Spotlight Is Falling on Bank of England Loan Rate Setters

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ASK any City expert worth their salt what Gordon Brown's greatest achievement in office has been - and his worst failures - and they will probably give you the same answers.

His biggest coup, they will say, was giving the Bank of England independence to set interest rates. One of the worst features of his record is his tendency to favour the public sector at the expense of the real world of industry and finance.

That came to the fore this week as the Chancellor replaced deputy governor Sir Andrew Large with Sir John Gieve, top civil servant at the Home Office.

To some it may seem a pretty innocuous decision. But the City is concerned that the Chancellor may be undermining the very independence which has ensured the Bank's success since 1997.

Ruth Lea, director of the Centre for Policy Studies, said: 'There is a genuine suspicion that Gieve is Gordon Brown's man, and that he's been put in there because Gordon wants cuts in interest rates. That's what people in the City are saying.' Large earned a reputation as the most vocal hawk on the Monetary Policy Committee, voting to raise borrowing costs in 12 of his 36 meetings and only once backing a cut.

After his surprise resignation on Monday, sterling dropped by more than three quarters of a penny as markets realised one impediment to lower rates had been removed.

Another related - and no less important - question is why Brown opted to replace Large, a City grandee and former deputy chairman of Barclays, with a career civil servant.

While Gieve has an excellent reputation and has served many years in the Treasury, he is not a trained economist and has no City experience.

Large's role was to monitor financial stability and some believe Gieve may struggle to fill his shoes.

The Refco affair in the US has raised fears of a collapse in the hedge fund sector, one of the biggest threats to financial stability.

Large was one of the few senior members of the Bank who genuinely understood this complex sector. Whatever his experience, it seems unlikely Gieve can emulate Large in that role.

'I would have expected them to go out and get someone who has been a practitioner,' said Douglas McWilliams, chief executive of the Centre for Economics and Business Research.

Peter Spencer, economic adviser to the Ernst & Young Item Club, said: 'It is a pity they couldn't find someone with a City background for the position. …