Concern as BoE Chief Blurs Line on Policy

Some senior staff at the Bank of England are uncomfortable with Mervyn King’s endorsement of the government’s public spending cuts, suggesting he has overstepped the line separating monetary and fiscal policy.

Sharon Lorimer

People familiar with the monetary policy committee’s deliberations have told the Financial Times that Mr King’s support for the coalition’s aggressive fiscal tightening are not fully shared by all members of the nine-person committee, comprised of bank staff and outside experts.

Since being granted independence in 1997, the bank has generally refrained from commenting on fiscal policy.

Charles Goodhart, professor at the London School of Economics and an expert on monetary policy, said: “Ministers have taken a decision not to comment on what the central bank does and there is an equal concordat that the central bank won’t comment on fiscal policy.”

But several senior current and former bank staff, contacted by the FT, said Mr King had blurred this policy by intervening in the political debate.

One former senior bank employee, who is still in contact with the MPC, said there was widespread concern within the bank about Mr King tying ­himself to such a risky fiscal policy, which could yet derail the nascent economic recovery.

“There is no Plan B,” the former staff member said.

“The only Plan B is that Mervyn buys more gilts,” he said, referring to the Bank’s explicit promise to review its £200bn programme of gilts purchases, known as quantitative easing, should conditions deteriorate.

Although Mr King has held out the possibility of further quantitative easing to offset fiscal tightening, it is unclear that this policy commands the full support of the MPC.

The last minutes of the MPC for October showed that members were divided over monetary policy, with one member voting for a rise in interest rates, one voting for further stimulus and the rest supporting a neutral stance.

The Bank said it was unaware of any internal concern that it may have crossed the line by appearing to endorse a political decision, adding that all its comments about fiscal policy were in the context of discussions of monetary policy.

It added that in May the entire MPC endorsed a statement indicating that the fiscal adjustment may need to be more ambitious than that outlined by the previous Labour government in March.

Last November, Mr King told MPs that the then Labour government’s intention of halving the deficit over the next five years was insufficient.

In May, just days after the coalition government was formed, Mr King said he had spoken to George Osborne, the chancellor, and supported his plans to cut spending by a further £6bn within the current fiscal year.

Mr King’s support for the government’s fiscal consolidation came in spite of concerns within the bank that cutting spending so rapidly could derail the nascent recovery, according to one former senior bank staff member.