The Chancellor gets his man: a hawk with a hard-earned reputation for caution

Bank of England

When Sir Edward George's tenure as governor of the Bank of England was extended in 1998 for another five years, the decision was interpreted as a setback for Gordon Brown, who was thought to have favoured the appointment of Gavyn Davies.

This time, the Chancellor got his preferred man, with the announcement yesterday that Mervyn King, the Bank's deputy governor since 1998, would replace Sir Edward when he retired in June next year. A clue to Mr Brown's regard for Mr King was contained in a reference to his "steady grip", high praise indeed from a man as steady as Mr Brown himself.

Perhaps the only surprising element of the announcement was its timing, seven months before the position becomes vacant. The reason may have been that Mr King had been linked with the position of Director of the London School of Economics, so Mr Brown may simply have wanted to tie him down to the £250,000-a-year post, in case he decided to make the short journey across the City to Aldwych.

Another interpretation of the announcement was that it was a diversionary tactic, to deflect attention from the less palatable aspects of Mr Brown's speech. Even if the markets didn't like the rest of it, they would at least approve of the new man in Threadneedle Street.

Mr Brown was on pretty safe ground here. In his position on the nine-member Monetary Policy Committee, which sets interest rates, Mr King has argued consistently for higher rates than many of his colleagues, developing a reputation for caution that makes even Mr Brown look imprudent.

But while Sir Edward has cemented his legacy by keeping inflation under control, Mr King may find his tenure as governor facing the opposite challenge – to avoid falling prices. Only time will tell whether the skills of the hawk will equip him best for this fight.

Mr King was born in 1948 and brought up in Wolverhampton, where he attended a local grammar school. He studied at King's College, Cambridge, and Harvard before becoming an economics professor at the LSE. There his ideas on fiscal policy came to the attention of Nigel Lawson, whose tax-cutting budget of 1988 might have carried a credit for Mr King. Tessas (tax-exempt special savings accounts) were also, to some degree, his brainchild.

He joined the Bank in 1991, where he came to wider notice for presenting its quarterly Inflation Reports, managing improbably to transform these turgid affairs into entertaining one-man shows.

Behind the scenes, Mr King was gliding into position as Sir Edward's right-hand man and heir-apparent at a time of relative upheaval for the Bank. The biggest bombshell came in 1997 when the new Labour Government granted the Bank its independence and, in a stroke, gave Sir Edward and his Monetary Policy Committee responsibility for setting interest rates.

The new arrangement was fraught with dangers for the governor. On the one hand, he had to show himself to be genuinely independent of the Government by putting political considerations to one side when deciding on base rates. On the other, he had to get the job right, since he could no longer blame the Chancellor when things went wrong.

It is testimony to Sir Edward, a veteran of 40 years on Threadneedle Street, that he made an unqualified success of the most radical reorganisation of the Bank's affairs in its history. Charged with keeping inflation between 1.5 per cent and 3.5 per cent, on pain of a summons to the Chancellor to explain a transgression in person, Sir Edward has never been forced to make his way to 11 Downing Street.

There have been other challenges, most notably the collapse of Barings in 1995 when, for a moment at least, the foundations of Britain's financial system tottered. As it was, Sir Edward oversaw the ordered demise of the bank, and the City breathed again.

Sir Edward did suffer a reversal in the creation of the City's new super-regulator, the Financial Services Authority, which took place over his head, he felt. But, after seeing off opposition to the renewal of his contract, the governor has been the author of his own departure and is leaving his seat for his chosen successor.

Mr King has been too instrumental in Sir Edward's success for the Bank's hard-won credibility to be threatened by his appointment. Inflation is safely within the boundaries laid down by the Government. Indeed, the biggest threat to Britain's continuing economic stability may be the housing market, a fact reflected in Mr King's recent utterances on the subject – although, as a resident of Notting Hill, one of London's most incandescent property hotspots, the new governor has been a beneficiary of the boom.

Mr King's emphasis of this issue has underlined his hawkish reputation. Even at a time of stagnant growth around the world, it seems that the Cassandras who are calling for lower rates to ward off the threat of falling prices will be disappointed in Mr King. Should a summons to the Chancellor be made, Mr King is more likely to be explaining why inflation has fallen below the 1.5 per cent floor than above the 3.5 per cent ceiling.

But the iceberg looming on the horizon of the Bank's odyssey is the euro. If sterling is to join, it is likely to happen during Mr King's tenure.

Inevitably, given the nuances of the single currency debate within the Government, let alone in the country at large, Mr King's choice has had the euro-obsessives in a frenzied search for its significance.

Like the incumbent, Mr King has the central banker's knack of speaking for long periods but saying very little. However, those who devote their every waking hour to scrutinising such matters have detected in his rhetoric, if not outright euro-scepticism, then at least a healthy realism. Witness his assertion that it would take 300 years of data to gauge whether Britain's economy had achieved the critical convergence with the rest of Europe. This has led to speculation that Mr King is the Chancellor's man and that Mr Blair would have preferred another candidate, possibly Sir Howard Davies, chairman of the FSA, or Andrew Crockett, the outgoing general manager of the Bank for International Settlements.

Although joining the euro will ultimately be a decision for the British people, the views of the governor of the Bank of England will play their part, at least in the timing of a referendum. Can Mr King be trusted to do the honourable thing, even if it means the effective end of the Bank of England as we know it?

The answer is probably yes. This, after all, is a man so given to self-sacrifice that he turned down the chance to become a director of his beloved Aston Villa because his seniority at the Bank suggested a potential conflict of interests.

THE ROAD TO THREADNEEDLE STREET

Mervyn Allister King

Born: 1948, Wolverhampton.

Education: Wolverhampton Grammar School, King's College, Cambridge, Harvard.

Career: Taught at Cambridge and Birmingham universities, economics professor at LSE (1984-95);

chief economist and executive director, Bank of England (1991-98); founder member of Monetary Policy Committee (pictured below 1997-); deputy governor, Bank of England (1998-)

Other: Fellow of the British Academy; honorary fellow, St John's College, Cambridge