John Redwood's Business Post Article
Posted by John Redwood, MP for Wokingham, at 16:07, Fri 23 February 2007:
It is a pleasure to write the occasional piece for a live newspaper. I am getting used these days to blogging for my constituents, with my new blog site johnredwoodsdiary.com offering the chance of daily comment. We live in a world of instant communication. Newspapers allow us to stand back and look at some of the bigger issues and trends.
It is widely accepted that Gordon Brown did one thing well. He made the Bank of England independent. They in their turn kept interest rates fairly low.
It is strange that the Prime Minister in waiting should think his best hour in government was right at the beginning, and should take the form of giving power away to someone else to do his job for him. It also shows some realism, given the disasters that have befallen pension funds since his tax increases, the huge complexity of the tax and benefits systems he has embroidered, the 5.3 million people of working age without a job and the million manufacturing jobs that have been lost on his watch.
Nothing is as it is spun. The truth about the so-called independent Bank of England is rather different.
What the Chancellor did was to give the power to set interest rates to the Monetary Policy Committee of the Bank, instead of rates being set by the Chancellor on the advice of the Governor. The Monetary Policy Committee was broadened, and the Chancellor himself appoints some of the key members. It was a change of degree of influence, rather than a revolution. In practise under the old system a Chancellor was unlikely to resist an interest rate rise if the Governor was sure the markets needed it. Under this system The Chancellor still has influence as the man who sets the targets and the man who appoints members to the Committee.
More importantly, the Chancellor himself changed the crucial inflation target before the last Election, making it easier for the Bank to hit. Instead of targeting the Retail Prices Index, he shifted to a target based on the Consumer Price Index, which has risen more slowly than the RPI in recent years. The Chancellor will tell you he did it to harmonise us with the EU. It was a happy coincidence that it pointed to keeping interest rates lower in the run up the election, even though he set a lower figure for the CPI than the RPI.
The other day I asked the Treasury how our interest rates have compared over the years of the Bank’s “independence” and the Euro’s existence. They would not tell me the answer. A little devilling on websites has revealed the truth. In the period 1999-2006 UK rates have averaged 4.7%, US rates 3.4%, Euroland rates 2.9% and Japanese rates 0%. In other words, we in the UK have had to pay much much more than our Japanese competitors to borrow our domestic currency, 60% more interest than Euroland borrowers and almost 40% more than US borrowers. Remember too that the US has grown more quickly than we have, and that we now have higher inflation than all the rest if measured by the RPI.
The Treasury’s line is that our interest rates have been low compared to the last three decades of the twentieth century. That is true and welcome. It is also true that rates in Japan, the USA and continental Europe have also been low in the last seven years compared to the period 1970-1999. It is difficult to attribute lower UK rates to the so-called independence of the Bank of England – we owe a debt to the benign international economic climate.
I am not proposing the end to Bank independence. Far from it. I would like it to be more independent, and would prefer us to keep the original inflation target. But we should be wary of accepting the spin that it has been wonderful. The UK is still paying a lot more for its borrowing than our main competitors, which is one more thing that makes it more difficult to do business in the UK.
*To read more of John Redwood's articles, speeches and press releases, please go to www.johnredwood.com. To read John's daily blog, please visit www.johnredwoodsdiary.com
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