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Bank of England to face "hornets' nest" of Scottish independence debate

Source: Reuters - Wed, 29 Jan 2014 00:01 GMT
Author: Reuters
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* BoE's Carney to give first speech in Scotland at 1315 GMT

* Scotland to hold independence referendum on Sept. 18

* Pro-independence campaigners want to keep pound

By David Milliken

EDINBURGH, Jan 29 (Reuters) - Bank of England Governor Mark Carney steps into the heated build-up to Scotland's independence referendum when he speaks in Edinburgh on Wednesday about whether the country could break from Britain but keep the pound.

Carney has said he will stick to "dry analysis" of the issues, including a proposal by supporters of independence to carry on using sterling even after seceding from Britain.

But he will struggle to avoid being drawn on whether this risks replicating the problems of euro zone monetary union - something he briefly alluded to in an interview last week.

Politicians on both sides of the debate will be quick to jump on any comments that back their case when Carney gives a speech in Edinburgh at 1315 GMT, followed by a news conference.

"There are a number of hornets' nests that he won't want to open up," said Philip Shaw, UK economist at Investec.

By contrast, there is relatively little more that Carney can say about British monetary policy and changes to his forward guidance strategy before it is discussed by all the BoE's policymakers at their Feb. 5-6 rate-setting meeting.

Carney's trip to Scotland is his first since becoming BoE governor in July. He is due to meet Scotland's First Minister Alex Salmond, a champion of Scottish independence.

Salmond's Scottish National Party, which runs Scotland's devolved government, and defenders of the three centuries-old union with England are locked in an increasingly bitter debate over the rewards and risks of independence.

On Tuesday Salmond said that Carney's predecessor, Mervyn King, had advised him privately that Britain's finance ministry would soften its negotiating stance if he won an independence vote. The BoE declined to comment on Salmond's remarks.

KEEPING THE POUND

The SNP wants to form a currency union with the rest of the United Kingdom if it wins the Sept. 18 referendum.

The SNP has proposed that as part of that plan, the Bank of England should act as a lender of last resort for Scottish banks and that an independent Scotland should have a voice within the BoE.

As Britain's top bank regulator as well as its monetary policy chief, Carney needs to clarify if this means that Scotland's big financial sector would still need to be regulated from London, and whether the BoE would function well as a cross-border institution, Shaw said.

Keeping the pound would help Scottish companies, including large banks, to avoid the costs and volatility of working with a new currency.

But the SNP's critics have sought to draw parallels between the SNP's currency union plan and the way that countries in the euro zone share a central bank in a currency bloc that has been plagued by governance problems since its inception.

British finance minister George Osborne has said the rest of Britain might be unwilling to let an independent Scotland keep the pound. The SNP has responded by suggesting that Scotland might refuse to take on its share of Britain's 1.2 trillion pounds ($2.0 trillion) in government debt in return.

Last month the British Treasury said it would honour all existing government debt regardless of whether Scots vote for independence, a move aimed at preventing volatility in borrowing costs before the referendum.

With the independence campaign lagging in opinion polls, financial markets have so far shown little concern about the chance of Scotland leaving Britain, and taking a chunk of North Sea oil and gas with it.

But the most recent poll published on Sunday shows the pro-independence campaign starting to gain ground, with 37 percent in favour of independence, 44 percent against and 19 percent unsure, according to a survey by polling company ICM.

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