The architect behind Independence Day

Mervyn King is a man with a mission. The deputy governor of the Bank of England tells Diane Coyle he intends to make sure Britain has a framework for economic policy that will mean big mistakes like Black Wednesday never happen again.

"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."

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?