* King holds quarterly news conference to present forecasts
* Economists see little change in forecasts, focus on
* Independence in spotlight after Treasury move on QE gilts
By Sven Egenter
LONDON, Nov 12 Bank of England Governor Mervyn
King will have a new set of questions to deal with on Wednesday
beyond the usual ones about the fragile economy: just how
independent is the Bank?
The issue has risen after last week's decision by the
government to take profits from the Bank's bond buys and put
them in the finance ministry coffers.
King agreed to a finance ministry decision on Friday to take
back 35 billion pounds in interest paid to the BoE over the past
three years on its 375 billion pound holdings of government
bonds, bought as part of its quantitative easing stimulus
On Wednesday -- as well as presenting a quarterly update to
the BoE's growth and inflation forecasts -- King is likely to be
asked to explain this move which came a day after the Monetary
Policy Committee decided not to loosen policy further.
The windfall may allow finance minister George Osborne to
achieve his debt reduction goals. It also amounts to a back-door
loosening of monetary policy.
But economists have warned that it carries future costs and
further blurs the line between fiscal and monetary policy,
putting the central bank's cherished independence at risk.
"Put simply, a decision to unwind QE will now be more
problematic for the government -- in the form of larger deficits
and financing needs -- than was the case before," Credit Suisse
economist Neville Hill said.
"To the extent to which a reversal of QE may now be more
costly for the government than was the case before, it clearly
raises the risk that the Bank's latitude, ability and
willingness to reverse QE when it needs to - to meet its
inflation target - will be more limited," he added.
In Friday's agreement, the finance ministry pledged to
indemnify the BoE for future losses on the gilts portfolio,
which economists think are likely once the central bank tightens
policy and sells gilts back to the market.
Nomura economist Philip Rush said the BoE's Funding for
Lending scheme, which provides cheap funding to banks if they
keep up lending to households and businesses, already raised
similar issues as the central bank ran the risk of losses.
For his part, King has stressed that the central bank could
only venture into such policies as an agent for the government,
because they ultimately put taxpayers' money at risk.
But economists said the recent decision may well feed back
into rate-setters' considerations.
"The move on coupons may make the Monetary Policy Committee
even more wary in future about expanding asset purchases, given
the temptations to monetisation that such a large chunk of
public debt held by the Bank has to politicians," said BNP
Paribas economist David Tinsley.
Many economists still see Britain's economy in need of more
support -- despite the strong exit from recession with 1 percent
growth in the third quarter -- after surveys showed fresh
weakness across most sectors.
Economists are keen to get King's view on the success of the
new FLS scheme as well as on alternative measures, after several
central bankers have said gilt purchases looked less effective.
Top bank regulator Adair Turner, who has applied to succeed
King at the helm of the BoE next year, has recently fuelled the
debate, suggestion a more cooperation across all policy areas
might be necessary to fight deflation dangers.
"We agree that more gilt purchases might not do a lot of
good," said Capital Economics analyst Vicky Redwood. "But this
just means that the Committee should get more imaginative."
Many economists think the BoE's forecasts will leave the
door for more outright quantitative easing asset purchases open.
"Mervyn King's usual dovish overlay could compound this
message with a reminder that the fire-fighting MPC will respond
if recent positive signs fade," Nomura's Rush said.
A Reuters survey showed that economists predicted the BoE to
leave its forecast largely unchanged to show annual growth of
2.0 percent and inflation at 1.8 percent at the end of 2014,
below the 2 percent goal and signalling leeway for more action.
King's news conference will start at 1030 GMT, after the
publication of the quarterly forecasts in the Inflation Report.