taught at Cambridge and MIT as well as the LSE, was initially appointed to the Bank for only three years to add intellectual muscle to its economic analysis after the exchange rate debacle. He swiftly became one of its heavyweight figures as well as the public face of the Inflation Report .
He reorganised the economics team and, although he has a reputation for not suffering fools gladly, the Bank of England has become one of the most attractive places for an economist to work in Britain.
Mr King is clearly delighted with Gordon Brown's surprise decision to give the Bank the independence to set interest rates. "It really was the biggest change in 300 years," he says, "although we still have a big educational effort to explain the benefits of price stability."
This is a response to the charge levelled by some commentators that the Bank is a nest of inflation hawks who will plunge the economy into recession in order to fight the phantom of rising prices. Not surprisingly, this is a charge the deputy governor denies: "We are not going to engineer recessions."
First, he says, the new inflation target of 2.5 per cent with a one-point band on either side does not give the Bank a stronger incentive to be below it than above it. Second, he argues: "It is not rational to believe that we are living in a world of permanently low inflation." Even though labour market reforms, global competition and technology have certainly helped reduce inflation, nothing has changed to guarantee it will stay that way.
He adds that it is the job of the new Monetary Policy Committee to get interest rates right and make sure inflation does stay low. And he is an evangelist about the new framework for setting rates.
"An independent central bank has to have the legitimacy of a target set by the government, and should be accountable. But monetary policy is a technical matter. It is not easy to be a politician 30 days a month and a monetary policy expert one day a month."
Mr King is in no doubt that the new arrangements - rates set by a majority vote of the new committee, with the discussion and vote reported six weeks later in the published minutes - are an improvement on the monthly Governor- Chancellor meeting. That structure forced the Bank to go into the meeting advocating one course of action rather than having an open discussion.
He is not certain yet how the MPC will work. One member, Deanne Julius, joined only last month, while another, Sir Alan Budd, does not arrive from the Treasury until November. A successor to Mr King as chief economist also still has to be appointed.
Beyond the personnel, however, lies the question of what will happen the first time they disagree. "We'll find our way through it when it happens," says Mr King. "One of the strengths of the committee is that everyone will see that reasonable people can disagree. No one person has a monopoly of truth. This is why the MPC does not have any politicians on it."
Although the first three sets of published minutes from the MPC have been rather bland, Mr King promises they will increasingly give a real flavour of the discussion in the meeting.
"This is an experiment in openness. We in Britain are now more open about policy than anyone else in the world. Central banks can no longer pursue a cult of secrecy and mystique," he says.
He is happy about answering to the Treasury Select Committee regularly, but hopes the MPs will decide to stop quizzing the Bank's officials about the Budget: "It is less appropriate for us to comment on the Chancellor's actions."
The other challenge will be changing the Bank of England itself. Its main job used to be banking supervision, necessarily a more secretive business. Now that its task is monetary policy, Mr King says it must become more open.
As for his own ambitions, Mr King refuses to rise to the bait of a question about whether he hopes to succeed Eddie George as Governor.
Mr King says simply: "I will remain at the Bank as long as I can make a difference."
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