Bank of England Governor Mervyn King's swansong: Markets have got it all wrong

Outgoing Governor says world economy still far too weak to allow interest rate rises

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The Independent Online

The outgoing Bank of England Governor, Sir Mervyn King, yesterday told financial markets they had "jumped the gun" by assuming that the end of global monetary easing was in sight.

Stock markets fell sharply last week and government bond yields spiked after the chairman of the Federal Reserve, Ben Bernanke, said the US central bank could end its monthly asset purchases next year if the American economy continued to pick up.

But Sir Mervyn, in his final appearance before the Treasury Select Committee before he retires next week, argued this was a premature reaction from the markets and that economic growth would need to be considerably stronger before central banks started hiking interest rates.

"I think people have rather jumped the gun thinking this means an imminent return to normal levels of interest rates. It doesn't," he said. "The Federal Reserve has merely said that the easing, in which it is still engaging, may taper at some point depending on economic conditions."

The Governor added: "I think the view that we are definitely at the beginning of the end, that we are definitely at the point where we need to raise interest rates, is a premature judgement about where we are, and no central bank has moved rapidly down that course."

Sir Mervyn also noted outstanding threats to global economic and financial stability, including the unresolved eurozone crisis and the interbank credit crunch in China. He described the latter as a "really quite significant development".

Speaking about the UK, Sir Mervyn struck a more downbeat note than statements in previous weeks. "A recovery is in sight, but it is too weak to be satisfactory" he said. "Unemployment is well above the level we'd hope to bring it back to."

The outgoing Governor has been in a minority of three on the nine-member Monetary Policy Committee in voting for a £25bn extension to the Bank's £375bn quantitative easing programme in recent months.

The incoming Governor, Mark Carney, has signalled he is in favour of offering financial markets so-called "forward guidance" on the path of interest rates. Sir Mervyn said he was not opposed to this, but added: "The question of communications in my mind, although very important, is a second-order problem compared with the question of how can we create the economic conditions so that the economy can get back to sustainable growth all around the world."

Sir Mervyn said politicians had wasted the time bought for them by loose monetary conditions and had failed to enact supply-side reforms and address trade imbalances to enhance growth. He said: "I've been very disappointed at the failure of the world to put in place policies to create economic conditions when it would be desirable to return to normal levels of interest rates."

The outgoing Governor also revealed to MPs on the committee that plans were in place to replace Charles Darwin with Jane Austen on £10 notes at some point, although he added that this would be a decision for Mr Carney.

The Bank has faced criticism for its decision to replace Elizabeth Fry with Winston Churchill as one of the images on the £5 note from 2015-16.

Property defies governor's gloomy theme

Sir Mervyn King was extremely cautious about the state of the British economy, but one area with room for optimism is the housing market, according to figures out yesterday.

Banks and building societies handed out the largest number of loans for more than a year in May, fuelling higher house prices, according to the British Bankers' Association.

The number of approvals for new home purchases jumped 10 per cent to 36,102 over a single month, the highest number since January 2012, and 24 per cent higher than a year earlier.

But economists at Capital Economics said the improvement in lending only came from a very low base and was helped by government intervention. "In aggregate, the major banks are still withdrawing credit from the housing market," said the think-tank.