This report comes out strongly in favour of a central bank free to set monetary policy; pursuing only price stability without Treasury control. Taking independence measures enacted since 1993 to their logical conclusion, it argues for the following: (1) Price stability to be the sole statutory objective of the Bank, which formulates and announces a medium-term target for inflation and controls short-term interest rates to achieve it. (2) The Bank has full control of interest rates. Given interest rates, foreign exchange markets then determine the exchange rate. (3) Increased democratic accountability through clear criteria to judge policy and through reporting mechanisms. (4) Ministerial power to override the Bank’s objective, subject to Parliamentary approval. (5) To safeguard monetary policy independence, the Bank ceases to be banker to the government. Written at a time when withdrawal from the ERM had left the UK without a credible monetary policy anchor, the panel’s recommendations offered a timely solution. Subsequent events – from the decision in early 1994 to publish the minutes of the meetings of the Chancellor and Governor to the announcement by the new Labour government of a framework for the Bank’s independence – have both benefited from and justified their deliberations. This report offers a concise and pertinent analysis of the issues surrounding central bank independence, with strong implications for the current proposed legislation.
