The decision by the British Chancellor of the Exchequer, Mr Gordon Brown, to give the Bank of England operational independence is commendable and has been watched with interest by Irish policy makers. It is a bold and audacious move by a chancellor in his first days in office; indeed it is the biggest shakeup in Britain's central bank since it was nationalised in 1946. The Bank of England has been one of the few such institutions remaining in Europe which has not gained more independence as part of the move towards a European Central Bank. The autonomy enjoyed by the Bundesbank is well known, while the independence of the French central bank has increased markedly as monetary union approaches.
But Mr Brown's move also has a wider significance. The chancellor has signalled that the sense of responsibility which Labour showed in economic matters in opposition will be maintained in government. The strong positive reaction from the markets represents a vote of confidence in Labour's management of the economy.
In handing over control of interest rate policy to the bank, the new Labour government has, of course, forfeited the right to manipulate monetary policy to its own political ends. This is no bad thing; the British economy is only now recovering from the "boom and bust" cycle of the 1980s when the then chancellor, Mr Nigel Lawson, maintained interest rates at a unrealistically low level for political purposes. Mr Brown talks about the need to lay the foundations long term growth and stability. Small wonder the markets are impressed.
For Ireland, the chancellor's initiative should bring welcome benefits. More stringent and less political control of interest rates should reduce the volatility of sterling and help Irish exporters. There is, clearly, much less risk of a dramatic and rapid sterling depreciation. The British move came as the Central Bank in this State demonstrated its independence by raising interest rates by half a percentage point. On the virtual eve of an election campaign, it was hardly the kind of decision that was welcomed by the Government; but it does, at the very least, show how interest rate policy has been removed from day to day political control. That said, it would be wrong to over state the political independence of the Central Bank; it formulates and implements interest rate and monetary policy but the overall shape of economic policy is dictated, as it must be, by the Government.
The Central Bank's independence has also been curtailed by the move towards monetary union, as policy is dictated by the Maastricht convergence criteria. The establishment of the European Central Bank (ECB) scheduled for January 1999 means, of course, that the tasks now conducted by the Central Bank of Ireland will be carried out in Frankfurt. The EU Council of Ministers will act as a democratic counterfoil to the new institution. But policymakers here need to stimulate a public debate on whether this alone will give the ECB the requisite level of democratic accountability.