— Adds Detail To Version Transmitted At 1303GMT

LONDON (MNI) – Bank of England Governor Mervyn King and Monetary
Policy Committee member Adam Posen have today made public their
differences over the governor’s effective endorsement of an accelerated
fiscal tightening programme.

With both appearing at the Treasury Select Commmittee, 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. The subject was a hot political topic at the time.

Posen sought to make clear he was not the source of a recent
Financial Times report on the issue, but said the differences of view
were real.

“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.

Posen, asked about the idea in principle of talking about fiscal
policy, said “my strong bias is, except on very rare occassions, and in
election cycles we don’t.”

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

King defended 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.

The Governor also said he had not made explicitly political
comments, adding that he had not entered into the debate over tax and
spending.

“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 said

He also said that he ‘reserved the right’ to make similar comments
again if the fiscal situation warranted him to do so.

Sentance made clear that he was not one of those who supported
Posen in his concerns about fiscal tightening.

“Some of the comments in the media on fiscal tightening, have been,
in my view, slightly overstating the intensity of it… as a percentage
of GDP it’s broadly similar to what we saw in the 1990s”.

Loose monetary policy as well as a strong global economy would help
offset the impact of the fiscal policy tightening, Sentance said:

“It’s not just monetary policy that acts as an offset here, we
already have, in my view, quite a loose policy with very low interest
rates, and a very large injection of QE, but also the growth of the
global economy and the support it provides”.

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

“The circumstances in which this debate this took place were the
most extraordinarily precarious position in the financial markets, the
chain reaction which we can still see playing out, where this country
needs to put itself beyond harm’s way. I think we would have said those
things to any government of any complexion, of any combination in those
circumstances. It was an absolutely legitimate thing for the governor to
do”.

“You cannot operate monetary policy in any sensible way without a
framework of underlying stability that comes from government and
parliament as well as from our mandate”.

Commenting on the spat in a later BBC Radio interview, Chairman of
the Treasury Select Committee Andrew Tyrie said that he thought the
Governor was perhaps right to comment on the fiscal plan in this
instance but warned that the BOE should ‘not make a habit of this’.

“In these very unusual circumstances a case can be made for doing
it. After all, we had just had a coalition government formed in which
the coalition agreement said the coalition would consult the Governor on
this issue and the Governor felt he was responding to a request from the
newly formed coalition,” he said.

“I think you’ve got to have very, very exceptional circumstances to do
this,” he added.

–London Bureau; tel: +442078627492;email:

ukeditorial@marketnews.com

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