Britain's Central Bank Enjoys Shift Toward Greater Autonomy
THE Bank of England is celebrating its first three centuries in business by flexing its muscles.
Instead of being little more than the government's agent in carrying out financial policy, the bank - known affectionately in London's financial district as the ``Old Lady of Threadneedle Street'' - is growing in confidence and influence, and many expect the trend to continue.
Eddie George, governor of the bank, says he doesn't intend to try to make the bank autonomous, but commentators say he would like to have the freedom of maneuver of Germany's Bundesbank president. Unlike the Bundesbank and the United States Federal Reserve, Britain's central bank has long been required to accept policy lines of the Treasury - the government department responsible for economic and financial matters.
This has meant that if base interest rates were to be raised or lowered, the Treasury, in the person of the chancellor of the exchequer, would decide. The bank could argue privately, but ultimately its job was to obey and carry out the policy.
The system has been criticized, especially since the Bank of England was nationalized in 1945. Governments of differing political persuasions have been accused of manipulating interest rates for political purposes - lowering them before general elections and raising them again soon afterward. But starting in 1992, after Britain withdrew from the European Exchange Rate Mechanism, the government of Prime Minister John Major decided on a new, more flexible approach.
Norman Lamont, chancellor at that time, decided to publish detailed explanations whenever a change in interest rates was announced. He also authorized the bank to produce a quarterly report on inflation for the public.
The swing toward a more independent central bank accelerated last year, when Kenneth Clarke became chancellor, notes Philip Coggan, author of ``The Money Machine,'' about London's financial ``Square Mile.''
Mr. Clarke determined that, although the Treasury would decide the size of interest-rate changes, the bank would have discretion in determining their timing. Last April, Clarke announced that the minutes of his monthly meetings with the governor were to be published. At the time, Mr. George described this as ``a terrific idea.'' The first published minutes showed that he and George argued about interest-rate levels and had to compromise on the size of a rate cut.
Raising bank's profile
George now has taken to raising the bank's profile in proposing policy measures. On Aug. 3, he published an inflation report warning that unless interest rates were raised soon, the government's aim of achieving virtually inflation-free growth in the next four to five years might not be achieved. The recommendation appeared to conflict with government policy, which is to avoid slowing Britain's recovery.
Just how political the bank's comments were was underlined by the reaction of the opposition Labour Party. Nick Brown, a Labour economic spokesman, said British short-term interest rates were already higher than those in the US or Japan.
Mr. Lamont said after his resignation that he would have been happier dealing with an autonomous bank that could make decisions unaffected by politics.
The case for independence
Nigel Lawson, chancellor under Margaret Thatcher, wrote in his memoirs that there is a compelling intellectual case for letting the bank enjoy a significant degree of independence. Lamont and Lord Lawson both argue that the governor of an autonomous ``Old Lady'' could set interest-rate and money-supply levels in the light of inflation and growth targets set by the government.
Yet there are constraints on how far the bank can extend its authority. Last December, the all-party Treasury committee of the House of Commons spoke in favor of the bank's autonomy, but added that it would still have to be accountable to Parliament.
This is in line with advice from Stanley Fischer, the US economist soon to become deputy managing director of the International Monetary Fund. He has urged the British government to make autonomy for the bank dependent on parliamentary scrutiny, much as the Fed is subject to examination by US congressional committees.
Mr. Major, himself a former chancellor of the exchequer, says he does not favor autonomy.
Mr. Coggan holds that ``independence for the bank is clearly a political matter.'' He observes: ``It would take a major failure of economic policy - for example a long period of excessive inflation - before there was a real prospect of the bank getting the independence it would love to have.''