Forex: Kings Influence May Spread into Politics after UK Election

Bank of England Governor Mervyn King’s influence looks set to spread beyond his remit of monetary policy and into politics after an election that opinion polls say may produce no clear winner.

With arguments about how quickly to cut the UK’s record budget deficit, currently 12.6% of GDP, taking centre stage in the general election campaign an inconclusive result could help King set the agenda as he pushes for a plan to reign in the nation’s debt. King, who is a political independent by law has not been afraid to criticize the government and first started warning Prime Minister Gordon Brown about the growing deficit a year ago.

Governor King sparked political controversy in March last year by calling for restraint in government spending at a time when Prime Minister Gordon Brown was insisting on the need to stimulate the economy. In January, his views on the deficit became the basis of a spat between Gordon Brown and Conservative Party leader David Cameron in Parliament.

Opinion polls are continuing to indicate that neither Gordon Browns’ Labour Party nor David Cameron’s Conservative Party will win a clear majority in Parliament. In the event of a so called hung parliament the next government may fail to agree on a clear plan to reduce the record deficit.

It is this uncertainty that has been weighing so heavily on the Pound of late. The currency has fallen 6% against the US Dollar on the forex online market this year. Yesterday it posted a loss of 0.20% against the US Dollar, falling for a second day to close at USD1.5239.

Governor King’s involvement in a future budget plan is already winning support in some political quarters.

“It doesn’t require a big problem to get the three shadow chancellors in a room with the governor of the Bank of England to agree the framework within which you conduct policy,” Vince Cable, the opposition Liberal Democrat treasury spokesman, said on March 31st. Cable may be a candidate to become Chancellor of the Exchequer in a coalition government if neither of the two main parties secures an overall majority.

However Governor King would need to steer a careful course to preserve the central bank’s independence, particularly at a time when the market would be in a fragile condition and there would be increased scrutiny from investors.

Governor King has already attempted to calm market concerns in relation to Britain’s public finances. He said on February 10th that there are “big differences” between the U.K. and Greece, which has struggled to contain market unrest over a budget deficit equivalent to 12.7% of GDP.

The Bank of England will announce the benchmark interest rate at noon today in London, the last decision before the May 6th general election. The bank is expected to keep the rate at its current record low level of 0.1% and hold its bond-purchase plan at 200 billion Pounds.