Leading Article: The jobs quandary is only just beginning

IT WAS bound to happen. Making the Bank of England independent was hailed as a master stroke by "Flash" Gordon Brown in the heady days after Labour's landslide. So it was sure to boomerang, and now it has.

This week saw the Prime Minister at the Fujitsu plant which employs hundreds of his constituents, effectively telling them that he felt their pain, but there was nothing he could do because he and the Chancellor had handed over control over interest rates to Eddie George and his colleagues.

An unfair caricature, of course, because the case for an independent central bank was and remains a sound one. Had interest-rate decisions remained with the Treasury, Tony Blair would have been just as powerless as he faced the workers at Fujitsu - or he should have been. Highly-publicised redundancies in the Prime Minister's constituency are not a good reason for cutting interest rates, and it is right that such temptations are removed from the process of rate-setting.

Meanwhile, the man who does actually control interest rates, the Governor of the Bank of England, was giving a speech to the TUC: evidence of the re-alignment of political and economic forces.

Mr Blair seems to have some difficulty adjusting to the consequences of his policy. The contradiction at the heart of New Labour is laid bare again: Mr Blair has given power away and yet continues to disport himself as if running an imperial premiership - just as he has difficulty coming to terms with the fact that devolution of power to Scotland means the Scots should run their own affairs rather than having the fate of Labour candidates decided in Millbank, SW1.

Mr Blair was perhaps unwise to point out that, if interest rates peak at 7.5 per cent in this cycle, that will be a great achievement compared to 15 per cent last time. That is undoubtedly true - bearing in mind that "if" - but it does imply that he thinks rates should now come down. So they should, but if the Bank's Monetary Policy Committee comes to a different conclusion, he is going to look silly.

The committee's problem is that the case for a rate cut is finely-balanced if it looks simply at the figures for the British economy. But there has been, as Gavyn Davies pointed out in our pages this week, a change in market psychology which is affecting economies all over the world.

That means the risk of recession - in Britain and the United States - is now greater than that of inflation. A rate cut would both head off that risk and help soften the pessimism which has gripped market makers. But it is right not to rush to judgement: another disadvantage of politicians is that they tend to be too easily swayed by such temporary surges of optimism and pessimism. Alan Greenspan, America's central banker, was right to be cautious about the idea of co-ordinated rate cuts across the world - that was what made the late Eighties boom worse.

Mr Blair was happy to take the credit for Bank of England independence when everything was going well. Now things are getting rougher, he needs to work harder to remind people of why it was the right policy. And things are likely to get a lot worse before they start getting better. Fasten your seat belts: we are entering the mid-term.