— WikiLeaks Publishes Cables Showing King Critical of UK PM, Chancellor
— Ex-MPC Member Blanchflower Calls For King’s Sacking
— Adam Posen Concerned BOE Inflation Report ‘Too Political’
— TSC Hearing Sees Posen, Sentance At Polar Opposites On Policy

LONDON (MNI) – An increasingly divided MPC, a tense hearing at the
House of Commons Treasury Select Committee and leaked US diplomatic
cables have all conspired to make November 2010 a hopefully
soon-to-be-forgotten ‘mensis horribilis’ for Bank of England Governor
Mervyn King.

The front page of The Guardian newspaper may well have caused the
Governor some anxiety this morning as the paper reported that King had
told the US ambassador that Prime Minister David Cameron and Chancellor
of the Exchequer George Osborne ‘lacked experience’ and had a tendency
to think about issues ‘only in terms of their electoral impact.’

On a far more serious note, the Guardian also reported that King
told the US ambassador that he had also held private meetings with the
two Conservative politicians before the election and urged them to draw
up a detailed plan to reduce the deficit, something which many pundits
regard as a transgression of the line dividing fiscal from monetary
policy.

Some broadsheet commentators say this shows the Governor is not
politically neutral – a situation that, if it gained wider credence,
could make King’s position as Governor less secure – although
he will ride out the storm in the same way he survived the criticism
of his handling of the 2007-2008 financial crisis.

But even though it is highly likely that King will survive,
condemnation of the governor in some quarters has been strident.

Former Bank of England MPC member David Blanchflower, who has been
poisonously critical of the Governor in the past, was quick off the mark
in calling for King to be sacked, saying his request for the government
to draw-up a detailed deficit reduction plan was a politically biased
move.

“He is expected to be politically neutral but has shown himself to
be politically biased and as a result is now in an untenable position.
King must go,” Blanchflower wrote in an op-ed piece in The Guardian

And it is not the first time this month that the Governor’s
political neutrality has been called into question.

ACCUSATIONS FLY AT TREASURY SELECT COMMITTEE

At a hearing of the House of Commons Treasury Select Committee,
Adam Posen revealed that he and at least one other MPC member had been
unhappy with what appeared to be an endorsement of accelerated fiscal
tightening back in May.

“There was a difference of opinion at the MPC at the May meeting
over a particular paragraph in the (Inflation) Report which was talking
about the need for a particular speed with which to deal with the fiscal
policy,” Posen said.

“A number of people on the committee, myself plus at least one
other … more than just me but fewer than the majority, were concerned
that that statement could be seen as excessively political in the
context of the Election,” Posen said.

“We expressed that point of view, we offered alternative language,”
Posen added.

After the election, King gave his explicit approval to the
accelerated fiscal tightening plans of the Conservative/Liberal
coalition government.

A tense-looking King was forced to defend his stance, saying that
the Inflation Report reflects the view of the majority of the MPC.

“Everyone around the table is asked if they approve, if they agree
with the wording we see in front of us and the majority clearly approved
that. There are times when a governor is asked to say something as
governor, I was asked after the election, and I commented as governor,”
he said.

“I have never spoken ever about the balance between spending and
taxes. I have merely commented on the outlook to the UK economy of the
largest peace time deficit ever,” he added.

BOE Deputy Governor Paul Tucker said he did not think a “line was
crossed” by King in approving the fiscal plan.

But the spat over political neutrality is not the only sign of
increasing division at the BOE, with the MPC’s most prominent Hawk and
Dove at each others throats over the next policy move.

POLICY SCHISM THREATENS TO WIDEN

On November 17, the minutes of the November meeting showed the
doveish Adam Posen calling for a stg50bn extension of quantitative
easing program to provide succour to a still-weak economy, and the
hawkish Andrew Sentance voting for a 25bps hike to head-off inflation
in what he thinks is an increasingly strong economy

Both are now thrashing their policy drums increasingly loudly and
both members are said to be increasingly frustrated with their isolation
on policy.

Posen, in particular, is increasingly vociferous in defending his
decision to back more stg50bn more QE, saying that he was not worried
about inflation getting out of control, the risks were all the other
way:

“Part of the reason I voted for an increase in QE is [that] to me
the forecasting risks are on the downside, and I am not worried about
inflation getting out of control by any means. To me the risks are much
more that QE will not be enough than that we will overdo it,” he said.

Posen and Sentance apart – the rest of the committee seems to be
calmly united in the belief that the best approach is to maintain policy
on its ultra-easy settings for the foreseeable.

As the November minutes of the MPC make clear:

“The Governor invited the Committee to vote on the proposition that
Bank Rate should be maintained at 0.5%; The Bank of England should
maintain the stock of asset purchases financed by the issuance of
central Bank reserves at stg 200 billion.”

The other seven members of the committee obliged.

“Most members felt that the balance of risks had not altered
decisively and that the right action at this meeting was to maintain the
current, highly expansionary, stance of monetary policy,” the minutes of
the November MPC Meeting, released on Nov. 17 said.

The majority took the view “it would be premature to tighten policy
while a significant margin of spare capacity remained and medium-term
inflation expectations remained anchored” and “premature to loosen
policy further without clearer signs that the economy was growing too
slowly to use up the margin of spare capacity, especially while
inflation was persistently above target.”

INFLATION EXPECTATIONS ON THE RISE

Just as the leaked cables in the morning papers will have jolted
the governor earlier, the evening news bulletins may also provoke
some policy angst.

The YouGov/Citi survey of UK inflation expectations among the
general public has today revealed a further climb in short-term and
long-term inflation expectations.

The median for inflation expectations in the year ahead rose to
3.3% y/y in November from 3.0% y/y in October.

Year-ahead expectations are now the highest since September 2008 –
and, indeed, year-ahead inflation expectations have only been higher in
seven months since the survey began in late 2005.

–London bureau: +4420 7862 7499; email: wwilkes@marketnews.com

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