George denies being fixated on inflation

PAUL WALLACE

Economics Editor

Eddie George, Governor of the Bank of England, has defended himself against charges that he is fixated on controlling inflation and mounted a vigorous defence of the Bank's supervisory powers.

In a lecture at the London School of Economics, Mr George also delivered what many will see as an implicit rebuke to the Chancellor, Kenneth Clarke, for last week's unexpected cut in interest rates.

"Time and again we have seen attempts to stimulate the economy directly result in a relatively short period of faster economic growth, followed by recession brought on by the policy restraint which was eventually unavoidable to bring increasing economic imbalance and accelerating inflation back under control," he said.

The absence of any open endorsement of the cut in base rate to 6.25 per cent led many City analysts to conclude that the Bank would have preferred delay after the inital quarter point reduction in December.

However, Mr George said the new monetary framework under which the Bank's advice to the Chancellor is published six weeks after each monthly meeting was proving a success.

"What matters in the end is the results, in terms of our performance - on inflation, but also on growth and employment.

"All I would say to you is we have made steady progress in all these respects over the past three years, and the prospects remain very encouraging."

The Governor's emphasis on growth and employment formed part of a broader defence of the Bank's mission of price stability. MPs on the Treasury Committee recently criticised Mr George for his unwillingness to concede that he made a misjudgement last May, when the Chancellor overruled his request for a further rise in interest rates.

The Governor insisted that the Bank's mission of price stability was not a goal in itself, but "because we see it as a means to the end of precisely those good things in life which our critics assume we disregard".

Mr George defended the Bank's role in supervising banks. He argued the two objectives of monetary and financial stability went hand in hand: disturbances in the financial sector could disrupt the pursuit of monetary stability and vice-versa.

The blurring of financial institutions had created new regulatory challenges but the touted solution of a single financial services regulator seriously underestimated the complexity of the issues.

"Any central bank must monitor developments in the banking system very closely and that will necessarily involve monitoring individual banks."