Bank sees red at latest charges

It's been a difficult time for the Bank of England. Divisions have emerged again on its rate setting committee over the risks to the economy from inflation and there's been a nasty and very public spat over control of the monetary policy committee's research agenda.

To add insult to injury, one of Britain's most respected independent think-tanks, the National Institute for Economic and Social Research, claims that the economy would have done just as well if Threadneedle Street had left rates on hold for the last two and a half years, instead of moving them up and down 14 times.

But back in the summer, the bank was being f ted for its handling of the economy since being given control of interest rates by Gordon Brown in May 1997. In particular, it was praised for its easing of monetary policy in late 1998 and early 1999, which helped prevent a slowdown in the economy becoming full recession.

But policymakers tend to be more popular when they are cutting rates. June marked the low point for rates in this economic cycle. Since then, detecting signs that the economy was picking up faster than anticipated, the bank has raised rates twice, to stand at 5.5%, and seen some friends turn to critics.

However, the bank can live with the brickbats from industry, the complaints from hard-pressed exporters, the grumbles from consumers. It is the other charges - that the bank is deeply divided, that the four members of the MPC appointed by the chancellor are being denied sufficient back-up resources, and that the committee runs around like headless chickens responding to the latest data - that rankle.

The first charge is the weakest. It's true the committee has been divided about the prospects for the economy. One group, led by DeAnne Julius, believes that changes to the structure of the economy have raised the speed at which output can grow without sparking inflation. New technology is boosting productivity while fierce competition is keeping the lid on companies' ability to raise prices.

The "new paradigm" school believes that the bank can afford to give growth a chance but another group, led by the deputy governor Mervyn King, believes that the bank must heed the warning signs from the labour market, property prices and the overall resilience of the economy. The last minutes reveal that Ms Julius is in a minority of one at present, but the fact that she and Mr King have different views is a healthy sign.

The bank has been on far shakier ground over the allocation of resources to members. The catalyst appears to have been the arrival of former hedge fund economist Sushil Wadhwani in the summer to replace Sir Alan Budd.

Like three of his four fellow Treasury appointees, Mr Wadhwani has had to give up his day job. Once the independent members became full-timers it was natural that they would want to pursue their own agendas. Mr Wadhwani, for example, has a different view on the likely path of sterling over the medium term to the mainstream bank view, believing that it may stay stronger than the classic economic models would suggest.

The newcomers found dealing with the bank's hierachy frustrating when it came to getting access to Threadneedle Street's team of economists to investigate questions like this. When the independent members asked Mr King for their own research resources in August, the former chief economist turned them down. The dispute became public and the bank has now given way.

It was a damaging row which should have been solved before it became public and may indicate a weakness in management that reflects a clash between traditional culture and a more democratic one.

The bank is hopping mad at the National Institute article. Charles Goodhart, one of the MPC's members, told the commons treasury committee on Tuesday: "I thought the article was silly."

The bank says the National Institute's criticism that inflation would have hit the government's target and output would have been less variable if rates had been kept at 6% since May 1997 only makes sense with the benefit of hindsight.

It may well be that the article went too far to suggest rates could have stayed on hold, particularly in the light of the Asian crisis which few policymakers predicted.

But there is no doubt that compared to other leading central banks, Threadneedle Street is keen on fine tuning the economy. It is questionable whether the bank's 14 moves in interest rates since June 1997 have been more effective than the Federal Reserve's six over the same period.

Marian Bell, economist at the Royal Bank of Scotland, says that the MPC pushed rates too high in 1997 and early 1998, then cut them too far. It is possible, she says, that they may now be heading too high once more. However, as the International Monetary Fund pointed out earlier this week, unemployment is at a 19-year-low, inflation is weak and the public finances are strong. Whether by luck or good judgment in Threadneedle Street, the economy is doing quite nicely.