Bank board uneasy over King deficit comments

City A.M. Reporter
The Bank of England's supervisory board said that it was uncomfortable with the way Governor Mervyn King's comments on fiscal policy had been used for political means and that the bank should have "shouted louder" to warn of an impending financial crisis.

The chairman of the Bank's board of directors expressed unease that King had made comments on fiscal policy that were open to a partisan political interpretation.

David Lees, who chairs the Bank's Court of Directors and oversees its Monetary Policy Committee, was asked by a parliamentary committee about a speech King gave in January in which he endorsed the government's fiscal course.

"I'm not terribly comfortable with that because that's moving away from the general to the particular," said Court chairman David Lees, who otherwise said he was happy with King's remarks on the need for fiscal tightening.

But Brendan Barber, who heads the umbrella trade union body as well as sitting on the Bank's Court, put the blame on the coalition for misrepresenting King's remarks.

"They sought to present his remarks as an endorsement of (their) strategy. I think that was very unfortunate and did risk getting the bank drawn in an unhelpful way in what is a very political debate," Barber said. "I didn't see (King's remarks) as a significant variation from his earlier comments."

The Labour Party has occasionally criticised King for compromising the Bank's independence by apparently endorsing the coalition's budget plans. King says that fiscal consolidation is necessary -- a view shared by all major UK parties – but that he is neutral on whether taxes are raised or spending cut to reduce the budget deficit.

Legislators criticised the Court of Directors for not taking a greater interest in the risk of the Bank getting politicised in the debate about how to reduce the budget deficit.

Asked what action the Court could take if it felt Governor King had compromised the Bank's independence, Lees said he would have a "very serious conversation" with King but stopped short of saying whether he would publicly call for King to go.

Another Court member said the Bank could have publicised risks to the banking sector more vigorously in the run-up to the financial crisis, although it may not have made any difference.

"In terms of what it could have done in the run-up to the crisis, it may have been able to have shouted louder. Whether people would have listened is questionable," said Roger Carr, a member of the Bank's Court of Directors since June 2007.