King Becomes ‘Political Football’ in Spat With Brown

By Brian Swint and Svenja O’Donnell

March 27 (Bloomberg) -- Bank of England Governor Mervyn King began testimony to lawmakers this week with a joke about football. As the week ends, he may have scored a goal for the opposition.

Conservatives George Osborne and William Hague are seizing on King’s unprecedented warning that U.K. Prime Minister Gordon Brown doesn’t have the room to drive up spending, while investors are using the remark to explain why a British bond auction failed for the first time in more than seven years.

King’s rare commentary on fiscal policy is exposing him to the political spotlight he has sought to avoid since becoming central bank chief in 2003. It also adds to the tension monetary policy makers already find themselves under as the economic crisis forces them to risk their independence by working more closely with governments.

“These comments are now a political football,” said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. in London and a former Bank of England official. “I’m not sure King will have wanted to see the reaction.”

Hague, deputy leader of the opposition Conservatives, said in Parliament that King’s comments reveal an “open disagreement” between the central bank and the government. Osborne, who speaks for the opposition on financial matters, described the remark as a “defining moment.”

‘Quite Unprecedented’

“King’s comments are quite unprecedented, but so is the deterioration in public finances,” said Michael Taylor, an economist at Lombard Street Research Ltd. “They do deal Gordon Brown a blow. If we do have another big fiscal stimulus, he has to be very careful in justifying whether it’s necessary.”

Brown gave King a second five-year term last year, having kept the governor waiting before confirming his reappointment. With an election due within 15 months, Brown now faces the prospect that the independence flaunted by King’s central bank may turn against him.

The prime minister sought to play down talk of a rift with King, while noting the central banker may support some fiscal stimulus. “I am someone who is cautious by nature,” Brown told broadcasters during a visit to Sao Paulo, Brazil. “I think what Mervyn King was saying is what I have always said, that you have to be cautious about everything you do. Mervyn King has actually said that he would be prepared to support targeted actions.”

Bond Failure

The warning has already proved a distraction for the prime minister on a world tour to promote the need for governments to bolster economies before next week’s summit of Group of 20 leaders in London. The European Commission forecasts Britain’s budget deficit will touch 9.6 percent of gross domestic product in the year ending March 2010, triple the European Union limit.

“Given how big these deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits,” King told lawmakers on March 24, adding that the Treasury could enact “targeted and selected measures.”

The next day the U.K. couldn’t find enough buyers for all of the 1.75 billion pounds ($2.55 billion) of bonds it was trying to sell. Robert Stheeman, head of the U.K.’s Debt Management Office, which runs the bond auctions, says it wasn’t able to attract enough bids partly because of the central bank’s efforts to lower yields by purchasing debt.

With the economy shrinking at the fastest pace since 1980, the Bank of England has cut the benchmark interest rate to 0.5 percent, the lowest in the bank’s three-century history. This month policy makers embarked on a program to spend as much as 150 billion pounds on U.K. government debt, corporate bonds and other assets with newly created money.

‘Worst Nightmare’

That need to work in lockstep with the government has led some economists to warn the central bank’s independence is at risk, especially if monetary policy makers come under pressure to keep injecting money into the economy once the recovery begins.

“The central banker’s worst nightmare is that he’s starting to print money to finance unsustainable government borrowing,” said Nick Kounis, an economist at Fortis Bank in Amsterdam and a former U.K. Treasury official. King’s comment is “a warning,” he said.

The government may now be heeding it. Chancellor of the Exchequer Alistair Darling, who presents the government’s budget on April 22, said yesterday he agrees with King that any new budget measures should be “targeted” at unemployment and struggling businesses.

The U.K. has “to have a sustainable position,” Darling told lawmakers, backing away from earlier indications he would ramp up stimulus spending.

King’s testimony also had its lighter moments. When lawmakers appeared confused about which of them should ask the next question, the governor joked, “I’m afraid it’s like Aston Villa passing: you’re not quite sure which man it’s going to.”

Birmingham, U.K.-based Aston Villa Football Club, King’s favorite soccer team, lost 5-0 to rivals Liverpool last weekend.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net.