It shouldn’t happen to a governor. On 23 November the seasoned head of the Bank of England, Eddie George, found himself carpeted by MPs half his age as he was asked to explain a bank row over research expertise. The experience could barely have been the highlight of his year. But it was a necessary one – and a stark reminder of how far the bank still has to go towards achieving permanent status as guarantor of UK monetary policy.
The post-independence bank has discovered that its new powers to set interest rates – and thus directly affect the life of every saver, householder, business-owner and employee in the land – have made it fair game for gossips and journalists alike.
Its challenges are now many and formidable. It has acquired an unsolicited role as a linchpin of the Labour government’s hard-won reputation for economic management. It is also central to the euro debate, with pro-euro campaigners looking eagerly for signs that the UK’s impressive stand-alone central bank is showing rust; while the passionately anti-euro Sir Teddy Taylor MP enthuses that, on this issue, the bank has done “terribly well” since its independence.
The bank may, just may, be an emblem of a new Britain that has thrown off the pettinesses of the past. Or else – and this is the real potential cost of the Monetary Policy Committee (MPC) war of 1999 – it could be that the bank has, extra powers apart, changed alarmingly little.
The MPC is the body that decides on interest rates. The row – between the five bank insiders and the four external members of the committee – was sparked by a seemingly trivial spat over the right to direct bank economic research. The four externals had quickly discovered that they had no executive authority within the bank’s pivotal monetary analysis division, which is where most of the whizz-kid economists are based. The economists reported to Mervyn King, the deputy governor who, it was grumbled, monopolised them – and thus deprived the four externals of essential egghead brainpower. The externals, all distinguished academics, had to carry out their own research, even their own basic computer analysis – time- consuming grunt chores not suffered since graduate school.
As the months passed, tension grew. Tempers were lost as highly talented but titularly junior monetary analysis staffers found themselves called on by MPC members to enact research. Too often, the complaint ran, the proposed analysis would take ages to travel “through all the layers” of the bank; and, even when the work was done, the externals frequently received the results too late to apply them to current decisions. Meanwhile, King (“one of the most driven men I’ve ever met”, according to one close colleague) and other bank insiders had begun to tire of what they saw as the outsiders’ persistent attempts to subvert the bank’s management of its own organisation and, critically, career staff.
The story was leaked to newspapers in late October, and then reached the House of Commons. It was difficult to cling to the image of the bank as an integral part of new Britain during the (now very public) dispute. Instead, it was C P Snow that came to mind as MPC members waited for Treasury committee MPs like senior common-room stalwarts awaiting an awkward college meeting. They discussed opera. The governor savoured a final cigarette.
Rancour persisted, though, beneath this civilised veneer. The row was “personal, very personal”, said one close to the bruised parties. A measure of the bruises showed up in the Commons evidence. The language used – of “two sides” and of a happiness to “approve an agreement” – was more reminiscent of a 1970s shop floor than new Britain’s previously dignified central bank. The matter was booted with great relief for many concerned to court members, who suddenly found themselves mediating in a ferocious organisational dispute between some of the British economy’s most senior experts. It had become, grotesquely, more like a catfight over the use of a photocopying machine than the intellectual interplay that might have been expected within one of the UK’s highest councils.
How very different this undignified public row is from the past. Throughout its history the bank had deployed a certain innocent dowdiness to deflect attention from its often colossal influence. But in 1997, when Gordon Brown gave the bank full powers over interest rates, he forced it into a far more awkwardly defined and spotlit position. The wisest course for MPC members was to remain anonymous and impartial. The trap was to accept notoriety and public responsibility for policy.
When, following a few gruff parliamentary noises, Eddie George was asked to present the bank’s solution to the mess, he outlined how henceforth each of his MPC members would have two dedicated research staff.
George spoke soothingly of an “evolving” process of outstanding managerial and technical excellence. King managed to get repeat mileage from a drunken sailor analogy he had publicly used two weeks previously. There was nothing to worry about. Truly.
Yet, to the externals, the solution seemed meagre alongside the academic armies that would remain under centralised control. Given the volume of research prompted by the new debate over whether the UK’s inflation climate has undergone a fundamental step-change in recent years, many feel the outsiders will still have inadequate resources to get the work done.
Even darker fears persist over the staff dedicated to the externals. Just who will they get? Concern by the highest-flying bank career staff for their futures implies there may be no rush to work on the proposed dedicated teams; indeed, no guarantee has been given that the externals will be assisted by existing bank employees at all.
Finally, signatures, as Tim Congdon, a former Treasury panellist, says, will still be required to present a “fiction” of united forecasts every three months on the inflation report – a final act of agreement with the bank’s view of the economy.
The bank will have to move swiftly if it is truly to grasp the historic opportunity that fate dealt it in 1997. There are some serious challenges ahead. There remains, as Martyn Wylie of the Northamptonshire Chamber of Commerce says, a perception of a committee over-focused on the London, rather than the UK-wide, picture. Others echo Brian Henry, of the London Business School, in saying that the bank has negligently failed to press for academic funding to train the very macroeconomic experts over whose time the row has been fought.
Most critically, there is that all-important role the bank plays within any debate on joining the single currency. Not only will its view be respected in any referendum campaign; its very prestige is vital to sterling’s chances of survival. As Jonathan Loynes, an HSBC economist argues, each bit of damage done to the bank’s public standing “provides ammunition” for the pro-euro campaigners.
If the euro were introduced, the bank would face instant extinction within the European Central Bank – and a historical epitaph of a brief and very eccentrically British period of actual power.
As for those internal disputes, it is perfectly natural for hyper-clever people to have strong views and occasional rows. But the sad implication of this particular tragi-comedy is that the bank still has some way to go to being the new UK’s reinvention of the Bundesbank.
If, as many Labour enthusiasts and so many of its senior staff privately desire, it is to be the shining beacon of national independence that will delay, possibly indefinitely, the UK’s entry to the single currency, then – for all concerned – there is still much work to be done.