The Bank of England's Kingmaker

Central bankers typically go to great lengths to stay above the political fray. When an election cycle coincides with a full-blown fiscal crisis like Great Britain's, that's not always an easy task. Such is the predicament of Bank of England Governor Mervyn King, a fiscal hawk who has issued dire warnings about his country's profligate spending.

In the just-completed U.K. election, King courted political controversy by urging then-Prime Minister Gordon Brown's government earlier this year to show more spending restraint in the face of the country's gargantuan budget deficit, now clocking at about 12% of gross domestic product. He warned in February that the U.K.'s top credit rating was "ours to lose," and said financial markets "want a clear and strong signal" that the government can manage the deficit.

Whether he intended to or not, King became the subject of a sparring match in Parliament before the elections when Conservative leader David Cameron used King's views on the budget to slam Brown's handling of the economy. Now Cameron, not Brown, resides as Prime Minister at 10 Downing Street, thanks to an accord reached by his Conservative Party and the Liberal Democrats.

At a postelection press conference on May 12, King said that while he tried to intervene "as little as possible" before the election, it was appropriate to comment on the budget shortfall. "We are still halfway through the world's worst financial crisis ever," he said. "It is important for the central bank to comment on the measures to deal with the fiscal deficit that will certainly color monetary policy for a long time to come." He said Greece's fiscal mess shows what can happen when budgets run out of control.

Budget Agreement

King says he welcomes Cameron's plans to trim the U.K.'s budget deficit, which Conservative officials have indicated will involve 6 billion pounds ($9 billion) of cuts this fiscal year. "The agreement I have been informed about that was reached between Conservatives and Liberal Democrats is a very strong and powerful agreement," King said in London after unveiling quarterly economic forecasts.

The central bank predicted the economy will sustain its pickup and reach an annual growth pace of about 3.5 percent by the beginning of 2012. Inflation is likely to remain below the 2 percent target. Mopping up after the fiscal mess will be a multiyear affair. And if the new government loses its nerve in cutting spending, it can probably count on King to issue a public scolding or two to get everyone's attention.

The bottom line King will continue to maintain a balance between calling for fiscal restraint and appearing to meddle in this new era of British politics.

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