Praise for Old Lady's control of inflation

The Bank of England's monetary policy committee used its 100th meeting yesterday to cut interest rates for the first time in two years.

The move, which took the Bank's repo rate down to 4.5% from 4.75%, had been widely expected in the City and almost no one disagreed with it. Indeed, the only debate was about the timing of the next rate cut.

In 1997 the new Labour government set up the nine-member MPC at the Bank of England, nicknamed the Old Lady of Threadneedle Street. Since then the MPC has gained enormous respect from economists, the business community and the public as Britain has enjoyed almost unprecedented growth and inflation stability.

The system, set up by Gordon Brown and his aide, Ed Balls, as soon as they arrived at the Treasury in May 1997, is credited by the City as having successfully steered the British economy through the Asian market crisis of 1998 and the global slowdown after 2000 that followed the dotcom bust in the United States.

The MPC has held an interest rate meeting each month since June 1997 and held an extra one a week after 9/11.

During that time it has raised rates as high as 7.5% and cut them to a 48-year low of 3.5% in the summer of 2003. Yesterday's cut from 4.75% marked the lowest interest rate peak in any cycle since 1952. Previous peaks under the MPC were 7.5% in 1998 and 6% in 2000.

On the MPC's watch, inflation has never strayed more than a percentage point from its Treasury-set target of 2.5% for the retail prices index excluding mortgage interest payments (RPIX) measure until 2003 and then 2% on the consumer price index (CPI). If it had, the Bank governor - first Eddie George and now Mervyn King - would have had to write an open letter to Mr Brown explaining why.

"The fact that the MPC has stayed within one point of the target in eight years is extraordinary. We never thought that would be achieved," said Sir Alan Budd, former chief economic adviser to the Treasury, who was present on the feverish first weekend of the new Labour government as plans for the MPC were put in place.

"In the past you often had a stable world and an unstable Britain. Now it is the other way round," he added.

Sir Alan served on the MPC in its first two years and thinks the system, with its clearly defined inflation target, is the world's best. The US system, by contrast, is too dependent on the personality of the Federal Reserve chairman and does not have a clear inflation target, he argues.

Jonathan Loynes, of Capital Economics, says inflation targeting helped reduce swings in the economy but did not stop bubbles in share and house prices in recent years.

"There is some concern the MPC has been too pessimistic about inflation and kept interest rates higher than they need to be," he said, noting that the current CPI inflation measure had only just risen to its 2% target after seven years below it.

The MPC has been fairly active in its eight years, changing rates 31 times in 100 meetings, with 14 rises and 17 cuts. It is twice as likely to move rates in one of the four months - February, May, August and November - when it prepares its quarterly inflation report, a document released to the public and which gives an in-depth look into its thinking.

Throughout its eight-year history, 21 people have served on the committee, almost half of them being academic economists and half members of the Bank of England. Mr King is the only one to attend all the meetings, first as chief economist, then deputy governor and now governor.

He has presented every inflation report since 1997 and been a key figure in establishing the system's credibility, although he stresses that the framework is more important than any individual member.

One former member, Willem Buiter, said the MPC had delivered a powerful combination of technocratic expertise, transparency and accountability. "I don't think the authors, when they cooked it up, knew just how good what they decided would turn out to be," he said.

"Still, there's one test to come. So far, the MPC has worked under the auspices of its father, Gordon Brown. It will be interesting to see what happens after a change in the incumbent or even in the governing party. You just don't know."