Sir Mervyn's date with history

The 12 February, 1993, was a day to remember for Mervyn King: it was the first ever Bank of England Inflation Report press conference, and he presided over it.

Chart showing changing monthly rate of inflation, based on year on year change, from 1973-2013

Little did anyone know then that he would preside over 81 more of them, first as the Bank's first chief economist, then its deputy governor, and finally as governor. Wednesday sees press conference number 82. Also Sir Mervyn's last.

I wasn't at that first conference. But as a student intern at the Financial Times I did go to the third one, in August of 1993. I remember being suitably awed by my surroundings, and impressed by the then chief economist's willingness to answer our questions and also his apparent desire to explain the Bank's policy rather than simply repeat it.

Back then, Sir Mervyn reminded me of my university economics tutors - unsurprisingly, given that he had been a professor at the LSE before joining the Bank.

Twenty years on, the economic journalists who make their quarterly pilgrimage to this event are not so awestruck. You could say the relationship has 'matured'. He would say we were less respectful - downright rude, on occasion. For our part we hacks might say he was now a bit too defensive, a bit too unwilling ever to admit a mistake.

Time for a change, maybe. The inflation target and the Inflation Report itself are now under review, the Chancellor having asked the Bank's policymakers to consider whether and how the system could work better after the new governor, Mark Carney, takes over in July.

But as Mr Carney has said himself, in 1993 the Inflation Report and the UK inflation target were "state of the art". And it is not too much of a stretch to say that they helped to change the world. They certainly changed the world of central banking.

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Sir Mervyn tends to deploy two rather different lines of defence.”

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Greater transparency

Like the inflation target - devised by Chancellor Norman Lamont in October 1993, after Britain's exit from the ERM - the Inflation Report was part of a global shift in central banking which the UK helped to lead. By making policy more transparent - and the people making it more accountable - the Bank's quarterly reports and press conferences also helped paved the way to central bank independence in 1997.

That greater transparency had a practical purpose: if the public understood the target and how the bank planned to achieve it, the idea was that households and wage earners would be more likely to believe in it - and if they believed in the new inflation target, it would be an awful lot easier to achieve.

To use the jargon, it was all about 'anchoring expectations'. And in that key respect you would have to say that the system that the UK helped to pioneer in the 1990s was a remarkable success - not just in the nice times before the crisis but pretty nasty ones

As you know, inflation expectations fell rapidly from the early 1990s onwards, in Britain and around the world. Inflation also fell, and became more stable. The one aided and abetted the other. What is interesting is that expectations have remained quite stable, even when inflation has been anything but.

At the time, many were astonished that the RPIX measure of inflation averaged just over 2.5% in the ten years from October 1999 - exactly on target. Sir Mervyn became Governor in the summer of 2003, the year when the Bank was asked to target a CPI inflation rate of 2%. in his first five year term, inflation averaged precisely that: 2%.

Since then, the average has been 3.2% - and inflation has been more than 1 percentage point above the target, more often than not. In fact, if the latest Bank forecasts are right, there will only be three quarters in the decade after 2005 when inflation was not above the Bank's target.

Why and how the Bank of England has been so wrong, for so long, has been the subject of much vigorous debate at these press conferences (and also in this blog).

Mervyn King In press conferences, critics can get short shrift from Sir Mervyn.

You'll remember that Sir Mervyn tends to deploy two rather different lines of defence: the first is that the inflation overshoots have largely come from unexpected factors like higher energy prices or the rise in VAT, which the Bank could not have been expected to predict - and, he will add, most city forecasters didn't either.

His second argument is that even if the Bank had expected that higher inflation, it would not have chosen to do anything about it, because tackling that kind of externally generated inflation would have done too much extra damage to the domestic economy.

Critics say he can't have both - either the Bank knowingly set out to miss the target, or it didn't. In the quarterly press conferences, such critics tend to get short shrift.

The inflation debate among academic economists in Europe and the US is somewhat different. There the surprise has been, not that inflation has been so high, but why it has not fallen into negative territory, despite the depressed state of the economy and persistently high unemployment (see, for example, this paper from the IMF). I hope to say more on that in a future post.

But for central bankers and economists here and around the world, it's worth saying that what has NOT happened to inflation expectations in the past five years is almost as interesting as what has happened to inflation itself.

As the chart shows - long-term expectations of inflation in the UK have barely budged in the past decade, despite several years, before the crisis when inflation came in below target, and many since when inflation has come in too high.

Banks have failed. The global financial system has teetered on the brink of collapse. And consumers have seen the effect, month after month, in shrinking real pay packets and spiralling bills. But through all that, the average person in the UK has continued to expect the Bank to do its job - and continued to expect that inflation will eventually come back down.

There are lots of reasons why our expectations have remained so well 'anchored' - against the odds. But perhaps posterity will say that Sir Mervyn presided over 82 of them.

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

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  • rate this

    Comment number 146.

    We have a Tory party out of control, tail wagging the gods.

    The Financial Transaction Tax is dead in the water across the EU. It was a time waster handed to bureacrats.

    Austria Luxembourg have blocked an EU deal to increase tax transparency.

    Nothing will happen in europe for three months until Merkle re-elects herself.

    The EU economy cannot be turned around. It is impossible.

  • rate this

    Comment number 145.

    Instructive to see the evolution of inflation under the periods of the various above-mentioned influential economic policy post holders.

    Even more informative would be graphics other key variables such as GDP, unemployment, price of crude, BoP, government debt, deficit/surplus, Co. VAT & patent registrations, etc similarly aligned.

    Some long-standing myths may be dispelled.

  • rate this

    Comment number 144.

    138.Tim Browning

    "...If only we could redeploy all civil servants as bookends, we would at least get some productivity out of them..."


    I've had a lot of dealings with Land Registry and other departments recently. I've found them perfectly efficient, and their work valuable.

    In the former's case, vastly more economic than pursuing matters through the courts.

  • rate this

    Comment number 143.

    Mervyn King failed where all the bankers, economists, politicos & pundits failed. They all fiddled while the City burned because they could not connect cause and effect on the lives of we mere wage slaves. It was Monopoly money until their game collapsed then we are left to pay in real earnings & real work.

  • rate this

    Comment number 142.

    If anybody else had made such catastrophic errors of judgement in their job, they'd have been shown the door.

    These muppets, though, get rewarded.

  • rate this

    Comment number 141.

    May I have knighthood too and some Wimbledon tickets please? At least I haven't stood by while the country burned, financial stability imploded, banks failed, behaved like pontious pilot while the Libor scandal rampaged. Oh to be a teflon King! And why has the press been so coniving in their adulation?

  • rate this

    Comment number 140.

    His biggest mistake was his lack of urgency when faced with the banking crisis.
    His initial reaction was a "hands-off" and "let them fail" approach. He didn't appreciate the seriousness of the matter or that they couldn't be allowed to fail.
    His best judgement was when he and Vince Cable repeatedly drew attention to the housing bubble and out-of-control lending before the crash.

  • rate this

    Comment number 139.

    I think purple has connected the dots that were freely available on every shorting discussion group in 2006.

    Northern Rock was not an "if", it was a "when". And you should blame those bankers, but there customers can't play dumb either. 125% mortgage, you must be stupid if you think that is
    a sustainable deal....

  • rate this

    Comment number 138.

    1 down, only 5.7 million to go.

    If only we could redeploy all civil servants as bookends, we would at least get some productivity out of them

  • rate this

    Comment number 137.

    Careful what you wish for. If you hammer the unions so that there's no wage inflation, or rather, deflation, don't moan when you can't inflate away national and private debt (no matter how much QE you throw about).

  • rate this

    Comment number 136.

    A good job?
    Presiding over a gigantic housing asset bubble and the insolvancy of almost every UK bank I'm surprised you can even ask the question..
    Sadly an academic with little real world skill to call upon. To fail to spot the nineties/noughties bubble is amateur.
    Anyone who says "no-one could have foreseen.." needs to substitute "I failed to observe.."

  • rate this

    Comment number 135.

    Asset deflation would affect every home owner, pension, savings and in fact everything in ways unimagined. Everything we know, understand and trust would end. There are people who wish that.

    What was seen in Cyprus recently was a payments crunch. Northern Rock was basically a credit crunch. They are inter~ related. The USA suffered an asset crunch during 2009. Imagine all arriving together.

  • rate this

    Comment number 134.

    He has been bad. Low rates caused the problems we have and he is ultimately responsible for that so cheap lending that house prices boomed and people borrowed ever more against it. He lets inflation carry on, deliberately acted to prevent any chance of good deflation. Cut rates fast in big chunks, miserly quarter percent rises when rarely he let them back up. Still they're all in it, be no change.

  • rate this

    Comment number 133.

    A twist on Hayek. Our economy, all £1.6tn pa is your income. You leverage that income to buy your home over 25 years.

    You buy a property you can afford. Where did it all go wrong?

    The house you paid for was 30% over priced at your mortgage interest rate. That is not a bubble it is a black hole.

  • rate this

    Comment number 132.

    It was unfortunate the BoE did not broach wider implications of the Bloomberg and related IRS matters breeding indignity amongst monied reactionaries. The broader issues of global tax avoidance, to big to fail in jail and the untouchables is at root of matters. Those robbing nations blind wish to continue and believe they should to such extent they will embarass a US government. Naughty people.

  • rate this

    Comment number 131.

    We will never know. Monetary tools and implementation are state of the art and work. Money is a conservative business unless it is you raking in the mega profits and wondering what accountants can come up with to protect pots of gold.

    The problems of imbalances from massive tax avoidance have not been addressed but are a political game. It was a pity regulation was taken from King's remit.

  • rate this

    Comment number 130.

    Sir Mervyn, guilty of illegally fixed prices (the cash rate), counterfeiting money (QE), knew and participated in LIBOR rigging, and allowed Fractional Reserve Banking (fraud and embezzlement).

    "Greater Transparency"
    Tell us who owns the BoE's: the Bank of England Nominees Limited owns its shares, so who are the BOEN? Why is this group specifically exempt for company disclosure laws?

  • rate this

    Comment number 129.


    Mervyn King should have resigned two months into the job. Once he'd had time to take a look at the books and understood the reckless nature of Brown's economic policy (borrow and be damned).

    The fact that he didn't marks him out as colluding with Brown and partially (with Brown) responsible for the UK's present economic catastrophe.

    For which he'll get a gong.

    Which is why he did it.

  • rate this

    Comment number 128.

    # Merve is Ok,but 2 or 3% inflation is not an issue
    Depends on your personal circumstances I guess, the point is that wages are dropping in relevant terms. In the last six months pace of real wages fall increased from just under 1% to nearly 3%. Putting more people out of work or on lower wages is not helpful to a sick economy with the longest return from recession since the 30's

  • rate this

    Comment number 127.

    @125 DuanK

    There is a reason bankers are seen as a figure of blame: they are to blame.

    In what other industry can you run op losses of bilions and still have the taxpayer give you a multi million pound bonus?


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