BoE governor in hot water again

The governor of the Bank of England is regarded as an impartial position but yesterday’s Wikileaks revelations mean Mervyn King has now found himself in political hot water on two separate occasions in recent weeks.

The former economics professor was cornered by MPs at a committee hearing last week amid concerns that he had been “excessively political” in his support for the coalition’s deficit-busting measures in May.

Adam Posen, a fellow member of the bank’s monetary policy committee, told the Treasury select committee that some rate-setting colleagues were uncomfortable with the tone of a report released a week after the May election.

The concerns were leaked to the press and Mr King was faced with accusations of overstepping a line by throwing his support behind the government’s plans.

In response, Mr King said the views were shared by the majority of the committee and added that it would be unusual for a central bank governor not to comment on fiscal policy in such unique economic times.

The Cambridge graduate was subject to similar accusations under the previous administration, when he made blunt pronouncements on the state of the public finances.

In one of his most damning interventions during the previous government, he said the “extraordinary” deficit “reflected the fact that we came into this crisis with fiscal policy along a path that was not itself sustainable and a correction was needed”.

He even took on the master of spin Lord Mandelson, labelling comments made by the former business secretary about the Bank’s slow support for the car industry as “puzzling”.

But arguably Mr King, who joined the bank in 1991 and took the top job in 2003, has every right to be testy.

The bank’s warnings of the inherent dangers in the banking sector have come to pass with shattering consequences for the UK economy but no one was listening to its strictures in the boom years and now Mr King has to clear up the mess.

Mr King’s stewardship has also come in for criticism, with the Financial Services Authority’s chairman Hector Sants accusing the bank last week of being slow in “fessing up” to mistakes made ahead of the financial crisis.

He has previously been criticised for not acting earlier over Northern Rock, which went to the bank for help in 2007.

But Mr King focused heavily on his “moral hazard” argument – that is, striking a balance between the need to secure the banking system and avoiding a situation where banks behave irresponsibly because they believe they will always be bailed out.

While the financial crisis and the bank bail-out added considerably to his in-tray, Mr King’s over-riding focus as chairman of the rate-setting MPC has been steering inflation to the government’s two per cent target.

But the cost of living has been much more volatile thanks to spiking commodity and food prices and Mr King has now written four letters of explanation to the Chancellor in the last year to explain why inflation has exceeded the target.

He will go down in history as the governor who presided over radical monetary policy in response to economic turbulence not seen before in the UK. This included the introduction of quantitative easing for the first time and historically low interest rates of 0.5 per cent.