Clarke gives Bank a free hand in reporting inflation: Chancellor to end interference in analysis of price outlook but says a decision on independence remains far off

THE CHANCELLOR yesterday granted the Bank of England a free hand to analyse and report on inflation trends but suggested that giving the central bank control over interest rates remained far off.

Kenneth Clarke said there were obstacles to giving the Bank complete independence. In an interview published in Crossbow, the Bow Group journal, at the Conservative Party conference in Blackpool, he indicated that he was prepared to end Treasury interference with the Bank's quarterly report on the inflation outlook and to relax other Treasury controls.

Mr Clarke said he would take a firm decision on the independence question following 'some substantial experience as Chancellor' but had for now concealed his opinions on the question, partly to avoid exciting an academic debate. However, he added: 'Any idea that you have an independent central bank here would cause wild parliamentary controversy' with both parties fairly evenly divided about the desirability of greater independence.

'I am quite prepared to let everybody else see a truly independent report from the Bank of England, which will have an effect on sentiment. And I am looking at other ways in which needless constraints on the Bank can be relaxed, but I think Eddie George (the Governor of the Bank) and myself, who get on very well, will proceed on this in a very pragmatic way.'

Mr Clarke's statement goes beyond the formal mandate on the inflation report given to the Bank a year ago by Norman Lamont, the then Chancellor. At that time, Mr Lamont said merely that he had asked the Governor to 'provide a regular report on the progress being made towards the Government's inflation objective' of 1-4 per cent. The Treasury retained the right to vet the report.

Mr Clarke said: 'The purists are really saying that key decisions on interest rates, and indeed the whole of monetary policy, should be placed utterly beyond the reach of democratically elected politicians and I think that would not in practice be an easy thing to accept for this country.' He added that even the Bundesbank was not removed from the political process, with its members nominated by the German state governments.

He said: 'I think it is important that monetary policy is taken objectively, openly and is certainly not buffeted about by short-term political considerations to assist the party in power. Now that is a self-denying, hair-shirted declaration by any Chancellor of the Exchequer. But given the overriding priority of getting the country out of recession, it is one I am determined to stick to.'

The only problems between himself and the Governor, the Chancellor said, were likely to arise if their judgements of monetary conditions varied. That had not happened yet, 'not even remotely, and I don't foresee any immediate difficulty'.

He played down the possibility of following the New Zealand government in setting monetary and inflation targets to be executed at the discretion of the Bank. Mr Clarke said: 'There are countries that have gone down that way, and I think that is an outline of the New Zealand situation.

'When I say it is a problem of parliamentary accountability, what I mean is: what happens if the Bank are judged to have got it wrong when they executed the policy? If the Chancellor does that, he is directly accountable with his colleagues in Parliament.

'I wouldn't be very popular in Parliament if I went along and said, 'Look, I'm sorry but it is nothing to do with me: there's a chap called the Governor of the Bank of England who is solely responsible for this error. It is no good giving me your opinions about interest rates because there is nothing I can do about it'.

'I don't suppose the British parliamentary process would take that sort of position too easily. I think people would get fed up with me telling Parliament that the most important features of economic policy were practically beyond my control.'

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