Bank boss plays down political bias fears

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The governor of the Bank of England was forced to defend his stance on the Government's spending cuts today after one of his senior colleagues raised concerns over impartiality.

Mervyn King was cornered at a Treasury Select Committee hearing when it emerged policymaker Adam Posen had challenged fellow members of the Monetary Policy Committee (MPC) for being "excessively political".

Mr King said the views, expressed in the MPC's quarterly inflation report in May, were shared by the majority of the committee and added he rarely discussed fiscal policy.

Asked to comment on reports earlier this month that Mr King had overstepped a line by throwing his support behind Chancellor George Osborne's deficit-busting plans, Mr Posen said: "There was a difference of opinion in our May meeting over a particular paragraph in the report talking about the need for a particular speed with which to deal with the fiscal policy.

"A number of people at the committee - more than just me and fewer than a majority - were concerned that statement could be seen as excessively political in the context of the election."

But Mr Posen added he was "comfortable" that no-one had said anything since to which he would object.

Mr Posen said he was "annoyed and upset" that somebody had leaked the behind-closed-doors conversation.

Mr King was initially confronted by allegations of political bias at the MPC's quarterly inflation report conference earlier this month.

Asked by committee chairman Andrew Tyrie if he had anything to add, Mr King said: "What the inflation report says is always the view of the majority round the table. Everyone is asked if they approve the wording and the majority agreed."

"I've merely commented on the outlook for UK economy in the largest peacetime deficit. I think most central bank governors around the world have spoken far more often on fiscal policy than I have and I reserve the right to make those comments if we ever again have the largest peacetime deficit ever."

The coalition government announced plans to cut spending as part of plans to cut the huge deficit as soon as it took office in May.

At the time King said the Government's plans provided a "very strong and powerful agreement" to achieve that goal.

In his opening statement to the committee, Mr King said he expected inflation to stay elevated for another year or so.

But he warned if the MPC took strong action to offset movements in inflation it would risk "undesirable volatility" in economic growth.

Mr King said the MPC was ready to adjust policy - in either direction - should the outlook for inflation demand it.

He added: "The range of views among the MPC about which of these risks will come to dominate is wider than usual and that explains why different members have drawn different policy conclusions in recent months.

"That difference of views - and the healthy, open policy debate that accompanies it - is something to be welcomed."

In his report to the Treasury Select Committee, MPC member Andrew Sentance said the rate of inflation in the UK - currently at 3.2% - could shoot past 4% in the coming months.

Mr Sentance said the forthcoming rise in VAT to 20% and higher commodity prices will push up inflation, and he was less confident than the rest of the committee that it would fall below the target of 2%.

The rate-setter also outlined the reasoning behind his voting in favour of a gradual rise in interest rates- which are currently at an historic low of 0.5%.

He said: "I regard this as the start of a necessary gradual adjustment in monetary policy to keep the UK economy on a low inflation course as it recovers from recession.

"Delaying this process risks a more abrupt policy move later on, which could deliver an adverse shock to business and consumer confidence."