Race for top job hots up

Bank of England deputy governor Paul Tucker is current favourite

SIR Mervyn King will not step down until next summer, but speculation over his successor has been bubbling on for months. It’s a far cry from the discreet successions of a previous era.

Seldom has the appointment of a governor of the Bank of England been the object of so much speculation, and for so long before the actual event. Even now the incumbent, Sir Mervyn King, governor since the late “Steady Eddie” George stepped down in 2003, has seven months to run before his second term expires on June 30, 2013.

King’s gubernatorial stewardship has been divided into two distinct periods: a happy one and a not so happy one. After the early glory days, both as deputy governor and later in the hotter seat, King basked in the reflected acclaim for what was considered, for a time, to be one of Gordon Brown’s greatest historic contributions to the British polity: the granting of operational independence in monetary policy to the Bank of England – that is, the power to determine the official short-term rate of interest.

In its early days, the monetary policy committee, which the governor chairs, was widely considered a huge success, and it was King who coined the acronym “Nice” (standing for non-inflationary continuous expansion) and applied it to that pre-crisis “nice decade”.

However, King was always too much of a student of economic history to believe things could go on like that, and began to downplay expectations well before the onset of the 2007 financial crisis. Nevertheless, neither he nor the rest of the economic establishment was prepared for the magnitude of the crisis that was to hit them and the rest of us – a crisis during which the Bank can no longer boast about “achieving” the inflation target, because it has not done so for several years.

There have also been some little local difficulties with the Bank’s analysis and forecasts of recovery – or non-recovery. King has recognised that there are limits to the degree to which monetary policy can offset the impact of the fiscal squeeze and other unfortunate developments.

And in an innovation that some policymakers already regret, we are talking about “candidates”: for the first time, people who fancy the job, and presumably themselves, have had to apply formally for interview by a Treasury panel of officials, accompanied by the outgoing chairman of the Bank’s court. Thus the days when a prime minister such as Margaret Thatcher could meet a chairman of a bank a few times, take a shine to him, and appoint him governor have gone. This is what happened when Robin Leigh-Pemberton (now Lord Kingsdown) was appointed (1983-93) and seemingly strong contenders such as Sir Jeremy Morse and Sir Kit McMahon were bypassed because they had given offence to Thatcher over some trivial matter.

Some months ago, the Financial Times ran a story suggesting that the governor of the Bank of Canada, Mark Carney, was in the running for the job. This was vehemently denied all round. Carney’s present contract runs to 2015 and he is rumoured after that to want to go into Canadian politics. But this might have been a case of no smoke without fire, or at least without a brief flame. Osborne knows Carney on the international circuit; Carney is chairman of the Financial Stability Board, the G20’s key committee on reforming the financial sector; and, as Carney once proudly told me, Canada did not have a banking crisis.

It is perfectly possible to reconcile the denials with the theory that Osborne in some way sounded Carney out. But that is all water under the bridge now, and, unless some deus (or dea) ex machina appears, the appointment will almost certainly go to one of the British candidates.

Historical precedents

Incidentally, there are historical precedents for a desperate chancellor to look overseas: Sir Geoffrey Howe, chancellor from 1979 to 1983, wanted at one stage to appoint Sir Philip Haddon-Cave, head of the Hong Kong Monetary Authority.

And it is not the first time that a British chancellor has thought of a Canadian. Way back in 1943, the then chancellor, Kingsley Wood, sounded out Graham Towers, governor of the Bank of Canada, for the Bank of England job, but the approach came to nothing.

This would have been to succeed Montagu Norman, governor from 1920 to 1944, who was the bete noire of both the Labour party and Winston Churchill. Churchill always regretted bowing, as chancellor, to Norman’s campaign to return to the gold standard at an absurdly high exchange rate in 1925. He observed in 1931: “Everyone I meet seems vaguely alarmed that something terrible is going to happen… I hope we shall hang Montagu Norman if it does. I will certainly turn King’s evidence against him.”

And that redoubtable Labour figure SidneyWebb, later Lord Passfield, once said that the Attlee government had nationalised the Bank of England in 1946 in order to avoid a repeat of the debacle.

In theory, the nationalisation of the Bank in 1946 reduced its powers considerably; certainly interest rate decisions thenceforth became the prerogative of chancellors until 1997 and independence. But as the Bank of England historian John Fforde observes: “The Bank of England Act 1946 brought Norman’s creation under public ownership while doing little to change it.”

It is important to note that, despite its operational independence, the Bank remains nationalised and was the largest item on the Treasury’s balance sheet until the crisis of 200708 and the nationalisation of several high street banks.

The late Lord Croham, whose memorial service took place last week, once remarked to me that, despite the 1946 act, the Bank remained “totally independent” for decades. Things only opened up when, as Treasury permanent secretary in 1970, Croham (then Sir Douglas Allen) discovered that the Bank had no obligation under the 1946 act to let the Treasury see its books, and had been making the same payments to the Treasury as in pre-1946 days when “they should have paid more”.

Annoucement soon

At all events, the choice of the new governor will be announced soon. The hot favourite is deputy governor Paul Tucker, but odds-on favourites do not always win, even if the bookies stop taking bets on them. In this business there can be no each-way bets, but it is interesting that the former Treasury permanent secretary Lord Burns is also reported to have applied – and that Gordon Brown is not now in a position to veto him.

Of course if, having gone around the houses, the prime minister and chancellor do end up, with some reluctance, opting for Tucker, they could still put Burns in there to keep a Treasury eye on him. – The Observer