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Coffee House

Sir Mervyn defends George Osborne’s QE trick

27 November 2012

3:25 PM

27 November 2012

3:25 PM

Sir Mervyn King told MPs, slightly wearily, at the end of today’s Treasury Select Committee hearing, that this was his 100th appearance before a parliamentary committee since he joined the Bank of England. It was as rigorous a session as any of the 99 others that the Governor has sat through in his time, with the committee members choosing in particular to attack the decision to transfer £37 billion from debt interest in the Asset Purchase Facility from the Bank’s QE budget back to the Treasury.

As Jonathan blogged on Monday, the Institute for Fiscal Studies warned George Osborne against using that transfer to meet his debt target, and MPs were unimpressed, not just with the substance of the decision, but also the way in which it was announced. They even elicited a rare apology from the Governor for this. He said: ‘I accept it is a matter of regret these announcements were not made at the same time.’ He added that he was unsurprised by the outrage from some commentators, Coffee House included, saying: ‘I think any move of this kind is likely to attract a good deal of cynical comment from our press.’

But King did make clear to the committee that he disagreed that this move would allow the Chancellor to ‘cook the books’, saying:

‘This does not give anyone the option: it is merely taking cash one year with the clear commitment to repay it in the next… it doesn’t have any impact on the long-term fiscal position.’

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He took great exception to Andrea Leadsom’s claim that the way the Bank had handled the decision on the QE switch was ‘highlighting really that the Monetary Policy Committee is operating really in a complete silo’. Leadsom drew parallels with the way the Bank had handled the Libor crisis by passing concerns on to others to investigate. But Sir Mervyn thought this ‘irrelevant’.

George Mudie pressed him on whether he had warned George Osborne about the long-term effects of the switch, asking:

‘Did you warn the Chancellor… by raiding this money he’s actually not being very clever or fair to your successor?’

The Governor replied:

‘I certainly discussed with him the consequences that taking the car now from the Bank to the Treasury would have… the question that you raise about could interest rates be higher in the future… is an important question, but it is very clearly one for the Treasury.’

One question that really was all for the Bank was how it managed its growth forecasts. Sir Mervyn didn’t exactly apologise for not cutting growth forecasts sooner, but he did admit that this should have happened, saying the change was ‘something which I think had been building up in our minds’, adding: ‘I think we should have done it much earlier, but we didn’t.’

He’s clearly keen to move on from his current role, updating the committee on the number of months and days that he has left at the Bank. Committee chair Andrew Tyrie even joked that King had glanced at his watch as he told them how long he had left, as though he might be trying to work out how many minutes and hours there were, too. The members of the committee, meanwhile, might be counting down the days to the session they will hold with King’s successor, Mark Carney, to see what he thinks of Osborne’s clever QE switch, and the general legacy he finds waiting for him when he arrives at the Bank.

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