Bank of England divisions are laid bare

Divisions within the Bank of England over Mervyn King’s “excessively political” support for the coalition government’s fiscal austerity programme were laid bare during parliamentary questioning on Thursday.

Adam Posen, an economist who sits on the Bank’s rate-setting monetary policy committee, confirmed that several members – “more than just me and fewer than a majority” – had not wanted an important report to endorse the rapid and sweeping fiscal retrenchment shortly after the election.

His comments at the parliamentary hearing on Thursday confirmed a Financial Times report this month revealing concern among some senior Bank officials including MPC members about Mr King’s endorsement of the coalition’s austerity plans.

Asked about the FT report at a press briefing, Mr King had brushed away the question as not “serious”.

Andrew Tyrie, chairman of the Treasury Select committee, grilled the governor about the worrying perception that the Bank’s independence had been compromised. Speaking after the hearing, Mr Tyrie said: “This is a very significant day in the history of the Bank of England’s independence.

“A line may have been crossed, albeit with the best of intentions, and I would be surprised if it were crossed again.”

In a rare display of dissent over internal Bank matters, Mr Posen said there had been concern about a paragraph in the May Inflation Report that “was talking about the particular speed with which to deal with fiscal policy”.

“We were concerned that the statement could be seen as excessively political in the context of the election,” he said. “That language was too political, too much of a statement,” he said, adding it threatened the impartiality of the Bank. “These are lines to draw.”

Mr King defended his position, saying his remarks after the election were in response to a direct request for his views. “I would emphasise that I have never spoken, ever, about the balance between spending and taxes.”

Mr King was supported by Paul Tucker, deputy governor, who noted the remarks came amid turmoil in European government bond markets because of fears that states could not get their finances under control. “We had to get out of harm’s way,” Mr Tucker said.

However, Mr Tyrie said the independence of the Bank was a serious matter for his committee which oversees economic and financial affairs, and should not be dismissed lightly.

Economists say an independent central bank, demonstrably free from political interference, is at the heart of inflation control. That requires officials to avoid any appearance of political bias.

Sushil Wadhwani, an economist and former member of the MPC, said the presence of a large budget deficit in Britain did not appear to be sufficient reason for Mr King to comment upon the fiscal plans of one political party since all parties agreed that to reduce the deficit was necessary.

“Rightly or wrongly, Mervyn has come to be seen as being much closer to the Conservative party than the Labour party,” Mr Wadhwani said. “No central bank governor should allow this to occur. In the years ahead, we are likely to need a Bank that is seen to be independent. It is a great pity that the perception of independence has been put at risk.”

Alan Johnson, shadow chancellor, said: “This further demonstrates that the government does not have a consensus of opinion on the way it is approaching deficit reduction. George Osborne is taking a big gamble with our economy.”