Bank of England Governor Mervyn King crossed the line by endorsing the Conservative-Liberal Democrat coalition government's austerity plan shortly after the May election, policymaker Adam Posen said on Thursday. Posen's unprecedented criticism left King defending himself against a grilling from lawmakers in parliament and will only add to tensions within the Monetary Policy Committee (MPC), which is split over what to do next to secure economic recovery.
Posen, a US academic appointed to the MPC by the previous Labour government, said at least two policymakers felt King's comments - made on May 12 - and lines in the May Inflation Report were "excessively political" for the independent BoE.
"There was a difference of opinion at the MPC, in particular in the main meeting, over a particular paragraph in the report that was talking about the need for a particular speed with which to deal with the fiscal policy," Posen told lawmakers.
"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 pace at which Britain's record budget deficit should be tackled was a key battleground for the May 6 election, with the Conservatives calling for sharp cuts to safeguard Britain's top-notch credit rating in the face of Europe's sovereign debt crisis.
Labour, in power for 13 years until May, accused the Conservatives of scaremongering and planned a slower pace of cuts to give Britain's recovering economy room to breathe. The Conservative-Liberal Democrat coalition adopted a harsh deficit reduction plan as soon as it came to power and received unusually vocal backing from King.
The MPC is currently split three ways on monetary policy with Posen arguing for further asset purchases to boost growth, Andrew Sentance calling for higher interest rates to curtail above-target inflation and the majority sitting on the fence.
The May Inflation Report called for "a significant fiscal consolidation" in the medium term, arguing that a more "demanding path" than had been set out in the March budget might be required. The report, which is signed off by the nine-strong MPC, also said the nature and pace of that consolidation would need to be sensitive to sustaining market confidence.
In a statement at the accompanying press conference, King said it was "imperative that our own fiscal problems are dealt with sooner rather than later". He also backed six billion pounds of spending cuts proposed by the coalition for 2010.
Posen said dissenting policymakers raised their concerns but the majority was happy with the language, published a day after the Conservative-Liberal Democrat coalition came to power. King, who along with Posen and other MPC members was giving testimony on Thursday to a parliamentary committee on the BoE's latest inflation forecasts, strongly defended his actions.
"The Inflation Report appeared after the election and I commented as governor," he said. "I have never spoken ever about the balance between spending and taxes, let alone about any of the individual measures. I have merely commented about the outlook for the UK economy of the largest peacetime deficit ever." BoE Deputy Governor Paul Tucker, one of five central bank insiders on the MPC, said the central bank would have said the same things to "any government of any complexion".