Tony Blair’s cabinet secretary warned him that his chancellor was “holding a gun to the . . . head” of the Bank of England’s governor with a “rushed announcement” of greater independence days after Labour’s election landslide in 1997, previously classified government papers have shown.
The memo by Robin Butler, released on Tuesday by the National Archives, warned the newly elected prime minister that the announcement by Gordon Brown might look “gimmicky or panicky” to financial markets. He also expressed concern that Eddie George, then BoE governor, might resign on being presented with the fait accompli.
The papers suggest a degree of panic in 10 Downing Street over Brown’s actions in handing the bank sole responsibility, in most circumstances, for setting UK interest rates. At the same time, the institution was stripped of its role in managing the country’s debt and of responsibility for bank supervision.
The change in banking regulation has since been a subject of particular controversy because of the perception that the Financial Services Authority, which inherited the bank’s oversight role, failed to spot and address promptly problems in UK lenders during the 2007-8 financial crisis.
Brown announced the decision to grant the bank independence over rate setting just five days after the general election that swept the Labour party to power for the first time in 18 years.
The documents express concern about the lack of consultation beforehand about the decision, including on the detailed future arrangements for the bank to set interest rates and the other changes to its role.
The bank had previously set interest rates in consultation with the chancellor of the exchequer.
Butler’s memo, written on May 4 1997, warned that Brown’s actions risked alienating George and that the chancellor was setting out unnecessary detail at too early a stage.
“Sending such a detailed letter to the bank with the deadline of an announcement 24 hours later looks like holding a gun to the governor’s head,” the civil servant wrote.
Although the independence decision had wide support among advisers, Derek Scott, an economics adviser to Blair, warned before the announcement that aspects of the plan were “insufficiently thought-out”.
Butler also warned that the announcement would look as if the change had been prepared before the election but not announced.
“This looks like lack of frankness,” Butler wrote. Other ministers might resent not having been consulted, he added.
“Do you want to start your government by being seen to take a decision of this magnitude without consulting cabinet?” he asked Blair.