Blair says George must stay

The Prime Minister, Tony Blair, has intervened to end speculation that Eddie George will be replaced as Bank of England Governor. He has insisted that Mr George is reappointed when his term expires next June.

Treasury insiders say the Prime Minister has accepted City and business advice that Mr George's continued role as Governor is an essential prerequisite for financial stability and economic policy credibility.

The decision by Mr Blair to take such an active interest in the appointment is being interpreted in some quarters as a sign of growing tension between Numbers 10 and 11 Downing Street.

Mr Blair's intervention put an end to the private campaign to insert Gavyn Davies, economist at Goldman Sachs, as Governor. Last week, Mr Davies' removal from the running was confirmed when David Clementi, chief executive of Dresdner Kleinwort Benson, and Mervyn King, the Bank of England's chief economist, were appointed as deputy governors.

The campaign to secure a Governor who is perceived to be more Treasury- friendly has not fizzled out altogether.

There is mounting speculation that Mr George will be reappointed for two years rather than the full five. The prospect of appointment to Governor in the year 2000 is thought to be sufficiently tantalising to retain the interest of potential candidates. While Mr Davies was thought to be Chancellor Gordon Brown's preferred candidate, Howard Davies, who has just left the Bank as Deputy Governor to run the Securities and Investments Board, and Martin Taylor, Barclays Bank chief executive, have also been touted as potential replacements for Mr George.

A two-year appointment would be illegal under current legislation. The law dictates that the Governor must be appointed by the Queen on the Prime Minister's recommendation for a five-year term. A two-year appointment could only be secured by a side deal involving a promise from the Governor that he would retire less than half way through his second term.

The Governor was not available yesterday to comment on whether he had made such a deal.

Before the general election Mr George, who will be 60 next year, hinted that he may not want to serve a second full term. Recently, however, he has made it clear he is determined to serve a full five years.

Ironically it is the freedom granted to the Bank by the Chancellor to take responsibility for the fight against inflation through its independence to set interest rates that has stiffened Mr George's resolve to stay on.

He has long harboured an ambition to deliver low inflation and sustainable growth to the nation. When the Bank was granted operational independence by Mr Brown as one of the first moves by the new government, Mr George saw it as an unmissable opportunity to fulfil what he regards as the Bank's reponsibility.

Confirmation that Mr George is to be reappointed as Governor will bring relief to the City and financial markets, which had become uneasy at the whispering campaign apparently designed to undermine his position.

The Governor has received public and private backing from the international banking community. It is this pressure that has forced Mr Blair to intervene.

Mr George's influence as Governor is regarded as key to the success of the Government's ambition to keep inflation under control. His presence on the international stage was also demanded in the run-up to the introduction of a single European currency, scheduled for 1999.

It is still unclear whether Monetary Union will go ahead on time and when, or if, Britain might join. The Bank will have a pivotal role to play. Mr George's continued presence as Governor is regarded as critical whether Britain is in or out of EMU.