Bank chiefs at odds over cuts stance

Mervyn King dismissed a suggestion this month that members of the Bank of England’s monetary policy committee objected to his strong endorsement of the coalition’s deficit slashing plans. It was not, he told a press conference, a “serious question”.

Andrew Tyrie, a Conservative MP and chairman of the Treasury select committee that is charged with holding economic policymakers to account, disagreed.

“I’m sure that for a committee such as ours the safeguarding of the Bank’s impartiality is . . . important,” he told the Bank’s governor at a hearing on Thursday.

Mr Tyrie’s interjection came after the Financial Times revealed that members of the MPC and senior bank staff felt Mr King had crossed the line of political impartiality in associating himself so closely with the government’s fiscal consolidation programme.

Adam Posen, an external member of the MPC, confirmed the picture of divisions within the Bank’s top echelons over the extent to which to support the government’s cuts.

“There was a difference of opinion at the MPC . . . over a particular paragraph in the [May inflation] report that was talking about the need for a particular speed with which to deal with the fiscal policy,” he said.

“A number of the people on the committee, myself plus at least one other . . . were concerned that that statement could be seen as excessively political in the context of the election.”

The sense that Mr King had overstepped his remit and waded into a political debate about the speed of fiscal consolidation was heightened by his explicit support of the coalition’s plan to cut a further £6bn from spending this year. This came at the press conference for the May inflation report just a day after the coalition was formed.

Mr Posen was not alone in being concerned about the Bank straying into political territory.

Sushil Wadhwani, a former MPC member, said Mr King appeared to have contradicted his own advice to new members of the committee.

“When I joined the MPC in 1999, Mervyn was kind enough to take me to dinner to explain how I should handle my new responsibilities. At the top of his list of ‘don’ts’ was that I should never comment on fiscal policy,” he said. “It is, therefore, a great pity that he seems to have changed his mind.”

Ray Barrell, acting director of the National Institute of Economic and Social Research, said: “Mervyn has probably said too much on fiscal policy, and said it at politically sensitive times. In particular there is no real evidence that a one per cent of GDP tighter or looser fiscal policy this year would affect risk premia despite the governor’s comments.”

Mr King argued that he has never commented on how deficit reduction should be distributed between tax cuts and spending rises and his specific comments on the need for an extra £6bn of cuts were in response to a government request at a time when the crisis in Europe threatened to engulf the UK.

“I have never spoken ever about the balance between spending and taxes, let alone about any of the individual measures,” he said. “I have merely commented about the outlook for the UK economy [which has] the largest peacetime deficit ever.”