BOE Rate Policy May Err Under Conservatives’ Plan, Gieve Says

By Jennifer Ryan

Feb. 3 (Bloomberg) -- Former Bank of England Deputy Governor John Gieve said the Conservative Party’s proposal to put the central bank in charge of financial regulation risks skewing its conduct of monetary policy.

“If, as I think is probable, the Conservatives win the election and they do make this change they need to give a lot of attention on how to mitigate these risks in putting everything into the BOE,” Gieve said in a speech late yesterday at Keele University in England. “You face a risk that your monetary policy becomes too attuned to the interests and concerns of the financial sector it’s regulating.”

Conservative leader David Cameron has pledged to shift supervision powers from the Financial Services Authority to the central bank if he beats Prime Minister Gordon Brown and wins the election which is due by June. That would concentrate oversight of the finance industry at the bank as it also keeps independence in monetary policy granted by Brown in 1997.

The point of keeping monetary policy and banking regulation separate was to ensure interest rates are “suitable for the whole economy,” said Gieve, a former senior Treasury official.

Gieve, who was the central bank’s top financial stability official until 2009, also acknowledged the dangers in the current system that kept apart competencies between the Treasury, the central bank and the FSA.

‘Through the Gaps’

“The risk is that if you go the other way and split these functions everyone attends to their own bit of the picture,” he said. In Britain, before the crisis struck in 2007, “things fell through the gaps. That’s been repaired in the last two years, but that’s a risk and if you stick with that system you’ll need to work very hard to mitigate that risk.”

His remarks came the same day that George Osborne, who speaks for the Conservatives on financial matters, pledged to give the central bank a greater role in government accounts by giving Governor Mervyn King an advisory role on fiscal policy.

Opinion polls published in the past few days put the Conservative lead at between 7 and 9 points, compared with levels as high as 17 points in December. The party needs a margin of 10 points to win a majority in the House of Commons, according to Anthony Wells, a pollster at YouGov Plc.

To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net