Mervyn King still ne regrette rien


Inflation is going to stay further above target, for longer. And the Bank of England is not planning to do much about it. Growth in the real economy is also going to continue to disappoint . And our central bank doesn't expect to make a big difference to that, either.

These were the headlines from today's Inflation Report press conference , the 81st that Sir Mervyn King has presented in the 20 years since the Report was first produced.

His designated successor, Mark Carney, said last week that the Report was "state of the art" when it first came out in 1993. So, in many ways, was the inflation target itself.

In 1993, we were just entering what you might call the golden age of central bank inflation targeting - when central banks were not only given the task of targeting future inflation but actually seemed to be able to do it.

Now, central banks around the world still have more or less the same target. All that's changed is the capacity to execute it - particularly in the UK. And the use of the word "flexible".

The target measure of inflation has been significantly above 2% for the best part of 7 years, and the latest central forecast from the Bank shows it staying well above 2.5% for at least the next 18 months.

Is there anything the Bank should be doing differently? Sir Mervyn King made clear, again, today that his answer to that question was no. Though he did think the government should do more on the supply side, to raise the economy's short and long term potential. What, exactly, he declined to say.

Unlike Mark Carney, Sir Mervyn does not think that quantitative easing - creating money and using it to buy government bonds - itself is encountering diminishing returns. Indeed, the current Bank of England governor thinks the general mood in financial markets suggests that monetary policy here and around the world is having, if anything, too much effect on asset prices.

True, we're not seeing anything like the same kind of effect on the real economy. But that's a reflection, Sir Mervyn said, of the inherent limits of monetary policy in today's environment. It wouldn't be resolved by the Bank doing the same thing in a different way.

The gap between him and Mr Carney, I suspect, is not as wide as even their careful rhetoric suggests. Mark Carney also thinks there are limits to what central banks can do to restore growth. But he does seem a little more willing to experiment, before concluding that monetary policy in general has been "maxed out".

Is there anything that the Bank or the government might have done, back in 2010, to make the path of adjustment any faster or easier? Again, the governor's answer was no. He told me that any more aggressive effort to stimulate the economy at that time - either fiscal or monetary - would have been "doomed to fail". The way Sir Mervyn tells it, the big disappointment since then hasn't been monetary policy or fiscal policy, but the external environment.

Some will say this is revisionist history, that the governor is forgetting the much more optimistic forecasts for domestic as well as external growth that were built into the Bank's initial forecasts. But it is indeed history.

The big lesson for right now from the report and the press conference is that inflation is going to stay higher for longer. As Sir Mervyn went out of his way to point out, this is in no small part because of government policies - notably the rise in tuition fees and administered increases in transport and utility bills - which the central bank could not predict, let alone control.

He talked a lot about the "paradox of policy" in his remarks. One wag on Twitter suggested the governor was using "paradox" as others might use the word "mistake". But Sir Mervyn was quite pointed in referring to these administered price rises as "own goals".

Tuition fees represent a tiny part of the Consumer Prices Index, but will be making an outsize contribution to inflation for several years to come. Of course, the same applied in spades to the increase in VAT a few years ago.

There might have been no better way for the chancellor to raise the money he wanted to raise, but the fact that he has made the job of the central bank harder - at the same time as insisting it take the lead in stimulating the recovery - is indeed a paradox.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 33.

    Lets say that King is right, things get giong again soon, what then?

    Unemployment is still too high.
    The deficit is still WAAAAY to high.
    The cost of housing is still WAAAAAAAAAY too high.

    It was the housing bubble that fuelled the rest of the events leading to the crash.

    What has been done to resolve it?

    Zip diddly squat!

  • rate this

    Comment number 32.

    Argent Pur
    ah yes. ZH providing some refreshing non tinted glasses reporting as usual, unlike what we get here. More money printing=stronger gold price. Other commodities are available of course.

  • rate this

    Comment number 31.


    Inflation is great for the rich. Not so great for the rest though. It has always been thus. As King and his banker buddies know well. Don't expect any better from Carney (ex-GS).

  • rate this

    Comment number 30.

    Well, department of no surprises, their broken economic thinking can only see one way to deal with the debt and that is to inflate it away. So aided and abetted by Useless George and Clueless Dave the good guys who didn't take on unsustainable debt and the savers will get to pay for the profligate spenders. CBI equally clueless trying to talk up the market, you couldn't make it up but they do.

  • rate this

    Comment number 29.

    So BoE has decided to save the house prices/banks/property speculators and sacrifice the economy and growth.

    Million of
    -Tenants will face high rents, high inflation and low savings and ridiculous high asset prices
    -Pensioners will face diminishing returns on their savings and low annuity rates
    -Savers will fave low savings rates

    BoE has sacrificed our economy. Disgrace and a national scandal.

  • rate this

    Comment number 28.

    Carney can't take up his duties a moment too soon.

    King was, at best, a mediocre and willing manager of British economic decline. The BoE needs visionary leadership, not timeservers from Oxbridge common rooms.

  • rate this

    Comment number 27.

    "You do realise that Labour will be back in power in 2015?"

    Hooray! They can't do any worse than a Chancellor who hasn't a clue.
    We might actually end up truly "all in together" where those who caused this crisis actually start to pay for it.

  • rate this

    Comment number 26.

    The sooner Sir Mervyn goes the better, like Osborne he was unqualified and incompetent in post,

  • rate this

    Comment number 25.

    So, inflation is "good" is it (according to some posters) ?

    I work hard (in the private sector), I pay all my taxes (most of which go to greedy bankers and the privatisers of public services), and then I face higher prices in the shops. And all because Gideon cannot get the economy started, so has to rely on price inflation to bring in more tax revenues. How very very cynical of him.

  • rate this

    Comment number 24.

    @11. Acet
    You are right, too much to believe. I guess they are softening us all up for something. Probably another round of taxes and cuts to 'further enhance the growth' (or put another way to put the plebs back in the box and let the rich get richer.
    Guess we will ALL end up working for free in the workhouse before much longer - not just those unfortunates on 'government schemes'

  • rate this

    Comment number 23.

    CBI chanting the same mantra, I believe it when I see it. !!!

  • rate this

    Comment number 22.

    In a nutshell...inflation is going to sky rocket.

    Only the multi millionaires and billionaires with their wealth hidded offshore are going to escape. Its a race to the bottom so that the west is competing with the east on a level wages playing field.

  • rate this

    Comment number 21.

    Does anyone take any notice of the governor of the BoE anymore? Just how many forecasts do you need to get wrong before you become a laughing stock? There are no "green shoots" as no one but no one is spending any money. How many more high st shops need to go under before its recognised as a problem?

  • rate this

    Comment number 20.

    As predicted years ago, the strategy is to inflate away debt. It is the tried and tested way since....err....last time. Time to raise interest rates. Never mind all that guff about tuition fees and utility bills, living is more expensive cf RPI. Oil and unemployment are heading in the same direction i.e. the recovery is underway.

  • rate this

    Comment number 19.

    No8 Betteroffdumb.
    The National Debt has been growing for hundreds of years.
    I am not surprised that you do not know that

  • rate this

    Comment number 18.

    Suggestions below that by debasing the currency through QE will deflate the debt are not credible. The QE is going to the banks. They are using this to speculate on the markets. Initially pushing up the FT100. But when that bubble pops, the money will move to commodities, pushing up the cost of living, and making people worse off not better.

  • rate this

    Comment number 17.

    What the financial world hasn't realised yet is that when times are hard nobody gets as much as they like including them: they seem to expect to continue raking it in when everyone else is being pushed into poverty to satisfy their greed - politicians and the Bank of England are complicit in this, failing in their duty of care to ordinary citizens.

  • rate this

    Comment number 16.

    The banks 'policy' is about giving the rich via banks and investments a massive slice of extra money in the hope that they will deign to buy yet another massive pile of houses, posh cars or £7000 mobile phones. This is apparently going to get us all out of the shite. Somehow I really doubt it, for a start just how many palaces can the average rich man want?

  • rate this

    Comment number 15.

    King, lets face it, even many of the bankers who stuffed up stood down.

    You though, the biggest of all, sleptwalked in, and right through this with your only "idea" being the highly origonal "lets print some money"

    Thank goodness the new guy will be better. it's not like he could be worse!

  • rate this

    Comment number 14.

    King was one of the hundreds of economists who got it so spectacularly wrong in their notorious letter about 80s Tory economic policy. He is just as wrong now. There is no recession and there has not been any double dip recession. What we have are erroneous GDP figures which King is basing his mistaken policy and comments on. The effects into the future will be frightening


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