King may alter course of rates policy

The operation of monetary policy in the UK is about to undergo a profound change when Mervyn King takes over as Governor, economists believe.

The initial reaction to the announcement focused on Mr King's reputation as a hawk on inflation and a sceptic about membership of the euro.

But seasoned observers and former Bank of England employees believe the shift will be more closely linked to issues such as leadership style and the Bank's reputation in the markets.

"This hawkish and euro stuff is wholly overdone," said Danny Gabay, an ex-Bank economist now at JP Morgan. "I think it will be a slower and more subtle process."

A key difference between Mr King and his current boss, Sir Edward George, is that the Governor has never been on the losing side when the nine members of the Monetary Policy Committee vote on interest rates.

In contrast Mr King has been in a minority for 12 of the 67 votes that have taken place since the MPC was set up in 1997. Mr King became deputy governor in 1998.

Sir Alan Budd, a former MPC member and now Provost of Queen's College, Oxford said this was probably more important an issue than views on monetary policy and the euro.

"I think perhaps the most interesting question is whether Mervyn King would be prepared to be recorded as a minority voter," he said. "He was certainly prepared to be a minority voter as deputy governor."

This could have implications for the Bank's credibility in the financial markets if the Governor was not seen as backing the interest rate decision.

Sir Edward insisted it would not be a resigning issue if it happened to him and one observer pointed out that the Governor fruitlessly argued with then Chancellor, Kenneth Clarke, to cut rates in the run up to the 1997 general election.

An alternative scenario would be that Mr King would decide to vote with the majority at a time when observers would have expected to vote against it.

Mr Gabay said Mr King was likely to slowly engineer changes, particularly over economic forecasting. "The forward looking nature of monetary policy has been denigrated in recent times but this will return to the fore."

He cited recent examples when the quarterly inflation report – the document Mr King used to establish the Bank's global reputation – indicated rates should rise but the MPC voted to keep them on hold.

"I don't see MPC members in future voting for a rate cut when the inflation rate is shown as hitting 3 per cent," he said.

Another former Bank insider pointed out that Mr King would be the first Governor with a grounding in academic economics, at least in the post-war era. "I'm not saying this is good or bad, and Sir Edward is a very good economist, but Mervyn will always be looking for an economic explanation," he said.

"If one is presented with a crisis I think an economist tends to ask how it relates to general economic phenomena while a markets person to ask what is special about this."

For many economists the important thing will be who will take over Mr King's role as deputy governor with responsibility for monetary policy.

Charlie Bean, the Bank's chief economist, is seen as a front-runner but John Campbell, a British economist currently at Harvard has also been named. On top of that the terms of two of the four non-Bank employee members – Christopher Allsopp and Stephen Nickell – expire on 31 May.