Brown Loosens Grip on Bank

Mr Brown described the move to give the Bank a degree of independence as the most radical reform in its 300-year history.

The decision has been criticised by a Labour MP on the House of Commons Treasury Select Committee, Diane Abbott. "Fashionable opinion" thought it was wonderful, she said - but was fashionable opinion had been wrong before and was wrong again.

The City was taken by surprise by Mr Brown's proposal.

"This is the time to take the tough decisions we need for the long-term interests and prosperity of the country," Mr Brown told a news conference in the Treasury. "I will not shrink from the tough decisions needed to deliver stability for long term growth."

"I have therefore decided to give the Bank of England operational responsibility for setting interest rates, with immediate effect," he said, after a meeting with the Governor of the Bank of England, Eddie George, which had been brought forward by a day.

Mr Brown said the Government had inherited a situation in which "in the absence of corrective action, inflation would overshoot the Government's target next year".

Clarke: Rates will rise further

The Chancellor said economic forecasts showed there was a threat to inflation from recent rapid growth of consumer spending, surging house prices, a recent rise in average earnings and the rate of growth of the money supply.

"Because inflation is the enemy of investment, we must ensure that it is under control, as it has not been so often in the recent past," he said.

The Shadow Chancellor, Kenneth Clarke, claimed the interest rate rise was a sign that Labour would follow a tight financial policy which could lead to job losses.

"I wouldn't have made this interest rate rise for a start because nothing economically has changed since I last decided not to," he told BBC Radio 5 Live.

He said Mr Brown had rushed to hand over responsibility for monetary policy to the governor of the Bank of England and his committees. "I think he has made a mistake," said Mr Clarke.

His predecessor, Norman Lamont, took a different view, however.

"I'm delighted Gordon Brown has decided to give the Bank full operational independence," he said. "This change is right and should have been made by Conservative governments.

"Gordon Brown deserves credit for this bold move."

Under Mr Brown's plans, a new Bank of England monetary policy committee will be established to set interest rates.

The Bank of England will stay in public ownership but enjoy considerable independence.

Although putting legislation on the statute book could take six months, Mr George has agreed to adopt the proposals immediately.

It means that the Bank will hold the responsibility for hitting the Government's inflation target - a target to be confirmed in each Budget statement but which at present stands at 2.5%, the same as under the Conservatives.

This move puts Britain in line with most of its G7 competitors. And with inflation targets now being set by an independent bank, politicians will no longer face the temptation of tinkering with inflationary policy for electoral gain.

Brown's Thinking Explained