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 373.

    No great shock here as the incoming bank of england governor is a high inflation guru and where he will let it ride without any intervention whatsoever. The problem here is that prices will sequentially go through the roof from food to petrol and everthing in between.

    Dr David Hill
    World Innovation Foundation

  • rate this

    Comment number 372.

    The Bank of England inflation target is legally mandated by Parliament at 2%. Mervyn King has been quick to condem traders attempting to fix Libor rates,however he has himself no qualms in doing the equivalent with inflation for his own political ends.

  • rate this

    Comment number 371.

    I say chaps all this criticism is a bit much, I was only doing what my mates at Goldman Sachs told me to do.

  • rate this

    Comment number 370.

    so to recap BoE buys gilts from pension funds, who then have to find something else to make money so they buy stocks and commodities or lend shares for shorting. ( who cares folk wont notice they have no pension for years).
    Banks get a commission on trade and they can front run the deals with HFT.(nice one).
    What we lose on the pension we lose again with inflation.

    QE is destroying us....

  • rate this

    Comment number 369.

    His passing will not be mourned. He could have told the government to stop passing on the responsibility for managing the economy to unelected bodies like the BoE/MPC.

  • rate this

    Comment number 368.

    The reality is the Federal reserve policy of QE has left the UK with little option but to follow suit . The function of QE is to devalue the currency , push up the nominal value of assets and to create inflation to counter the deflationary forces generated in a recession. Real growth will only occur when sentiment changes and the expectations of both consumers and businesses turns positive

  • rate this

    Comment number 367.

    @363. Little_Old_Me
    Supply and demand... interesting. So where is the demand from? 99.999% of this country can't afford to scratch their backside. I assume the tiny number of fat cat bankers, expense fiddling MP's and landlords being paid by the tax payer are the demand side... as normal, all right for some (Same under Labour of course)

  • rate this

    Comment number 366.

    @353, 363 & 365
    Current inflation almost entirely due to weak £, rising cost of oil & gas, increased taxation thereon & incr cost of food, fuel & water. Until Council Tax was frozen, that was another source of infl. Rail/tube/bus fares & mail costs are other major causes.

    Incrd raw material prices for manufacturing has an impact but prob small; most stuff consumers buy is imported.

  • rate this

    Comment number 365.


    Perhaps you should read this? It would drive JfH to distraction.

    It is highly speculative in terms of policy outcomes say nothing of QEs primary purpsoe - govt's funding (easing furtehr gilt issuance). Not does it say anything about awful effect it has had on annuities.

  • rate this

    Comment number 364.

    Mervyn King, the Pontius Pilate of banking.

    Truth, what is truth?

    Probably washing his hands at this very minute. Nothing to do with me...

  • rate this

    Comment number 363.

    353.jacroberts - ".....ONLY cause of long term inflation is printing money........."

    For sure that is having an impact currently (arguably the main impact) but it is far from the only cause of inflation:

    Demand out stripping supply (basic economics that one)

    Fall in currency of importing nation vs exporting nation (for goods traded internationally)

    for just 2 factors to start....

  • rate this

    Comment number 362.

    I think we are entitled to know where the £375bn has gone.

    How much has pushed up commodity prices? How much invested in our competitors?

    The final twist is that even the Funding for Lending tranche seems to be going into property lending rather than productivity-related investment.

    These capitalists will do ANYTHING other than do the right thing!

  • rate this

    Comment number 361.

    29 Actionr

    Didn't you realise? We in the UK don't actually have to DO anything to become more wealthy any more. So long as bankers get their bonuses, and house prices go up and more people are employed (off benefits) we are all fine. Except for most of us.

  • rate this

    Comment number 360.

    357. Yes some gilts have been bought back from banks but minority. These are liquid assets. How has this prevented collapse?

    QE has raised pr of gilts (thus sold at profit by banks). But it has disaster for pensions lowering yields & redc returns on pension invtmts, helping push final salary schemes into large deficits

    Primary purpose of QE - govt funding enabling gilt issue at low coupon

  • rate this

    Comment number 359.

    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?

    Arrested the culprits and locked them up. Hired Marc Carney earlier.

  • rate this

    Comment number 358.

    335. "From the BOE website: -
    MPC’s decision to inject money directly into the
    economy does not involve printing more banknotes.
    Instead, the Bank buys assets from private sector.."
    So the money is still in the banks as suggested earlier.
    Lets hope they didn't lose it all on libor.

  • rate this

    Comment number 357.

    Hi Mr fTP
    You question ealrier was why QE has supported banks?
    You say they have bought gilts from pension funds.
    the links I have posted imply or say that they have bought securities from banks, and that these sales have profited or supported the banks.
    Can anyone show me figures, of what was bought and where?
    I believe the QE has bought from the banks and this money flow prevented their collapse

  • rate this

    Comment number 356.

    335. From the BOE website

    "MPC’s decision to inject money directly into the
    economy does not involve printing more banknotes.
    Instead, the Bank buys assets from private sector
    institutions – that could be insurance companies, pension
    funds, banks or non-financial firms – & credits the seller’s
    bank account.... The end result is more money out in the wider economy."

  • rate this

    Comment number 355.

    @350 fTP
    You had better correct the Wiki page & write to new DG, when in post, to complain about BBC's news reporting.

    Oh, while you are at it, a letter to M.King (cc GO) to say they got QE3 all wrong. Could be why 1. we don't hear much about it, & 2. Stephanie seems reluctant to do any research on it.

    Could, of course, be due to Treasury deficiencies - sitting in an In/Out-Tray somewhere?

  • rate this

    Comment number 354.

    351. Are you really that slow? Both articles confirm exactly what I have been saying.

    The real issue is in the States (athough I have big Q over QE here) where Fed has been swapping high quality assets (government bonds, cash) for low quality assets (asset backed securities and otehr low q paper) munching Fed's BS.


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