The Chancellor, Gordon Brown, has given the Bank of England independence from political control.
His surprise announcement – coming only four days after Labour’s landslide election win – is being described as the most radical shake-up in the bank’s 300-year history.
Mr Brown has also announced a loan rate rise of a quarter-point to 6.25%. The increase was decided after Mr Brown’s first and last meeting with the Governor of the Bank of England, Eddie George.
The chancellor went straight from that meeting to a news conference at which he unveiled his plans to give the bank freedom to control monetary policy.
He said: “I want to set in place a longterm framework for economic prosperity… I want to break from the boom bust economics of previous years.”
Labour MPs have applauded the chancellor’s announcement – but the Conservatives were divided, with former chancellor Norman Lamont congratulating Mr Brown while former home secretary Michael Howard deplored it.
Business chiefs have broadly welcomed Labour’s decision to give the bank its independence.
Under the new regime, a monetary policy committee will be set up to decide interest rates with a view to achieving an initial inflation target of 2.5% or less.
The committee will be made up of the Governor, his deputy, a new second deputy, two bank executive directors and four experts, appointed from outside the bank
It will meet monthly and each member will be entitled to one vote.
In the past, the chancellor held a monthly meeting with the governor at which interest rates were agreed.
It means the bank will now be free to decide monetary policy without taking the short-term wishes of politicians into account.
It is understood Mr Brown and his economic adviser, Ed Balls, put the final touches to their plans to give the bank independence over interest rates in a London hotel only 36 hours before the party’s election victory.
Within hours of celebrating the party’s win, Mr Brown was at the Treasury. Officials had to work through the bank holiday weekend to get the paperwork ready for the most sweeping reform in the bank’s history.
The regular monthly meeting between the Chancellor and the Mr George was brought forward by one day but details of the final announcement were kept secret until the news conference.
Courtesy BBC News
In context
The decision to give the Bank of England its independence was seen as a decisive move, the swiftness of which took many by surprise.
Arguments that it was a first step towards achieving European Monetary Union were quickly rejected on the basis further legislation would be needed before the bank achieved the total independence required by the Maastricht Treaty.
Mr Brown quickly developed a reputation as an iron chancellor and “prudence” became his watchword. He said he wanted to put an end to Labour’s reputation for boom and bust economics.
On 15 June 2004 he became the longest-serving modern day chancellor, beating the previous record set by David Lloyd George of seven years and 43 days between 1908 and 1915.
In the nineteenth century, William Gladstone was Chancellor for a total of 12 years and four months between 1852 and 1882.
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