Bank of England's New Head Joins Bid for Independence
THE case for extending women's liberation to the Old Lady of Threadneedle Street - otherwise known as the Bank of England - is strengthening, according to officials close to Eddie George, its incoming governor.
But Prime Minister John Major appears to be set against cutting the bank's links with government, despite arguments advanced by Norman Lamont, his ousted chancellor of the exchequer.
Mr. Lamont's call for an independent Bank of England was a key feature of his bitter resignation speech June 9 in which he accused Mr. Major of manipulating central bank interest rates for political advantage. Lamont told the House of Commons: "Britain is one of the few countries where monetary policy remains firmly in political hands, and the pressure on politicians to take policy decisions for political reasons can be quite irresistible." He added: "With an independent bank, policy would be more credib le, and it would give us the necessary discipline for keeping inflation down on a permanent basis."
Mr. George, who takes over as governor from Robin Leigh-Pemberton in July, immediately authorized the issuing of a statement which said that there were "clear advantages" in making the central bank responsible for achieving price stability, "if only because this may enhance the credibility of policy." This brought George into conflict with Major who said that although a case could be made for independence, politicians should still be able to call to account "those who make decisions about monetary policy ."
Lamont's charge of interest-rate manipulation apparently refers to last January when, in the midst of depressing economic indicators, Major ordered a rate cut while touring India. Analysts in London's financial district said it was a panic reaction.
The pro-independence lobby won strong support June 14 from the Bank of International Settlements (BIS), the so-called "bankers' bank" in Basle, Switzerland. In its annual report it called for all European central banks to be independent of government. The BIS said that during last year's currency turbulence, which forced Britain to devalue the pound, short-term political interference in setting interest rates had undermined the credibility of many currencies.
Behind the scenes, Treasury officials, whose views about the economy strongly influence Bank of England policies, attacked Lamont for putting independence back on the agenda for debate. They drew support from senior analysts in London's financial district. Neil McKinnon, chief economist at Citibank, said those who advocated independence for the Bank of England were "searching for a holy grail." What mattered, he said, was "whether we have the right economic policies."
Germany's Bundesbank is often cited as a model by those who advocate sturdy independence for central banks. In battling inflation, it has resisted pressure from Bonn to boost a flagging economy by cutting interest rates. The Bundesbank also has been criticized by opposition Social Democrat politicians for allegedly failing to take full account of the pressures on the German economy caused by reunification. Yet its independence from government is rarely questioned by politicians and economists in the fede ral republic.
A Bank of England official says there is a "clear trend, worldwide" toward central bank independence. Four years ago, the New Zealand Reserve Bank was made independent and assigned the target of getting inflation down to 2 percent by 1993. Its governor was told he would lose his job if the target was not reached. It was, and now Bank of England officials cite the New Zealand experience as a model of what should happen in Britain.
The Bank of France will be the newest recruit to the ranks of independence. Legislation is before the National Assembly. Under the Maastricht Treaty, countries committed to European economic and monetary union are required to have an independent central bank in place before the creation of a European central bank.
British officials concede that Major's reluctance to accept the case advanced by Lamont is in line with Britain's lukewarm attitude toward the treaty. They point out that Britain has negotiated its own opt-out from early acceptance of monetary union. Bank of England sources note that if the government sticks to its view that the Old Lady should never be given its freedom, Britain may never qualify as a member of a fully integrated European Community.