Knives out for King

AS MERVYN King battles his way through the central London traffic and chilling weather to the Old Lady of Threadneedle Street tomorrow morning, he could be forgiven for thinking that the Christmas holidays could not come soon enough.

While the rest of the City is already enjoying the first of the Square Mile's festive drinks parties, the Bank of England governor has no time to let his hair down as he faces a serious challenge to his credibility and his future at the helm of Britain's central bank.

Over the last ten days, the man who has helped steer the UK economy through good times and bad over the past seven years has faced an unprecedented attack from politicians, commentators and colleagues, both past and present.

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When King arrives at the Bank on Wednesday for the first session of the monetary policy committee's monthly interest rates meeting, it's likely to be a stormy affair as both economic and personal tensions simmer around the table.

But the two-day committee meeting, at which the MPC is expected to put to bed any thoughts of further quantitative easing, may be the least of King's worries as trouble brews in the halls of Westminster.

A member of the political and constitutional reform committee, Tristram Hunt, has called for King to be hauled before MPs to answer allegations of inappropriately political actions - an area that is strictly off limits for Bank governors.

The first questions over King's behaviour emerged less than a fortnight ago when Adam Posen, a US academic and current member of the MPC, shocked the City with the revelation that he and another MPC colleague had reservations about the governor making "excessively political" remarks in a report and press conference just a few days after the formation of the coalition government in May.

During a hearing before the Treasury Select Committee, Posen suggested that King had made comments in May's inflation report that appeared to side with the Conservative Party's view on budget deficit reduction - a major battleground between Labour and the Tories during the election.

"There was a difference of opinion at the MPC, 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 said.

"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."

Posen's remarks prompted several startled looks among the Square Mile's economists. Not only was it unusual for an MPC member to criticize the governor but the timing was also curious given that the US academic had chosen to wait six months before airing his concerns.

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The incident fanned rumours of a major discord between MPC members as they reach a crossroads in monetary policy and whether they should extend or withdraw support to the economy.

But if Posen's remarks angered the governor, they were nothing compared with what was about to hit him less than a week later when he became the latest public figure to get swept up in the Wikileaks scandal.

On Wednesday, correspondence sent from US ambassador Louis Susman to Hillary Clinton was published by the controversial website, adding to the allegations of political behaviour.

In Susman's cables to his homeland, King was accused of privately criticising David Cameron and George Osborne prior to the general election, for a lack of experience, lack of depth among their inner circle of advisers, and for viewing everything through a political kaleidoscope.

"King expressed great concern about Conservative leaders' lack of experience ... both have a tendency to think about issues only in terms of politics and how they might affect Tory electability," the cable read.

For King's opponents, the Wikileaks revelation was an opportunity too good to miss and almost immediately there was a chorus of calls for King's head to roll.

Among the chief cheerleaders for the governor's resignation was the outspoken economist David Blanchflower who since his departure from the MPC last year has had not held back in pointing out the errors in King's approach to monetary policy.

But even though there's little love lost between the two former colleagues, the strength of Blanchflower's remarks suggested that the swelling criticism of King's actions may be more than just a storm in a teacup.

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Blanchflower said the governor's "thirst for power and influence" have clouded his judgment "one too many times".

"He has now committed the unforgivable sin of compromising the independence of the Bank of England," Blanchflower added.

"He is expected to be politically neutral but he has shown himself to be politically biased and, as a result, is now in an untenable position. King must go."

It wasn't long before a host of politicians seized the opportunity to stick the knife into the governor, who has also been the subject of speculation in several recent books about the events surrounding this year's general election.

Shadow defence secretary Jim Murphy said: "There has got to be this sense of independence and that has been called into question so he has to work even harder now to demonstrate that."

While Bank governors - like politicians - are used to developing a thick skin when it comes to criticism of their choices, the momentum building against King was such that both the Bank and 10 Downing Street intervened in the growing row.

A spokesman for the Prime Minister said King was doing a "good job" but refused to respond to questions about whether Cameron had confidence in King.

"The issue of confidence simply doesn't arise," the spokesman said.

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The Bank also denied any tension between Downing Street and the Old Lady of Threadneedle Street. "The governor has a very effective working relationship with both the Chancellor and the Prime Minister," a spokesman said.

Several of King's allies also called for calm as fears grew that the central bank could lose its leader at a time when the UK economy's fortunes are at a tipping point.

Tory MP Patrick Mercer argued that even if King's independence had been compromised by the Wikileaks revelations, now was not the time to cut off an "experienced hand". "The last thing I think we need at the moment is, first of all, the independence of Mervyn King to be compromised," Mercer said.

Former MPC member Charles Goodhart also dismissed as "ludicrous" any suggestion that King's position at the helm of the Bank was untenable. "If anything, they (the revelations] underline how independent of any political party the governor has been," Goodhart said.

While the governor is not short of friends willing to stand up and fight for his integrity, those who believe the time is nigh for a new captain to take over the good ship of the Bank of England are not willing to let the matter lie.

It is believed that at least six current and former members of the MPC have misgivings about the governor's behaviour, which will no doubt be inflamed by the publication of a new book by Anthony Seddon and Guy Lodge, which claims that Gordon Brown had suspicions about King's role during the formation of the coalition government.

The authors claim that the former prime minister was so paranoid about King's manoeuvres during those tension-filled days that he telephoned him and confronted him about whether he had been in discussions with the Conservatives and the Liberal Democrats - something that would have been well beyond the bounds of the governor's position.

King denied the accusation but it was last week pointed out that in another book written by David Laws, one of the key negotiators between the Lib Dems and the Tories, it has been suggested that the Bank governor did have some form of contact with Cameron's party.

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Hunt is unwilling to let the issue lie. He has written to Graham Allen, chairman of the political and constitutional reform select committee, calling for King to be brought in for questioning.

"I believe Mervyn King should give evidence to the committee to clarify what role he believes a governor should play in the formation of coalitions, as well as what specific role he did play in May," Hunt said.

"This is not a small matter and does deserve some serious analysis by a committee like ours."

This week's MPC meeting, the results of which will be announced to the markets on Thursday, is not expected to be revolutionary in its outcome. Interest rates are likely to be held at their historic 0.5 per cent low while no further money is forecast to be pumped into the economy via QE.

But while it may be dull in content, it certainly won't be in atmosphere. As one economist pointed out, perhaps King should in future remember the age old dinner party advice: "Never discuss religion and politics."