New Bank of England Head Stirs Talk of Independence
MEMBERS of Britain's financial establishment are waiting to see whether Eddie George, newly appointed governor of the Bank of England, will obey government economic and financial policy as closely as Prime Minister John Major desires.
The appointment of Mr. George to succeed Robin Leigh-Pemberton, the central bank's governor since 1983, followed months of debate over whether the bank should be given independent status in line with Germany's Bundesbank, the Banque de France, and some other European central banks.
George, until now the bank's deputy governor, told a London press conference last week in the sometimes-obscure language of central bankers: "If independence has to be in some sense in opposition to government, I don't think I want it."
A source inside the bank, however, forecast that its new governor would "put his personal views forcefully to government policymakers" whenever necessary, and would "speak his mind when he thinks it appropriate." The new governor is said by a wide range of banking sources to favor greater independence for "the Old Lady of Threadneedle Street." So too is Rupert Pennant-Rae, who leaves his post as editor of the Economist magazine to become deputy governor.
Mr. Major seemingly put an end to the argument, saying he was "against making the bank independent at this stage."
In recent months editorials in the Economist magazine have advocated cutting the Bank of England's ties to government, and Mr. Pennant-Rae reiterated that view a few hours after he was appointed deputy governor.
George is on record as saying that the bank should have operational independence but be accountable to Parliament.
Advocates of central bank independence tend to argue that autonomy helps in the battle against inflation. Those who oppose central bank autonomy often maintain that the link between the money supply and the business cycle is so important that only governments should be allowed to decide questions of high financial policy.
The Bundesbank in Frankfurt is often in conflict with the Bonn government, as well as Germany's European Community (EC) partners, over interest rates.
In the short term George's views on inflation are unlikely to clash with government policies. Accepting his appointment, he said he was delighted that "for the first time the government has given the bank a clear mandate to support it in the fight against inflation," which he called "the grade-A issue."
George was responding to a comment by Norman Lamont, chancellor of the exchequer, who had said it was the new governor's responsibility to support him in his struggle to hold down prices, which remains "the government's central economic strategy."
A senior Conservative Party source said Major opposes independence for the bank partly because of the high level of homeownership in Britain, where mortgages are "widespread and large by European standards."
This made Britain a "special case" in the EC, the source said. He added that fluctuation of mortgage interest rates could be politically dangerous, and the prime minister preferred to keep a tight grip on policy in that area.
In Britain, mortgage interest rates rise and fall with the bank's base rate. On Tuesday the bank moved to revive the economy by cutting that interest rate a full percentage point to 6 percent - the latest in a series of rate cuts.
The Financial Times echoed a common view in London's financial district when it editorialized Monday: "A recently humiliated government will find it impossible to brush aside warnings from the Bank.... The Bank should say precisely what it thinks and let the government, which must borrow some British pounds50 billion a year for many years to come, cope with the consequences of ignoring it."
Under new rules, the bank issues an assessment of inflationary trends every three months, and George said last week it would be "difficult for us not to make it known publicly if we actually think that the government's inflation objective is threatened."
George's moral credit is high among opponents of the EC's Exchange Rate Mechanism (ERM), which Britain quit last September as the pound fell sharply in currency markets. A Threadneedle Street insider said George personally was dubious about entering the ERM in 1990 and breathed a sigh of relief when Britain withdrew.
The same source described the new governor as a "slow mover" on European integration who "tends to share the prime minister's cautious thinking" about the Maastricht treaty on monetary and political union.
One of Pennant-Rea's senior colleagues at the Economist magazine said the new deputy governor would "combine a close identity of views with George" with "a much greater facility" in expressing those views beyond the world of banking. George is known in international banking circles as "steady Eddie," with a reputation for pragmatism and trenchant comment.