King says living standards may never recover from the crisis
Bank of England Governor strikes dovish note on timing of interest-rate increase
Wednesday 02 March 2011
The Governor of the Bank of England warned yesterday that living standards may never recover from the financial crisis and that households were only just starting to feel the full impact of bankers' mistakes.
Mervyn King told MPs that ordinary people were not to blame for the pain ahead and that he was surprised there had not been more public fury.
"It is not like an ordinary recession where you lose output and get it back quickly," the Governor said when asked if the country would ever recover from a squeeze on living standards on a scale not seen since the 1920s.
"You may not get it back for many years, if ever, and that is a big long-run loss of living standards for all people in this country."
Mr King said that unlike previous recessions, the economy had not needed a shake-up to get industries out of state control or weaken union power and that the people bearing the most pain are blameless.
"They can't look at this and say, 'Okay, something was wrong that has to be put right' and they don't get bonuses on the scale of people in the financial services sector," he told the House of Commons Treasury Committee.
"The cost of this crisis is only now being felt. I'm surprised that thedegree of anger hasn't been greater."
Mr King said the cost to ordinary people was one reason why the Bank would take a hard line with banks and let troubled lenders fail when regulation is transferred to it from the Financial Services Authority.
Mr King said the FSA had spent too much time listening to banks' views and getting bogged down in detail.Instead, he said, the role of a regulator should be to clamp down on riskyactivity and make sure that if a bank gets itself into trouble it can go bust without the taxpayer, savers or other banks paying the price. "It will change the face of banking supervision for the next quarter of a century," he said.
MPs also grilled the Governor on the Bank's inflation record after prices rose at double the 2 per cent target rate in January. Rate-setters split four ways last month on monetary policy.
The Governor rejected criticism of the Bank's interest-rate forecasts and rejected calls for a rate rise to ward off wage increases – arguments made by the Monetary Policy Committee hardliner Andrew Sentance.
Mr King said rising oil and commodity prices were the main causes of surging prices and that all MPC members believed the effects would drop out of the figures. Divisions were over how quickly this would happen, he added.
The bank's inflation forecasts stand up well but by definition "the chance of our central projection taking place is close to zero", Mr King said.
He added that raising rates to send a signal to workers and employers would be "self-defeating" because the Bank had already said the risks ofundershooting and exceeding the medium-term inflation target were equal. It was up to people to make their own judgements, he said.
Mr King said the economy appeared to have picked up in the early part of this year after a shock 0.6 per cent contraction in the final quarter of 2010. But he warned that with big spending cuts and rising unemployment ahead therecovery would remain "choppy".
He added that there were few signs that short-term price increases were feeding into increased wage demands that would entrench inflation.
The Governor insisted he had made no agreement with the Chancellor to hold rates at their record low to support the economy while the Government cuts spending. He admitted taxes could have been increased "for people like me" to soften the cuts but that the decision was for politicians.
Howard Archer, economist at IHS Global Insight, said: "Mervyn King continues to give the impression that he is very wary about raising interest rates in the near term, at least. The one certainty remains that interest rates will rise, be it sooner or later."
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