Inflation hawk takes over

By Steve Schifferes
BBC News Online economics reporter

Mervyn King is taking over as governor of the Bank of England at a critical time in the Bank's history.

If the Chancellor were to decide next year or soon after that the UK meets the five economic tests, he will begin the process that will lead to a referendum on UK euro membership - and the elimination of any independent role for the Bank of England.

That is because if Britain was to join the single currency, interest rates would be set by the European Central Bank (ECB), which acts for the eurozone as a whole.

At best, the Bank of England governor would get a seat at the table, as one of the 12 central bank chiefs (soon to be 22) who would vote on rate decisions.

But in choosing the feisty Mr King, Gordon Brown gave another signal that he was not minded to recommend early UK membership of the euro.

Euro-sceptic views

Mr King would officially have to keep quiet if the government were to call a referendum on the euro.

But he has made no secret of his scepticism about the wisdom of the UK joining the current eurozone regime.

He shares the Chancellor's belief that the Bank of England has made a better job of managing the UK economy than the ECB has done of managing the eurozone.

Indeed, both Mr King and Mr Brown believe that the ECB should have cut interest rates much more quickly to stimulate growth and ease pressure on the pound.

And they both believe strongly that the close coordination between the Bank of England and the Treasury on fiscal policy (with a Treasury representative attending every meeting of the Monetary Policy Committee) is preferable to the rigidity of the Growth and Stability Pact. (which sets an inflexible 3% limit on Budget deficits.)

Academic roots

Mr King had a distinguished academic career before joining the Bank of England, initially as chief economist.

As a professor of economics at the London School of Economics, he specialised in tax policy.

He worked closely at LSE with Charles Bean, the current chief economist of the Bank, and also with the influential monetary economist Charles Goodhardt, a former member of the Bank's Monetary Policy Committee (MPC), which sets interest rates.

It is Mr Goodhardt's belief that the key to controlling inflation is a tough and credible stance that markets trust over the long term.

And Mr King is determined to keep the Bank's reputation intact by raising interest rates whenever necessary to keep inflationary expectations in check.

Inflation hawk

Over the years, Mr King has not hesitated at being a lone voice on the MPC, even when the vote went 8-1 against him, warning about the dangers of inflation.

But as the main author of the Bank's influential Inflation Report, his worries have increasingly gained the upper hand - and he has been a key vote in preventing the Bank from cutting rates more steeply.

Mr King believes that the Bank needs to take action to cool the housing market, and avoid further pain later on.

And it is likely that as his influence grows, the chances that the Bank will raise interest rates in the next few months - despite the global slowdown - have increased.

Mr King is also likely to be more aggressive in responding to any boost to wage inflation by raising rates.