UPDATE 2-BoE’s Posen accuses King of being too political

* Posen: some MPC felt May report “excessively political”

* Majority of MPC were comfortable with fiscal language

* King says was only commenting on UK economic outlook

(Adds details)

By Matt Falloon

LONDON, Nov 25 (BestGrowthStock) – Bank of England Governor Mervyn
King crossed the line into party politics when he endorsed the
coalition government’s fiscal tightening plans in May, fellow
policymaker Adam Posen said on Thursday.

In the biggest attack ever on King’s integrity by a BoE
official, Posen revealed he and at least one other policymaker
thought the governor had overstepped the mark on May 12 when the
BoE published new forecasts a day after the coalition took
power.

How fast to cut a record budget deficit had been a key issue
before Britain’s May 6 election and many commentators had been
surprised at the time that King had welcomed the more aggressive
Conservative/Liberal Democrat tightening plans so warmly.

“There was a difference of opinion…in particular in the
main meeting, over a particular paragraph in the report that was
talking about the need for a particular speed with which to deal
with the fiscal policy,” Posen, a U.S. academic told lawmakers
as he sat just a few feet away from King.

“A number of the people on the committee, myself plus at
least one other … were concerned that that statement could be
seen as excessively political in the context of the election.”

King denied the accusations and was backed by his Deputy
Governor Paul Tucker, Chief Economist Spencer Dale and Monetary
Policy Committee member Andrew Sentance as he defended himself
in front of parliament’s Treasury Committee.

“The Inflation Report appeared after the election and I
commented as governor,” King said. “I have never spoken ever
about the balance between spending and taxes, let alone about
any of the individual measures.”

Analysts were surprised by the quarrel in the normally
secretive central bank being aired so publicly but for the most
part were supportive of King and his right to talk about a
budget deficit that had topped 11 percent of GDP.

“It is not helpful but as King himself pointed out, other
major central bank governors have said much more,” said Philip
Shaw, chief economist at Investec.

RELATIONSHIP STRAINS

King had a strained relationship with the previous Labour
government, particularly during former Prime Minister Gordon
Brown’s last years in office, and has been accused of being in
cahoots with the Conservative Party before.

Conservative finance minister George Osborne has repeatedly
had to deny talk of a secret pact between him and King in which
the BoE would keep putting monetary stimulus into the economy to
cushion the economy from harsh spending cuts.

The May Inflation Report called for “a significant fiscal
consolidation” in the medium term, arguing that a more
“demanding path” than had been set out in the March budget might
be required.

The report, which is signed off by the nine-strong MPC, also
said the nature and pace of that consolidation would need to be
sensitive to sustaining market confidence.

In a statement at the accompanying press conference, King
said it was “imperative that our own fiscal problems are dealt
with sooner rather than later”. He also backed six billion
pounds of spending cuts proposed by the coalition for 2010.

Posen said dissenting policymakers raised their concerns but
the majority was happy with the language, published a day after
the Conservative-Liberal Democrat coalition came to power.

BoE Deputy Governor Paul Tucker, one of five central bank
insiders on the MPC, said the central bank would have said the
same things to “any government of any complexion”.

“You cannot operate monetary policy without a framework of
underlying stability from government and parliament,” he said.
(Editing by Ron Askew)

UPDATE 2-BoE’s Posen accuses King of being too political