Bank Governor faces calls for resignation

Mervyn King, the Governor of the Bank of England, faced a call for his resignation yesterday amid fresh claims that he has overstepped the mark by becoming embroiled in politics.

Mr King's neutrality was questioned after leaked US diplomatic cables revealed that he described David Cameron and George Osborne as "lacking experience". He told the US ambassador in London in February that he had pressed the two at recent meetings for details on how they planned to cut the public deficit but "received only generalities in return".

Professor David Blanchflower, a former member of the Bank's Monetary Policy Committee, said the leak showed that Mr King had tried to "co-author the Coalition's strategy on the deficit". He accused the Governor of breaking his own two rules – that the Bank should not comment on fiscal policy, or on party political matters.

Professor Blanchflower claimed yesterday that Mr King's "thirst for power and influence" had "clouded his judgment one too many times".

He added: "He has now committed the unforgivable sin of compromising the independence of the Bank of England. He is expected to be politically neutral, but he has shown himself to be politically biased and as a result is now in an untenable position. King must go."

Some Bank officials have recently questioned Mr King's public enthusiasm for the deep spending cuts announced by the Coalition. But he himself has rejected criticism that he has crossed the line into politics as "not a serious question".

The Tories have dismissed Mr King's reported pre-election doubts about the party's "lack of depth" as "overtaken by events". But had they leaked out before the election, it might have boosted Labour's campaign to play on voters' fears about a Tory Government. Senior Labour figures, meanwhile, claim Mr King got too close to Mr Osborne while he was shadow Chancellor, when he agreed to restore the Bank to its role in charge of financial regulation. Last year Mr King told MPs that Labour lacked a "credible plan" to restore the public finances.

There is some evidence that Mr King played a behind-the-scenes role in edging the Liberal Democrats towards supporting £6bn of spending cuts this year even though at the election they had opposed immediate cuts.

During the post-election talks on forming a Coalition, the economic crisis in Greece was in full swing and, like Mr King, the Treasury wanted urgent action on the deficit in order to steady the financial markets.

Treasury officials instructed to brief the parties' negotiating teams pointed out to them that Mr King and Nick Macpherson, the Treasury's permanent secretary, were at one about the need for early action.

In his book on the birth of the Coalition, David Laws, the Liberal Democrat former Chief Treasury Secretary, quotes Mr Osborne as telling the Liberal Democrat team: "I will also get the figures for Vince [Cable] for him to look at, and he will find that Mervyn and Nick [Macpherson] are very supportive of what we want to do."

Mr Laws' book, 22 Days in May, also discloses a planned meeting between Mr Cable (who at that time was the Liberal Democrats' deputy leader and their Treasury spokesman), Mr King and Mr Macpherson. And Nick Clegg for his part has revealed he had "a long conversation a day or two after the Government was formed" with Mr King. "He couldn't have been more emphatic. He said, 'If you don't do this, then because of the deterioration of market conditions it will be even more painful to do it later,'" Mr Clegg said.

The latest disclosures are bound to fuel Labour claims that Mr King is the power behind the throne.

Some Labour MPs believe that Ed Miliband, the party's new leader, missed a trick by not raising the Governor's doubts about Mr Cameron and Mr Osborne at Prime Minister's Questions yesterday. Mr Cameron was widely seen as having outgunned Mr Miliband – adding to the muttering in Labour circles about Mr Miliband's performance as incoming leader.

Philip Shaw, chief economist at Investec Bank, commented yesterday: "Mervyn King can't win. He either gives an opinion on the subject and potentially lands himself in hot water, or he keeps silent on the most pressing policy issue of the day – which seems strange for a central banker."

King and politics

The whispers about Mervyn King exceeding his remit were brought into the open last month by Adam Posen, a member of the Bank's Monetary Policy Committee. Mr Posen, an external member of the nine-strong group, stated at a hearing of the Treasury Select Committee that some members of the MPC were concerned at the wording of the Bank's quarterly inflation report after the election, particularly with regard to the speed of deficit reduction. Posen said: "A number of people on the committee... were concerned that that statement could be seen as excessively political in the context of the election."

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