Comment: testing times at the Bank

The Chancellor conceded that his Budget forecasts for growth would not be met and, as inflation this week reached a 16-year peak, accepted that prices would be higher than predicted. The Governor of the Bank, Mervyn King, made it clear in his own speech that interest rate rises were under consideration. Faced with that possibility, which would further dampen growth, Alistair Darling could do little more than call for wage restraint.

Mr King last night made a point of asserting his determination to focus on the control of inflation, if necessary at the expense of growth. He said he did not agree that the Monetary Policy Committee's remit should be changed to target growth rather than the price level. Nonetheless, this is a difficult time for the Governor. The departure of Sir John Gieve was expected, following a savaging by MPs over his role in the Rock crisis. Because Sir John was a recent Whitehall import who may well be replaced by career Bank man Paul Tucker, it does not necessarily undermine Mr King, who has also won his battle to replace Rachel Lomax as retiring Deputy Governor with an economist. But it is not yet clear if reforms involving a new "financial stability committee" represent a rebuke for the Bank. It, rather than the Financial Services Authority, will take responsibility for the new Special Resolution Regime for failing banks.

What is certain politically is that the new arrangements represent an admission that the post-1997 tripartite framework for banking supervision was not adequate to deal with Northern Rock's problems. While the PM will continue to deflect blame for inflation on to international factors, the announcement of new supervisory arrangements will reopen arguments that can only weaken further Mr Brown's reputation for economic competence.