King accused of ‘unholy alliance’ with the Tories over economy

Ministers believe Bank of England Governor is guilty of bias to Opposition

Cabinet ministers yesterday accused Mervyn King, Governor of the Bank of England, of “getting too close” to the Tory Opposition and being used by it to score political points against the Government.

Gordon Brown and the Chancellor, Alistair Darling, are said to be “perplexed” by Mr King’s outspoken remarks to a Commons committee on Wednesday, in which he demanded tougher action in future years to cut the “extraordinary” levels of public borrowing, and complained he had not been consulted about the Government’s imminent plans to reform the way banks are regulated.

Senior ministers told The Independent that Mr King appeared to have formed “an unholy alliance” with George Osborne, the shadow Chancellor, who has admitted privately that his strategy is to “keep very close” to the Bank Governor. The Tories have promised to put the Bank in charge of financial regulation if they win the general election. But the Government will maintain the three-way split between the Treasury, the Bank and the Financial Services Authority (FSA).

One cabinet source said: “King is fighting a turf war with the FSA. The Tories are flattering him, appealing to hisvanity and using him to play politics.”

The minister said he was not accusing Mr King of indulging in politics, admitting he was “an academic, not a politician”.

But he claimed that the Governor’s controversial remarks to the Treasury Select Committee would damage confidence in the British economy.

Mr Darling met Mr King at 11 Downing Street last night for a routine private meeting planned before his appearance before the Treasury Committee.

The two men discussed the White Paper on banking regulation, to be published in the next few weeks. The Chancellor was surprised by the Governor’s claim that he had not been consulted because they have discussed the blueprint previously.

However, Mr King has not yet seen a draft of the document. Last autumn, the Chancellor told the Governor he suspected him of passing on details of a plan to recapitalise the banks to Mr Osborne and David Cameron, who called publicly for such a move before the Government announced it. The Tories denied that they were briefed on the plan. One senior Tory said last night: “George Osborne meets Mr King regularly, which is normal practice. No one is playing politics. Labour is upset because Mr King endorsed our critique – that borrowing was out of control before the recession. Labour didn’t fix the roof while the sun was shining.”

Mr Darling and Mr Brown believe the right way to reform the banks is to work out what needs to be done following last autumn’s financial crisis, before deciding which powers are handed to the Bank and the FSA. They believe Mr King and the Tories are looking at the issue “through the wrong end of the telescope”, a Downing Street source said.