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View from City Road: Bank campaign meets an immovable object

Tuesday 16 November 1993 00:02 GMT
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Kenneth Clarke clearly wants to stop the Bank of England's campaign for independence gaining unstoppable momentum. Just a couple of weeks before the Treasury Select Committee of backbench MPs publishes a report supporting independence, Mr Clarke yesterday poured cold water on the idea for the foreseeable future.

'I don't remember any previous Chancellor who has ever made an announcement on the subject while in office, and I doubt whether this one will,' Mr Clarke said at the CBI's Harrogate conference. His comments possessed a Heseltinian ambiguity ('I cannot foresee the circumstances. . .') but in effect they rule out any radical announcement in the Budget if not beyond.

Central bank independence would leave the Bank of England free to set interest rates without interference from the Treasury, in pursuit of a specific target for inflation set by Parliament. This might make employers and unions more confident that low inflation would be achieved and maintained. They would therefore moderate their wage settlements, allowing inflation to be reduced with less damage to growth and employment.

A further benefit could be financial savings on the cost of servicing the national debt, since the gilts market would be less likely to extract a risk premium against the possibility of a sharp rise in inflation.

It is obvious why the Bank of England should be campaigning for independence, but its motives are neither here nor there. There will be few better opportunities to cut the Old Lady free of her Treasury masters, a reform that would help to lock in our low inflation rate. So far, consultation ahead of interest rate changes and the freedom to write apparently uncensored reports on counter-inflation policy increase the Bank's independence in only the most modest of ways.

It is equally obvious why Treasury ministers - especially those who aspire to be prime ministers - should oppose independence: interest rates are as important a weapon in the battle for votes as they are in the battle against inflation. Mr Clarke has always claimed to be a 'political' Chancellor rather than an economic one. His reluctance to lose control over interest rates in the run-up to the next election is therefore entirely to be expected. But it is a shame.

(Photograph omitted)

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