The Bank must become more representative

Let's assume that Eddie George will win his battle with the Chancellor, and that at the next monetary meeting he will get his way over base rates. The odds are probably better than evens, given the pressure markets are now putting on the Government. This may be a delayed-action victory for the Bank but it will be a victory none the less and will confirm that greater transparency in setting interest rates has genuinely shifted the guardianship of monetary policy further towards the Bank.

Whether or not you think this an advance, most would agree that if the Bank is to continue having a greater say in policy, it must also become more accountable and representative. Mr George is advised by a handful of Bank executives including Mervyn King, the Bank's increasingly influential economics director. It plainly would not be acceptable for such a small clique of London-based mandarins to determine the direction of interest rate policy as well as the timing of interest rate changes.

Reforming the Bank in a way that would make it more accountable is a far from easy thing, however. A report 18 months ago by the Centre for Economic Policy Research suggested an independent Bank should report to Parliament through the Treasury and Civil Service Select Committee. That might just make sense if the committee were given the clout of the Public Accounts Committee, which would mean giving it a secretariat comparable with the Comptroller and Auditor-General's office. In more than a quarter of a century of public hearings, however, select committees have failed to impress even their most enthusiastic constitutional supporters. The Treasury committee is not famed for its insights.

Another option would be to broaden the basis of decision making inside the bank. The German Bundesbank and the US Federal Reserve are run by powerful individuals, but there is a restraining influence on them from council or board members who have their own, mainly regional, power bases, in federal political systems. Neither model translates easily to the UK, with its centralised administration.

The nearest to a solution offered so far would be to give the Governor, whose present court of directors is barred from involvement in setting interest rates, a smaller board, appointed after consultations with as wide a body of opinion as possible. That board would take the decisions with him. Even that, however, might not be acceptable in a country with as complex and secretive system of patronage as ours.

Labour appears no nearer a solution than the Tories. Gordon Brown, the shadow Chancellor, is expected to confirm next week that he has no more intention than Kenneth Clarke of giving the Bank independence. He will talk of increased openness, stamping out political manipulation and the like but he will stop well short of a commitment to independence.

As things stand, the Treasury retains ultimate control, despite the cheerily misleading way Michael Heseltine in a radio interview yesterday equated openness with independence. But the more the Bank distances itself from the Chancellor and the Prime Minister the more urgent the need to introduce new checks and balances. Like the exchange rate mechanism, the present system of transparency with an uncertain degree of power sharing is deeply unstable. If they continue to disagree, at some point quite soon one side or the other will be obliged to take full control again or the markets will wreak havoc.

One reform the Government could however make more easily, as Mr George moves to the centre of the economic stage, is to relieve him of the need to worry about banking supervision, the area of the bank that keeps undermining the credibility of the rest. That should be split into a separate agency.