Changing of the Guard
Sir Edward George, who retires as Governor of the Bank of England at the end of June, long ago earned the sobriquet "Steady Eddie." Over his 10-year tenure as Britain's chief central banker, he deftly weathered more than his share of financial turbulence -- from the Asian and Russian crises to the economic fallout from September 11, to the big chill that has gripped global equity markets for most of the past three years.
But as George prepares for retirement, the financial markets are showing no signs of distress. That's because his successor, Deputy Governor Mervyn A. King, is widely viewed as the brains behind the bank's solid track record since 1997. The Bank of England gained the authority that year to set interest rates independent of the Treasury. "In my view it has been the best performer in the G-7," says Francesco Giavazzi, professor of economics at Bocconi University in Milan. Giavazzi adds that "if King had been at the helm of the European Central Bank, we would have a very different monetary union now."
Be that as it may, there is no doubt the Bank of England has been instrumental in taming what had been a bucking beast of a British economy. Growth has settled into the 2% to 3% range that many experts consider the country's sweet spot. The healthy economy has whittled away at unemployment, which now stands at 5.1%, among the lowest in Europe. Inflation has hugged the bank's 2.5% per annum target. Most important, investors no longer demand a fat premium to buy British debt. In April, 1997, yields on British government 10-year bonds were almost 2% higher than Germany's; now there is little difference between them.
Britain's bright economic picture stands in sharp contrast to the dark days of the 1970s and 1980s. Rates surged to 15% as recently as the late 1980s to cool inflation. Britain has shifted from "being vastly more unstable than the rest of the G-7 to being more stable," says Ben Broadbent, an economist at Goldman, Sachs & Co. in London. King is given much credit for that shift. He arrived at the bank in 1991 from the London School of Economics to serve as chief economist in the midst of Britain's disastrous experience with first joining, and then abandoning, the exchange rate mechanism, the precursor to the euro. Although other central bankers suspect that experience made King wary of Britain's adopting the euro, they praise him for the bank's high-quality forecasts, which he presents at a quarterly press conference.
King, who declined to comment for this article, is viewed as both a formidable scholar and independent thinker. Before his appointment as Governor was secured, he took a big risk in mid-2002 by being the only member of the rate-setting Monetary Policy Committee (MPC) to argue for a rate increase. As that move confirmed, King is hawkish on inflation -- to a fault, some critics think.
But together with George, he has helped create the innovative structure that most experts agree has contributed to the Bank of England's successes. Although known as the Old Lady of Threadneedle Street, the BOE is anything but cloistered these days. It publishes detailed notes on the discussions of the MPC. It also posts members' votes on rate moves for all to see. The BOE enjoys a reputation for being even more open than the Federal Reserve Board, its U.S. counterpart.
The bank's most eye-opening innovation has been the inclusion of four independent members on the nine-person MPC. The idea is to provide real-world voices to balance the views of the five BOE executives and economists on the committee, who tend to be more hawkish than outsiders on inflation. "Monetary policy can be taken over by technocrats, and that is not right," says Richard Portes, a professor at London Business School.
Chancellor of the Exchequer Gordon Brown chooses the independent members, and some critics worry he rewards friends. But for an economic policy buff outside the government, getting a seat at the interest rate table is pretty close to going to finance heaven. "It is both technically fascinating and important," says Stephen J. Nickell, a professor at the London School of Economics, who recently signed up for a second three-year term on the MPC. Nickell says he particularly enjoys the powwows that the bank arranges around Britain to give its policymakers a chance to see the world outside of their mausoleum-like headquarters in the City of London. "We talk to all sorts of people in all sorts of places about economic policy and everything that concerns them," says Nickell.
Committee members as well as bank watchers are waiting for King's first MPC meeting on July 9 to see if he departs from George's style. Not as dominating a figure as Fed Chairman Alan Greenspan, the retiring governor almost always asked the other members to give their votes first on rate moves, then cast his ballot last. "There is not a follow-the-leader approach at the MPC," says DeAnne Julius, a former British Airways PLC economist who served on the MPC from 1997-2001.
That could change. Unlike George, who always ended up with the majority, King has sometimes been a lonely voice warning about the risks of higher inflation. Some analysts fear that now that King is in the governor's chair, the brainy economist may use his mastery of economic research and argument to steamroll the rest of the MPC. Julius thinks such concerns are overblown. "He is fully supportive of the open and challenging debate that takes place in the committee room," she says.
Outside Britain, the 55-year-old native of Wolverhampton, in the Midlands, is well respected. He is a regular participant at the prestigious annual central bankers' conference sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole, Wyo. There, he has been tapped frequently for the challenging role of summing up the proceedings. "He's a first-rate economist and a first-rate -- and experienced -- central banker," says former Fed Governor Laurence H. Meyer.
King also gets respect at the European Central Bank, even if he twits his Continental colleagues in private. "Eddie George told us that Mervyn thinks we should have cut rates further and faster and earlier and that he thinks the Bank of England has managed monetary policy better than we have," says one European central banker. "We obviously disagree."
Whether King wins the plaudits that George is now receiving will greatly depend on how the British economy performs on his watch. The crystal ball has become increasingly cloudy. Consumer spending, which has sustained growth, is slowing; the outlook for world recovery is uncertain; and sterling is falling against the euro but rising against the dollar. After cutting rates by a quarter point in February, to 3.75%, the MPC was split in May and June, with nearly all outside members arguing for a quarter-point cut, while King and the rest of the bank staff voted to hold.
The MPC is still torn between worry that growth, now about 2%, could stall and fear that further rate cuts would fan more borrowing by highly indebted consumers. Unless he sees a sharp slowdown, King is likely to set his face against a cut -- a sort of Steady Merv, you might say.
By Stanley Reed in London, with David Fairlamb in Frankfurt and Rich Miller in Washington