Osborne says no deal on rates with Bank

Chancellor of the Exchequer George Osborne poses with a bronze replica of a bull during his visit to the Bombay Stock Exchange (BSE) building in Mumbai July 28, 2010.

NEW DELHI (Reuters) - The government has not stitched up any deal with the Bank of England to keep interest rates low but thinks the best way to stimulate the economy is through monetary policy, Chancellor George Osborne told Reuters on Thursday.

In an interview in New Delhi, Osborne said that the corollary of improved global growth was a rise in inflationary pressures and that authorities always have to be mindful of that, adding that he had full confidence in the judgement of the central bank governor, Mervyn King.

Inflation in Britain has repeatedly surprised on the upside and is currently more than a percentage point above the 2 percent target. It is expected to remain high through next year.

Yet there are few signs the BoE, which is operationally independent from the government and charged with keeping inflation at 2 percent, is about to remove the extraordinary stimulus it has put in place since the credit crisis.

Interest rates remain at a record low of 0.5 percent and the central bank has pumped an unprecedented 200 billion pounds into the economy. King on Wednesday told a parliamentary committee that further easing was still possible despite the elevated inflation outlook.

Some analysts have speculated that King has done a deal with the new coalition government, which came into power in May, to cushion the economy while it gets on with cutting the record budget deficit.

Osborne said that was not true. "There is no tacit agreement at all. He is absolutely independent, as is his (Monetary Policy) Committee," he said.

But he added that he had always thought the best way to support the economy was through monetary policy though setting interest rates was a matter for the central bank.

"I have always believed that the greatest stimulating effect you can have in the economy is a monetary one not a fiscal one and the way to keep rates for longer... is by making sure fiscal policy is supporting and in this case means dealing with the budget deficit," he said.

GLOBAL INFLATION

Osborne is in India as part of the large trade delegation led by Prime Minister David Cameron and earlier was in Mumbai where he met the Indian central banker.

Together they discussed the global economy. Osborne said that the global economy was clearly recovering but the corollary to that would be a pick-up in inflationary pressures.

"One of the corollaries of global growth is you have to keep an eye on inflation pressures," he said.

"I have every confidence in Governor King and the MPC. The governor was giving evidence to the Treasury Select Committee yesterday (Wednesday). He made it very clear he is very vigilant in the fight against inflation."

The government has also awarded responsibility for financial supervision to the BoE and is considering options for giving it new macro-prudential tools such as the power to change leverage ratios to avoid financial excess in boom times.

Asked if this could mean the setting of maximum loan-to-value ratios in the housing market, Osborne said he did not want to pre-judge any legislation but said that a return to the lending practices of the past would be a mistake.

"It is worth looking at mortgage regulation but to jump in now and say what the borrowing ratio should be is a mistake -- what we don't want to do is return to the days of the Northern Rock mortgages of 125 percent with limited checks on whether families were able to afford that," he said.