Page last updated at 02:06 GMT, Thursday, 19 June 2008 03:06 UK

Darling sets out new Bank remit

Alistair Darling talks about the Bank's new remit

Chancellor Alistair Darling has outlined plans to give the Bank of England new responsibilities in his Mansion House speech.

Speaking in his first keynote address to business leaders, the chancellor said the Bank would now be accountable for the UK's financial stability.

This is in addition to its statutory objective of setting interest rates.

The radical new measures come in the wake of the collapse of Northern Rock amid global credit problems.

Part of the reforms will include setting up a new Financial Stability Committee, which will guide the Bank's operations in this field.

"It will bring valuable, external expertise with City experience to bear on the Bank's decision making," he said.

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"The challenge for us is to ensure that the authorities can act quickly and decisively where necessary to support financial institutions," Mr Darling added.

He intimated that the proposals would clarify and enhance the powers of the Bank of England and the UK financial watchdog, the Financial Services Authority, and improve co-ordination between the regulators.

More details will come in a letter to the Treasury Select Committee chairman John McFall on Thursday.

'Tough times'

Mr Darling also addressed inflation risks, saying "times are tough".

He said consumer inflation, which reached 3.3% in May, must be tackled and called again for pay restraint in both the private and public sector.

But he dismissed suggestions that the most recent inflation figures show we are returning to the days of the 1970s when economic growth was falling, while prices were rising by 26%.

Upbeat that the UK would continue to grow despite "global difficulties", he said: "Independent forecasters expect UK inflation to fall back next year.

"Employment is at a record high. Many order books are full. British business is competing and winning all over the world. Our economy is flexible and resilient."

The chancellor's optimism was tempered by comments from the Bank of England Governor Mervyn King, who offered a grimmer picture of the economic reality.

He said that rising fuel, gas, electricity and food prices will mean that average take-home pay will "stagnate" this year, but warned that pay settlements must remain low to bring inflation back to the government's target of 2%.

Insisting that the Bank's rate-setting Monetary Policy Committee (MPC) "is prepared to take whatever action is needed" to bring inflation down, the suggestion is that higher wage settlements may result in higher interest rates.

'Right framework'

He said that the Bank had the "right framework" to make sure inflation returns to the government's 2% target and that economic growth recovers.

Mervyn King on take-home pay

But he added that no monetary policy could prevent the current effects of rising food and energy prices on living standards.

Neither could interest rate cuts coax banks, which are currently re-evaluating risk and keeping a tight grasp on their balance sheet, to be more generous in their lending to house buyers.

And he warned that higher living costs were likely to restrain consumer spending to a far greater extent than tighter lending conditions as a result of the credit crisis.

"It will not be an easy time, and I know that some families will find it particularly difficult."

But he said these pressures would be temporary - the opposite side of the coin to the falls in price of manufactured goods from countries such as India and China, which over the past few years allowed our standard of living to rise at a rate faster than productivity.

Mr King also welcomed the chancellor's plans to increase the Bank's responsibilites that will come in the form of a Banking Bill.

This he said provided an opportunity to put in place a set of reforms that "provide a coherent framework for banking regulation".

"It is an opportunity we must not throw away," he added.

Criticised

The chancellor's speech was criticised by the Conservative Party.

Shadow chief secretary to the Treasury Philip Hammond called it a "missed opportunity".

"Gordon Brown's reputation for economic competence has gone bust and this was the big test of whether the chancellor had the vision to steer Britain's economy through these difficult times," he said.

"What Britain needed from the Mansion House speech was a display of economic leadership. Instead all we got were re-hashed announcements and no new ideas."


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