Who Rules the BoE's King?

(MoneyWatch)  Was it deliberate or simply serendipitous that Bank of England governor Mervyn King inveighed against further fiscal stimulus just as PM Gordon Brown was extolling its virtues to Euro MPs (well, the few who turned up) in Strasbourg?
King is grown-up enough to know that timing matters as much as substance, especially with a rare contradiction of his boss.

The official line from Downing Street is that there is no rift between the governor and the PM.

HM Treasury is keeping its own counsel. Since King clearly had next month's Budget in his sights, the Treasury probably agrees with him and may even have given him the nod. It won't favour a political giveaway any more than he does.

There have been some howls of outrage, and some blog-blasts calling for King's head, but criticism from the Labour Party itself has been strangely muted.

This is not because Labour politicos like their leader being made to look a fool. It's because the 'independence' of the Bank of England is one of their most cherished myths and they don't want to spoil the illusion.

Only days after Labour took office in 1997, then-Chancellor Brown surprised the City by giving the Bank responsibility for setting interest rates.

Since then, he and everyone else has called it independence and it has been seen as one of Labour's great economic achievements.

Some say it is the only one. It was certainly a positive move and also a shrewd one, distancing the government from any subsequent surge in inflation.

But it's only independence in the same way that a learner-driver in a dual-control car has independence. The government can wrest back the controls at any time.

The Bank, through its Monetary Policy Committee (MPC), pursues an inflation target. But that target is set by politicians, and confirmed annually in the Budget Statement.

The Chancellor directly appoints the four non-Bank members on the nine-seat MPC. Three of the five Bank employee members are the governor and the two deputy governors -- and the Chancellor appoints them, too.

Doesn't sound quite so independent, does it? But the impression of the Bank's independence remains, and the government isn't going to wreck it by decapitating, or even publicly reprimanding, its governor.

(Photo: den99, CC2.0)