Bank row casts a cloud over Tories' economic policy initiative

The Conservative Party's attempts to set out its economic policy suffered an embarrassing setback yesterday after the Bank of England reacted angrily to a report that it was in "constant dialogue" with the Tories at every level.

The row distracted attention from a proposal by George Osborne, the shadow Chancellor, to reform the way the Bank sets interest rates radically.

In a policy document handed to the Mervyn King, the Governor of the Bank, in January and published yesterday, Mr Osborne raised the idea of removing the majority that the Bank's staff currently hold on the Monetary Policy Committee (MPC).

However, the Bank was annoyed by a newspaper report that said the shadow Chancellor was "in constant dialogue with the Bank at every level".

In an unusual move, the Bank issued a statement saying: "The Governor has never met George Osborne and has not had discussions with him on any of these ideas".

Mr Osborne's advisers sought to play down the significance of the gaffe, saying the shadow Chancellor had not used the words that were used in the newspaper.

A spokesman said that the party had been in touch with the Governor to arrange a meeting that had not yet taken place and had used the Bank's public inquiries unit to discuss issues of monetary policy.

The Conservatives were dismayed that the row had taken the focus from what the party said was a major significant contribution to the debate over economic policy.

It said there was an in-built risk that the Government of the day could be seen as influencing the MPC's decision-making by being able to appoint seven of the nine members of the MPC. It added that the appointment system was " secretive and ad hoc", while the Chancellor had the power to change the inflation target at any time without consultation.