If an independent Scotland kept the pound, it would have no say on interest rates – King

AN INDEPENDENT Scotland could lose its influence over interest rate changes that help fight inflation, according to the governor of the Bank of England.

• Bank of England governor Mervyn King warned that Scotland would lose its influence

In a letter responding to the Liberal Democrats in Scotland Mervyn King says if Scotland kept the pound, the bank's monetary policy committee may set rates with no input from north of the Border.

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The Liberal Democrats initiated the correspondence with Mr King seeking clarification on a number of issues relating to the economy in an independent Scotland. They say the content of Mr King's reply was evidence of the "fantasy economics" which underpinned the SNP's independence plans.

However, the SNP dismissed the correspondence as a "typically silly attack".

The row follows an SNP proposal that an independent Scotland could keep the pound until a referendum over joining the euro.

In his letter to Lib Dem finance spokesman Jeremy Purvis, Mr King wrote: "It would not be possible for interest rate decisions to take account of inflation in an independent country with its own fiscal policy, in the absence of a proper monetary union framework."

Mr Purvis said: "The SNP used to complain that the Bank of England didn't take Scotland's economy into account when setting inflation. They wanted a permanent Scottish board member.

"But now they're content for a foreign bank to set Scotland's interest rates without taking any account of our economic circumstances."

Labour finance spokesman David Whitton said: "Our economic fate is entwined with the rest of the UK and for the SNP to suggest otherwise is fantasy."

Derek Brownlee, his Conservative counterpart, said: "Scotland's needs should be taken into account in forming monetary policy – which is why we think Alex Salmond's quest for independence is misguided."

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However, economists cautioned over the impact of Scotland losing influence over rates.

Professor David Bell, of Stirling University, said Scotland currently had only a limited say, and it remained unclear whether the absence of any Scottish input would adversely affect the country's economy because it was so similar to England's.

Prof Bell said: "So long as the economic management of the Bank of England is sensible, Scotland would not be disadvantaged." However, he added: "If you are a small country without control of your own interest rates, you have to be pretty active with fiscal policy (such as tax rates] to keep the economy stable."

Ronald MacDonald, Adam Smith professor of political economy at Glasgow University, said an independent Scotland would have some input in setting rates, if it produced the expected monetary union arrangement, like many countries in the euro area.

A spokesman for finance secretary John Swinney said: "This is a typically silly attack from the Lib Dems, given they agree with the SNP that we should join the euro when the time is right with interest rates set by the independent European Central Bank.

"Retaining sterling until that point also makes every sense. The huge advantage of independence is that we would have maximum control of fiscal and economic policy."