Bank in exchange control U-turn

A DRAMATIC Bank of England U-turn has reopened the question of exchange controls, 21 years after they were scrapped in Britain. Deputy Governor Mervyn King has given his blessing to a Bank report that approves the use of controls to block 'large and persistent' outflows of funds from a troubled country.

It is thought the report, published last week, was toned down after an early draft drew hostile comments from the International Monetary Fund, a long-standing opponent of capital controls. A senior source on the report team would say only: 'The IMF is very aware of our work. It's been a two-way dialogue.' He added: 'There are definitely certain conditions when it is optimum for a country to impose capital controls.'

Until now, the financial establishment in Britain and abroad has set its face firmly against them. Chancellor Gordon Brown said earlier this year: 'We reject those that ... argue we should return to tightly controlled capital markets.' The Bank's Mervyn King said in 1999: 'Capital flows ... should be encouraged.'

But the Anglo-Canadian report states: 'On rare occasions, when capital flight is large and persistent, capital controls may be required to provide a breathing space.' Later, it suggests controls could prevent multi-billion dollar assistance packages being frittered away paying off private-sector debtors, who would then take the money abroad.

The Bank of England denied any inconsistency in its approach. 'It has been our view for a while that capital flows are good things but that, in rare circumstances, temporary capital controls may be needed,' it said.