The free Citizen is published monthly and has a print run of 10,000, while Hackney Today is published fortnightly with a print run of 108,000.
Government guidelines currently state that local authority-run publications should have a publication frequency of no more than quarterly.
Keith made the criticism in an open letter to Mayor of Hackney Philip Glanville published in the current edition of the paper.
He wrote: “Whilst we have always recognised the right of the council to produce its own communications for residents, we regard the selling of advertising in its publications and on its websites as unfair competition.
“Like the BBC, the council’s fortnightly freesheet Hackney Today is funded by the taxpayer – and would not be viable were it not subsidised by the taxpayer. It does not rely on advertising sales as its lifeblood. But local news publishers do.
“The council’s selling of advertising therefore makes the funding of effective government scrutiny more difficult and in so doing has an adverse effect on local democracy and debate.”
However, Mr Glanville has defended the council’s policy, arguing it would lose between £100,000 and £150,000 if it did not sell display advertising for the newsletter.
He said: “Hackney Today is still by far the most popular source of information in Hackney about the council, other local services and national policy changes, especially amongst older people and those on lower incomes. Given the amount of change around housing, education and welfare reform it is more important than ever that this information reaches everyone in the borough.
“The advertising revenue it raises takes pressure off scant public resources, but the paper has always been run in a way that does not aggressively compete with other local titles. Most advertising revenue comes from partners such as the NHS, schools and colleges and housing associations who wish to take advantage of its borough-wide door-to-door distribution.
“The council’s website sells advertising through a national network, and does not compete by taking ads from local business.”
In response, Keith said: “Hackney Today may be the most popular source of information about the council, but it is difficult to measure this. It is also an easy argument for the council to make, given that it has at least ten times the circulation of any printed news publication in the borough.
“Mayor Philip Glanville does not deny that Hackney Today sells advertising space to local businesses and therefore competes with newspapers like ours. Three years ago I said I did not regard Hackney Today as a competitor. But the commercial landscape for national, regional and local papers has changed significantly since then. Journalists are being laid off left, right and centre and newspapers are folding.
“The vast majority of London boroughs, including the most deprived borough – Tower Hamlets – manage without ad revenue from council freesheets. I have never denied the council has a right to communicate with local residents – this is about how that is funded.”
“If the challenges for local newspapers are exacerbated further by local councils, it will have dire consequences for democracy.”