Osborne’s Scope to Reshape Bank of England Widens on Posen Exit

U.K. Chancellor of the Exchequer George Osborne
U.K. Chancellor of the Exchequer George Osborne. Photographer: Simon Dawson/Bloomberg

Chancellor of the Exchequer George Osborne’s scope to reshape the Bank of England just got wider as the departure of policy maker Adam Posen lengthens the list of key staff to appoint as he also redesigns the institution.

Posen, 45, will leave the central bank at the end of August before becoming president of the Washington-based Peterson Institute, according to a statement released May 18 in London. That will further pile up Osborne’s Bank of England inbox as he drives through legislation to revamp its role and considers how to fill multiple vacancies in its leadership.

Posen’s exit will remove one of the most vocal policy makers at the Bank of England, whose pronouncements often presaged shifts in officials’ stance. With decisions also due on the successor to Governor Mervyn King and Deputy Governor Charles Bean, Osborne’s personnel choices may have as important a legacy on the central bank as his plans to return financial regulation to the institution.

“He’s got to be careful,” said Howard Archer, an economist at IHS Global Insight in London. The Monetary Policy Committee “has got to be seen to be independent and if there was a perception that Osborne was really shaping it to fit his desires, there would be a threat to the bank’s credibility.”

The government has been counting on the central bank to adopt loose monetary policy as it pursues the biggest fiscal squeeze since World War II. Prime Minister David Cameron said on Feb. 9 that “it’s the right stance to have that, as we have a tight and robust fiscal policy of getting our deficit down.” He said last week that the central bank “is able to do more to support the economy if necessary.”

Stimulus Program

The central bank held its bond-purchase program at 325 billion pounds ($514 billion) this month, and left the key interest rate at a record low of 0.5 percent.

Posen will leave on Aug. 31 at the end of his current three-year term, the central bank said in an e-mailed statement last week. He will replace Peterson Institute founder Fred Bergsten on Jan. 1, 2013, the research institution said.

The terms of King and Bean, the deputy governor for monetary policy, finish on June 30, 2013. Hector Sants, chief executive officer of Britain’s Financial Services Authority, will step down at the end of June this year.

As a so-called external member of the Bank of England’s nine-person MPC, Posen is one of four part-time appointees who vote on the quantitative easing plan and set interest rates. King and Bean are among the five full-time bank staff setting policy.

Someone to Trust

“For the governor, the chancellor will want someone he feels he can work with and trust,” said Grant Lewis, head of research at Daiwa Capital Markets Europe and a former Treasury official. “For external members they’re not necessarily looking for someone who thinks in a particular way.”

The governor is appointed by the queen following a recommendation by the government. Osborne has said he’ll start the formal search for King’s replacement in the fall. The Treasury said last week it will advertise for a replacement for Posen “as soon as possible.”

Paul Tucker, deputy governor for financial stability at the central bank, is the favorite to replace King as governor. While his term doesn’t finish until the end of February 2014, a decision by Osborne to award the top post to someone else may spur Tucker to leave the bank, leaving the chancellor with another position to fill, said Richard Barwell, an economist at Royal Bank of Scotland Group Plc and a former Bank of England official.

If Tucker were to be appointed governor, Osborne would then have to find a replacement deputy.

Stimulus Calls

Posen led calls to expand stimulus from September 2010 and spent the next year pushing alone to increase the size of the central bank’s bond-buying plan. His colleagues joined him in voting unanimously to restart asset purchases in October 2011 as the economy headed into two consecutive quarters of contraction that marked Britain’s first double-dip recession since 1975.

In September, Posen proposed the creation of a new public institution that would increase credit to small- and medium-sized companies as banks continued to curtail lending after the financial crisis.

“It’s a real headache because most people would say that Posen has done a phenomenal job,” Barwell said. “He called the economy right and he stood his ground. You need to have brains and you need to be courageous. He’s going to be difficult to replace.”

Financial Regulation

The Bank of England vacancies come as it prepares to absorb new powers to regulate financial institutions to prevent another financial crisis. Ed Balls, the opposition Labour Party lawmaker who speaks on Treasury affairs, said last month that the arrangements, outlined in a banking bill being considered in Parliament, give the governor so many responsibilities that King’s replacement “will face a near-impossible task.”

The Treasury Select Committee, whose role is to scrutinize the central bank, has also conducted an inquiry into its accountability. In a report published in November, the panel said that “the independence of the governor from political control must be upheld.”

“You don’t want to be seen as putting in your own man,” Daiwa’s Lewis said. “It’s such a sensitive job. It’s very difficult to put a ‘yes man’ in because it would damage the bank’s credibility.”

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