Brown's Thinking Explained

In an emergency, the Chancellor would resume control, but otherwise rates will be managed by a new Monetary Policy Committee which will be responsible for keeping inflation on target. Labour's target is 2.5%, the same as that of the previous Conservative administration.

The Committee will have nine members: Eddie George; his deputy, Howard Davies; another deputy to be appointed; and six other members, picked by the Chancellor, four of them "recognised experts".

The Chancellor said Britain was one of the few major industrial nations in which a central bank did not control interest rates. But today's move was still a big surprise.

TRANSCRIPT of report by BBC Correspondent, Peter Morgan:

MORGAN: At its most crude, the argument in favour of an independent central bank can be summed up by the notion that politicians can't be trusted to set interest rates. Generations of British Chancellors have been tempted to keep the cost of borrowing low when it suited their political purpose, no matter what the consequence for inflation. The Governor of the Bank of England, Eddie George, has long subscribed to this theory and so is thrilled at today's news.
GEORGE: Well of course I'm delighted. I do think it will improve the credibility of monetary policy. I think that people will be persuaded that they're really serious about inflation now, the credibility will improve and that will be good for the economy.
MORGAN: Amongst the biggest and the best run of the world's economies, Germany and the United States, both have an independent central bank, although they work rather differently from the new British model. Germany's Bundesbank doesn't have an inflation target set by government and yet has, over the decades, delivered lower inflation and higher growth than anywhere else in Europe. America's Federal Reserve Board has a broader responsibility than simply the control of inflation. Its remit is to maximise long-term growth and employment whilst maintaining stable prices. In the event, Gordon Brown has followed the Central Bank formula of New Zealand, where Government sets inflation goals, and Bank fixes interest rates. Ruth Lea gave the Institute of Directors' endorsement of the the new Chancellor's approach.
LEA: I think this sort of halfway house is what we see in New Zealand. I think it's right that the Treasury still has some control over where it wants the inflation target to be. You don't want to denude the Chancellor of all his responsibilities, but I think the key thing about taking the day to day operations of interest rate policy is correct.
MORGAN: In the recent past, Conservative Chancellors have toyed with the idea of Central Bank independence, but the time never quite seemed right. Today Gordon Brown, for better or worse, has demonstrated a rare characteristic in political leaders - a willingness to delegate economic power away from Government.