Economic stability would not be sacrificed for political popularity and a committee of economic experts would analyse all the available evidence and come to a rational decision on how interest rates should move.
Eighteen months on, after what has been arguably the Bank's most important interest rate decision to date, that much-trumpeted independence is looking rather more shaky.
There have been claims of transatlantic political interference by the Chancellor of the Exchequer and his advisers in Washington where they attended the annual meeting of the International Monetary Fund.
Charlie Whelan, Mr Brown's pugnacious press adviser, became a familiar figure around the briefing rooms. Right from the moment that he arrived in Washington, he wasted no time briefing British journalists heavily that the Bank of England would reduce interest rates this week. A cut was "in the bag", he indicated.
While there were plenty of other stories emerging from the international financial meetings - notably a series of differences between the participants - Mr Whelan very carefully steered the story around to an interest rate cut, particularly over the weekend as the Group of Seven leading industrialised nations met to discuss their next steps in economic policy.
But when journalists wrote the story, Mr Whelan's mood changed very quickly from coaxing to bullying. He conducted a screaming match with one British journalist, precisely because he had let on that the source of all the hints on monetary policy was the Treasury. His habit of flinging obscenities at journalists caused some shock among the rest of the international press corps, who associate this sort of behaviour with countries where advisers wear uniforms and ministers are called Colonel.
The reason for Mr Whelan's outburst was that the Bank had become increasingly angry at the spin from Mr Brown's advisers. Interest rate decisions were supposed to be made by the Monetary Policy Committee, not by Treasury advisers. There had been harsh words between the Old Lady of Threadneedle Street and the young spinners from Whitehall. This is by no means unusual - in the run-up to the pound's exit from the European Monetary System, the two were virtually at war and the Bank gave a fairly clear idea of what it thought of Norman Lamont, then the Chancellor.
Mr Whelan appeared to want reporters to repeat his line - that the Bank could and should cut - without acknowledging the Treasury as the source. But when the Financial Times made clear that the Treasury was conducting a covert campaign to win a rate cut, again there was fury. The FT story was faxed to Mr Brown in the US, and the Treasury began a campaign of discrediting it and its authors.
Mr Whelan took the unusual step of writing to the FT yesterday, reaffirming the Chancellor's position. "Unlike those who were opposed to independence from its outset and continue to campaign to undermine its independence by whatever means they can, this Chancellor will continue to give the Bank of England its full support in whatever difficult decisions it must make", he wrote.
But the pressure on the Monetary Policy Committee to cut rates did not come via only Mr Whelan's briefings. After the marked deterioration in the international economy, both Tony Blair and Mr Brown dropped strong hints that they would like to see interest rates fall. And the Chancellor's announcement in Washington, on the eve of yesterday's MPC meeting, of a revision downward in his forecasts for economic growth was seen as heaping yet more pressure on the Bank to loosen UK monetary policy and irritated the Bank further.
What's more, the fact that Eddie George, Governor of the Bank of England, and Mervyn King, the deputy Governor, were both also out in Washington with the Chancellor sparked suspicions in the financial markets that the politicians and the Bank were cooking up a plan in advance of this week's rate-setting meeting.
The debacle over yesterday's rate cut from 7.5 per cent to 7.25 per cent has left some in the financial markets (as well as the public at large) thoroughly confused about who calls the shots - the politicians or the Bank's "independent" rate-setting Monetary Policy Committee. Have we moved from a regime where politicians overtly set interest rates to one where they do so covertly, via leak and via spin?
The official line, of course, is that the Bank - and only the Bank - sets rates. Politicians may or may not have their personal views, but these have no bearing whatsoever on the rate decision, taken by the committee after two days of deliberation. So if the Bank truly is independent from government, what is the difficulty with the politicians expressing their view about rates, either privately or publicly?
In other countries with independent central banks - such as the US and Germany - politicians regularly sound off about rates without causing all this fuss. The difficulty, according to the experts, is that an independent Bank of England is still in its infancy. No one is quite sure about the rules of the game.
One senior City economist remarked: "The problem is I don't know exactly what is happening. I don't know what the Chancellor and the Treasury have been really saying. My view is the Chancellor is trying to have it both ways."
Fortunately for the Treasury and the Bank, this time round there was a good economic case for cutting interest rates, meaning that the Bank can argue convincingly that it was the economic evidence, not the political pressure, that pushed it into yesterday's decision.
Indeed, there was a good economic case for cutting rates by more than the Bank did yesterday, as articulated by Gavyn Davies, chief economist of Goldman Sachs, in The Independent on Monday. World stock markets are in turmoil. There is a global banking squeeze. Most City experts are agreed that the Bank could easily have justified a half-point cut in rates yesterday.
So it seems that the Bank's independence has emerged intact from the latest debacle - but only just.
Terms Of Independence
`The objectives of the Bank of England shall be to maintain price stability and, subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment'
Chancellor of the Exchequer's letter to Eddie George, Governor of the Bank of England, on 3 June 1998, setting out the Government's objectivesReuse content