The Bank of England has raised interest rates four times since Gordon Brown gave it the power to do so on 6 May. The most frequent criticism made of the newly independent Bank is therefore that it has been trigger- happy, over-reacting to scant inflationary signals when the pound is already too strong for comfort.
The Governor, reviewing the events of the past year, denies the charge of being an "inflation nutter". Framed in his magnificent office by one austere piece of tinsel, he told The Independent: "Of course, when we get a situation as we have had where the strength of the exchange rate is exaggerated, the people who are directly affected by that will feel the discomfort."
The Confederation of British Industry rubbed this home yesterday, voicing a new year wish for a lower exchange rate. But despite the dilemma for setting interest rates posed by the strong pound, Mr George insisted: "We need a slowdown in the economy next year, there's no question." Although there are uncertainties about the timing and degree of this slowdown in the economy, Mr George added: "We're not at the point where we need to plunge it into recession again."
He went on to explain that the new Monetary Policy Committee, created by the Chancellor to set interest rates, would not feel bound to keep inflation within 1 per cent, either way, of the 2.5 per cent target at all costs. If the target measure goes beyond those bounds, the Governor has to send a letter to the Chancellor explaining why.
"People talk in terms of a range as if this was something we can't go outside. I don't see it like that," the Governor said. Although hastening to add that he did not see inflation going outside the range in the near term, he said: "If there were a very powerful reason for going outside that 1 per cent either side, then I think that's what the Monetary Policy Committee would advise the Chancellor."
Mr George was also keen to stress that setting monetary policy is an uncertain process.
Under the old system, he had one meeting a month to try to persuade the Chancellor to take the Bank's advice. By May, he said: "We were clearly behind the game." It was not until August that the Bank could credibly claim policy was back on track.
"What we have now is a genuinely open debate with people exploring alternative interpretations. What that reflects is the imprecision of the process. I don't think you ever get it exactly right," Mr George said.
Even so, he professed himself reasonably happy with the current policy. He downplayed fears of general upward pressure on pay, a concern in the City, saying the behaviour of the jobs market so far had been encouraging.
There was even a faint hint that the Bank might be taking a more relaxed view about falling unemployment than many observers have assumed. "Clearly, if we could run the economy at a higher level of employment without this producing upward pressure on pay, then everybody would be happy, even the inflation nutters at the Bank of England," Mr George said.
He said that, despite the complaints of exporters, higher interest rates were only part of the explanation for the strong pound. Rates "will peak, may already have peaked, I really don't know," he said.
"But you can't explain much of the appreciation in those terms, so we conclude that it's a question of market expectations about the nature and characteristics of the euro. Perhaps as we get closer they will change."
Along with gaining independence for the Bank, Mr George rates Gordon Brown's statement clarifying the Government's intentions towards the single currency as one of the high points of 1997. He bills himself as a "Euro- pragmatist".
"I have never opposed the principle in a doctrinaire way. But I have never felt the time and the place were right, certainly not for the UK."
Mr George predicted that monetary union will go ahead with a broad membership, as the markets expect. But he clearly remains sceptical about the tensions bound to be generated by a "one interest rate fits all" policy for countries with very different economic structures.
The low point in the past year had been the loss of the Bank's responsibility for bank supervision, Mr George said. "It wasn't the principle, it was the manner," he explained.
However, his relationship with Mr Brown has improved from that low point, and the Governor's contract, which expires next spring, is widely expected to be extended. Mr George, who would clearly like to stay on, said the Chancellor had not yet discussed this with him.
Apart from the Bank's difficult task in setting interest rates at the right level, Mr George picked out Asia as the main cloud on the horizon for 1998. "There is no question that Asia is serious," he said.
Is it more serious than previous crises? "It's right in the forefront of the mind, it's the immediate problem. But if you go back to the debt crisis of the early 1980s, I don't know that I would feel it is worse than that."Reuse content