George should follow US in warning of rate change

Eddie George, the governor of the Bank of England, should take a leaf out of his American counterpart Alan Greenspan's book and tip off the markets each month about the future direction of interest rates, MPs said yesterday.

In a report on the first two years of the monetary policy committee's work, the influential treasury committee backed Labour's decision to put Threadneedle Street in charge of setting interest rates. "Operational independence has made an excellent start in terms of transparency, credibility, adherence to the inflation target and avoiding recession," said Giles Radice, the committee's chairman.

The report was released as the Conservatives signalled that they were preparing to drop their hostility to the Bank's independence. Instead, they will set up a commission to examine the relationship between parliament, the Bank and the government.

The committee said it was too early to draw strong conclusions about the MPC's record but said it was clear that it had begun to affect inflation expectations "favourably".

To improve the system further, the MPs said the MPC should consider adopting the approach of the Federal Open Markets Committee which declares whether it is biased towards putting rates up or down in the future, after each monthly meeting.

However, shadow chancellor Francis Maude said the system Labour had set up had several significant flaws.

"The new monetary policy arrangements have not created a central bank that appears to be properly independent at all.

"It is a sort of halfway house, which provides neither full institutional independence nor proper democratic accountability."

His nine-member committee of economists and City experts will examine the relationship between the Bank, the government and MPs.

The Treasury committee gave the MPC credit for helping to avoid a recession this year.

"Witnesses told us that survey evidence of the type seen in the second half of 1998 had in the past always been a strong indicator of an economic recession.

"In the light of this, the actions of the MPC have helped to stave off recession."