Bank Reform Whips Up Debate In Uk

While Left-wing Labour MPs have attacked Mr Brown for taking a retrograde step and have said they will oppose any legislation that makes the Bank of England independent without democratic accountability, the former Chancellor of the Exchequer, Kenneth Clarke of the Conservative party, has bemoaned the death of a tried and tested strategy. Interestingly, Michael Howard, the man who wants to replace John Major as the leader of the Conservative Party, launched a political attack charging Labour with giving up powers that ought to rightfully belong to a democratically elected government to a non-representative body of technocrats. Another former Chancellor from Margaret Thatchers regime, Norman Lamont, has praised Mr Brown for a bold move. It is Labour which is now defending greater freedom from political interference for the monetary policy makers and bankers, so that political considerations do not impinge upon managerial decisions!

 

Britain remains behind Germany, the United States and France in the extent of autonomy it gives its central bank. The German Bundesbank, the US Federal Reserve and the Bank of France not only already enjoy the right to set interest rates, but they are also free to intervene in foreign exchange markets to influence the exchange rate of their national currency and set inflation or other monetary targets. Mr Brown has retained the right to set inflation targets and has said in his letter to the Governor of the Bank of England, which announced the Labour governments new plans for the reform of monetary and banking system, that the Bank will have operational responsibility for setting short-term interest rates to achieve an inflation target which the government will determine.

Inflation management remains a key political concern, and for an Indian observer used to hearing sighs of relief in New Delhi at inflation not being in double digits, it is amusing to encounter a debate on whether the rate should be 2.5 per cent or 3.0 per cent!

Analysts here are convinced that an inflation rate approaching 3 per cent is unacceptable. More liberal-minded economists like John Kenneth Galbraith have recently challenged this low inflation tolerance and believe it is not in the interests of growth and employment generation. Traditionally, the Labour Party would have gone along with that view, but European integration has imposed its own discipline.

Britain is among the last of the European Union members to be falling in line with the stringent requirements of the Maastricht Treaty. Mr Browns so-called revolutionary move is, however, still a far cry from the Maastricht obligations and Mr Brown has clarified that he is in no hurry to move all the way. Not surprisingly, the Maastricht obligations on central bank autonomy have been defined by the Germans who are proud of the total autonomy from political guidance given to the Bundesbank.

The story is narrated by European bankers about how the Bundesbank shows off about its headquarters not being located in Bonn but in Frankfurt. More to the point, they say, the windows of the Bundesbanks chief, currently the legendary Hans Tietmeyer, dont even face the direction of Bonn and, in fact, open in the opposite direction! RBIs governor, C Rangarajan, can also take delight in the fact that his windows also dont open to the north, and that they face the vast expanse of the Arabian Sea, reminding central bankers to think more about the world outside rather than the political bosses at home. Unfortunately, however, even when the RBI governor contemplates the waves, he still has Delhi on his mind, and not just because the governors term is now being extended annually.

The degree of freedom that central bankers are seeking from their political masters in the OECD countries is a far cry from the situation in India, where despite formal declarations of intent the finance ministry continues to run the RBI through remote control. One of governor Rangarajans concerns over the last few months, in the Deve Gowda administration may well have been the increasing interference in banking activity by politicians from New Delhi. Finance minister, P Chidambaram, did not, regrettably, protest too much when former prime minister, H D Deve Gowda, chose to address bankers to urge them to lend liberally to farmers, a practice which former finance minister, Manmohan Singh, never encouraged during his tenure at North Block.

The last word has not yet been said on what should be the relationship between a central bank and an elected government. The Maastricht agenda in Europe has essentially been driven by the Germans, who worry more about inflation than unemployment. As unemployment increases across Europe, finance ministers are bound to ask the question raised by Prof Galbraith, as to which is a lesser evil. This debate is not relevant at the moment in India where the central bank and the finance ministry should make ensuring a lower rate of inflation their primary concern.