In keeping with the calls for wage restraint to help curb commodity price-induced inflation, the Governor of the Bank of England is forgoing a pay increase that could have seen his salary rise by more than £100,000 a year.
A review by independent consultants in 2006 concluded that Mervyn King's remuneration package was not commensurate with the size and responsibilities of his role, and it recommended an increase of as much as 40 per cent at the top end of the scale. Under the terms of the proposed package, the Governor's salary was to rise from £288,290 to a range from £375,000 to £400,000, from the start of his second five-year term this month.
But the offer was refused in favour of a sub-inflationary 2.5 per cent raise, according to the Bank's annual report, published yesterday. "Mr King declined to accept the new package and retained the salary and annual increases which applied during his first term," it says.
The Governor's abstinence is particularly noteworthy following the Chancellor's calls, in last month's Mansion House speech, for moderation in wage negotiations to avoid fuelling rising inflation. So far this year, after more than a decade of stability, the Governor has been called upon to write to Alistair Darling twice to explain why inflation is higher than the target of 2 per cent. Most recently, in May, the inflation rate was at 3.3 per cent, and the Bank's own predictions are that it will hit 4 per cent in the medium term before getting back down to acceptable levels.
Mr King used the publication of the annual report to re-emphasise the rationale behind the Bank's Monetary Policy Committee (MPC) decision to continue to hold interest rates steady, rather than use a raised rate as a mechanism to control inflation.
"The MPC can have little impact on the path of inflation in the short term," the Governor said. "It has not attempted to prevent inflation moving away from the target following the sharp rises in commodity prices. To do so would have required a large increase in interest rates with such a severe impact on output and employment that it would have risked inflation falling well below target further out."
But the Bank is on a watching brief. "The dilemma that has made our task so difficult since last summer is that we have had to balance this risk that inflation expectations might be dislodged against the possibility that inflation might fall below the target," Mr King said. "These are judgements the committee must continue to make month by month."
The Bank of England report also confirms that the non-contributory Court Pension scheme previously offered to Bank executives has been closed to new members. While existing members of the scheme will continued to accrue benefits according to the original terms of their agreements, newly appointed executives will have the option of either the Career Average scheme available to all staff or a salary supplement of between 15 per cent and 30 per cent.
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