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Mervyn King warns

Persistently low growth
will last until the next election,
Bank of England governor warns
as he cuts 2013 growth forecast to 1%

Wednesday 14 November 2012
13.46 GMT
Guardian.co.uk
Josephine Moulds
This article was published on guardian.co.uk
at 13.46 GMTon Wednesday 14 November 2012.
It was last modified at 15.05 GMT
on Wednesday 14 November 2012.

The UK economy risks suffering from a triple-dip recession amid a period of persistently low growth that will last until the next election, the governor of the Bank of England has warned.

Sir Mervyn King cut Britain's growth forecast to 1% next year and warned that output was more likely than not to remain below pre-crisis levels over the next three years. "There seems a greater risk that the UK economy may be in a period of persistent low growth," he said on Wednesday.

The UK economy emerged from a double-dip recession in the third quarter of this year, when the economy grew by 1%, but King warned that this was driven by one-off factors. "Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in the fourth quarter as the boost from the Olympics in the summer is reversed – indeed output may shrink a little this quarter," he said. If that period of contraction continues into 2013, the UK could drop into a triple-dip recession.

At the same time, the Bank significantly raised its inflation forecasts. Inflation is now is expected to reach around 3% in the near-term and not fall back significantly until the second half of 2013, later than previously thought.

UK inflation jumped to a surprise five-month high of 2.7% last month, driven by rises in tuition fees and dearer food bills. Energy price rises over the next few months are likely to drive it even higher.

King said the outlook for inflation was the main reason why the monetary policy committee decided not to expand the quantitative easing (QE) programme in November. He said there were limits to what monetary policy could do to boost an economy undergoing far-reaching adjustments in the wake of the financial crisis and amid severe headwinds from the eurozone debt crisis.

But economists said the bank may still engage in more QE in the future. Howard Archer of IHS Global Insight said: "With economic recovery currently looking feeble, fragile and far from guaranteed, we believe that the Bank of England will ultimately decide to give the economy a further helping hand with a final £50bn of QE. This seems most likely to occur in the first quarter of 2013."

Labour said this gloomy outlook proved the coalition government's economic plans were not working. The shadow chancellor, Ed Balls, said: "This sobering report shows why David Cameron and George Osborne's deeply complacent approach to the economy is so misplaced. Their failing policies have seen two years of almost no growth and the Bank of England is now forecasting lower growth and higher inflation than just a few months ago."

UK risks triple-dip recession, Mervyn King warns,
NYT,
14.11.2012,
https://www.theguardian.com/business/2012/nov/14/
uk-risks-triple-dip-recession-mervyn-king

Debt crisis:

emergency action revealed to tackle

'worst crisis since second world war'

Sir Mervyn King announces emergency measures
to help UK banks and boost business lending
by at least £80bn

Guardian.co.uk
Thursday 14 June 2012
21.14 BST
Larry Elliott, Jill Treanor and Ian Traynor in Berlin
This article was published on guardian.co.uk at 21.14 BST on Thursday 14 June 2012. A version appeared on p1 of the Main section section of the Guardian on Friday 15 June 2012. It was last modified at 01.05 BST on Friday 15 June 2012.

Sir Mervyn King has announced emergency measures to help banks and boost business lending after a warning from George Osborne that the "debt storm" raging on the continent had left the UK and the rest of Europe facing their most serious economic crisis outside wartime.

In a joint proposal between the Bank of England and the Treasury, banks will receive cut-price funds provided they pass on the benefits to their business customers.

This new "funding for lending" scheme could provide an £80bn boost to loans to the private sector within weeks and alleviate growing fears of a second slump since the start of the financial crisis in 2007.

In a second scheme the Bank will begin pumping a minimum of £5bn a month within the next few days into City institutions to improve their liquidity.

With one Spanish minister warning that the future of Europe could be decided within hours, both the governor and the chancellor used the backdrop of another day of financial and economic turbulence in the eurozone to express deep concern about the threat to Britain posed by Europe.

As interest rates on Spain's 10-year borrowing hit the 7% level and Angela Merkel insisted she was running out of patience with her fellow eurozone policymakers, King told a City audience at the Mansion House, London, that there was a "large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole".

Osborne said things were likely to get worse in the eurozone before they got better and insisted that the time for decisions had come. Strongly defending the government's handling of the economy, the chancellor said it had been the hard-won credibility built up over the past two years that had allowed the Treasury and the Bank to take action.

Thursday night's announcements were designed to shore up confidence before this weekend's elections in Greece, seen as a possible trigger point for a new phase in Europe's debt crisis.

In a speech to parliament in Berlin presaging a fortnight of crucial elections and summitry in Europe, an exasperated Merkel bluntly told the rest of Europe to get real about the crisis, dismissed calls for Berlin to share responsibility for other euro countries' debt, and rejected charges that Germany was not doing enough to stabilise the euro.

"Germany's strength is not unlimited," Merkel warned. "The way out of the crisis in the eurozone can only be successful if all countries are capable of recognising the reality and realistically assessing their strengths."

Merkel's uncompromising remarks came as Spain's foreign minister, José Manuel García Margallo, said: "The future of the European Union will be played out in the next few days, perhaps in the coming hours."

According to a report in the Spanish newspaper El País, García Margallo said: "The three months that [IMF boss Christine] Lagarde gave is possibly too long."

García Margallo called on the European Central Bank to buy Spanish bonds, and there was market speculation that the central bank had stepped in as the yield on the 10-year bond fell back below the 7% mark that had sent alarm bells ringing in the financial markets. In a dig at Germany, he added: "If the Titanic sinks, it takes everyone with it, even those travelling in first class."

Merkel expects to come under pressure when the G20 group of developed and developing countries meets for its summit in Mexico on Monday.

"Once again Germany will be the centre of attention," the German chancellor said, adding that some of the formulas being proposed for saving the euro using German money would simply amount to illusory short-lived fixes condemning Europe to a future of high debt and economic mediocrity.

Spanish government sources said the European council president, Herman Van Rompuy was due to meet Spanish prime minister Mariano Rajoy, Merkel, Italy's Mario Monti and French president François Hollande at the G20. Barack Obama, who has been pressing eurozone countries to act quickly to sort out the debt crisis, was also expected to meet the five eurozone leaders in Mexico. David Cameron may also join the meeting.

King raised the prospect on Thursday night that the eurozone would not emerge from the crisis intact. Noting that funding costs for UK banks were already going up as a result of the problems faced by the weaker nations of monetary union, the governor said: "Any significant redenomination of their currencies, or a default on domestic debts, would, both directly and as a result of the consequences for all our economies, put a dent in the capital position of our banks. As a result, investors demand a higher risk premium on loans to banks, pushing up the cost of borrowing for homeowners and businesses."

Underlining his concern about the pressures on UK financial institutions, the governor said Threadneedle Street would provide as much cash as banks required "given the turbulence ahead".

Osborne said the Bank and the Treasury were taking co-ordinated action to inject new confidence into the financial system and support the flow of credit to the real economy.

"We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep. The government, with the help of the Bank of England, will not stand on the sidelines and do nothing as the storm gathers."

    Debt crisis: emergency action revealed to tackle 'worst crisis
    since second world war', G, 14.6.2012,
    http://www.guardian.co.uk/business/2012/jun/14/
    debt-crisis-emergency-measures-mervyn-king

A Crisis of Faith

in Britain’s Central Banker

February 6, 2011
The New York Times
By LANDON THOMAS Jr.
and JULIA WERDIGIER

LONDON — A central banker need not be loved, but at the least he should command respect — and in Britain these days Mervyn King cannot count on either.

Mr. King, the donnish governor of the Bank of England, has been accused of presiding over the worst stagflation — a dreaded combination of stagnant economic activity and rising inflation — happening in any major developed economy. He has been condemned for flouting the bank’s independence by publicly supporting the British government’s deficit-cutting strategy.

As for the issue on which he may have most closely staked his reputation — that Britain’s large banks must increase capital levels well beyond international standards — he so far has been ignored.

Doubts over Mr. King’s inflation strategy come as European leaders are working to devise a unified strategy for dealing with sovereign debt woes in the region. Germany and France are pressing for concrete steps to harmonize fiscal spending by focusing on tax and pension issues, while weaker nations are struggling to bring down their deficits.

But with inflationary pressure picking up everywhere, the main topic of debate is expected to be how much longer the European Central Bank, like its counterpart in Britain, can resist the pressure to raise interest rates.

Not long ago, central bankers in the United States, the European Union and fast-growing emerging countries like Turkey and Brazil were being hailed. They were seen as having salvaged their economies by flooding their banking systems with enough money to help prevent a depression.

But now many of them are confronting the prospect that their powers are on the wane, as inflation begins to creep up and as growth in advanced industrial countries is hampered by high levels of government debt.

For a group accustomed to being influential — the Federal Reserve’s Ben S. Bernanke and Jean-Claude Trichet of the European Central Bank are facing challenges similar to Mr. King’s, if less acute — such diminution can come as a rude awakening. In a speech last month, Mr. King acknowledged his limited ability to combat the high levels of unemployment and increased inflation bedeviling Britain.

With food and energy prices increasing and the weakness of the British pound making imports more expensive, he said, monetary policy could not “alter the fact that, one way or another, the squeeze in living standards is the inevitable price to pay for the financial crisis and the subsequent rebalancing of the world and U.K. economies.”

It sounded a bit like the last cry of the “incredible shrinking central banker.”

“It was a defensive speech, and there is a degree of frustration in the forces that are beyond his control,” said DeAnne S. Julius, the chairman of Chatham House, a research and analysis organization in London, and a former member of the Bank of England’s monetary policy committee.

Ms. Julius is a critic and argues not only that Mr. King is underestimating the inflationary winds but also that he is too extreme in urging that British banks take on more capital. “The pressure is on — both in terms of banking reform and inflation,” she said. “I do not think he has an easy life.”

And then there is the issue of fiscal policy.

The British public could be in for an even rougher ride this year when the government’s £80 billion austerity program really starts to bite. That prospect looms even larger after recent indications that the economy, instead of continuing to grow, shrank by 0.5 percent in the last quarter.

Consumer prices rose at a 3.7 percent annual rate in December, reaching the highest level in two years and, for a 13th consecutive month, missing the Bank of England’s target of 2 percent.

Mr. King declined to be interviewed. But people who have worked with him paint a picture of an innovative thinker who has an agreeable charm but can also be pugnacious and confrontational when challenged intellectually.

“Mervyn is not blessed with any doubts about his abilities,” said Michael Foot, chairman of the Promontory Financial Group consulting company in London and a former Bank of England executive.

But the accumulation of pressures seems to be having its effect. His January speech, while carrying all the quirky earmarks of a King address — he began and ended with quotes from “Anna Karenina” — came across to many analysts as unusually prickly rather than as a measured analysis of the British economy.

“There is a misapprehension in some quarters that the monetary policy committee could have prevented the squeeze in living standards by raising interest rates over the past year to bring inflation below its present level,” Mr. King said in the speech. “That view is a misunderstanding of how monetary policy works.”

Two members of the bank’s policy making committee recently expressed public disagreement with Mr. King’s insistence that Britain’s current inflation rate had been driven by outside shock factors and that interest rates should not be increased. He has also been accused by another board member, Adam Posen, of jeopardizing the bank’s independence by talking up the Conservative-led government’s deficit-cutting strategy.

Since the Bank of England was made independent from the Treasury in 1997, its governors have been appointed by the government but have been viewed as apolitical, with a focus on ensuring price stability — and with no business sharing their views on fiscal policy. Mr. King, whose second and final term will end in 2013, appeared to have moved beyond that understanding when he endorsed the coalition government’s plan to cut the deficit faster than the opposition Labour Party had suggested when it was still in power.

The fear, some economists said, is that his endorsement creates expectations that he would be willing to neglect inflation for a while in order to let the government’s spending cuts work.

To Mr. King’s defenders, however, those who raise such fears do not know the heavy burden of running the Bank of England from its palace-like base on Threadneedle Street at the heart of the City, as London’s financial district is known. Indeed, Mr. King has plenty of fans who praise him for the power of his convictions — unpopular as they may be.

On the subject of being too close to the Tories on cutting the deficit, his defenders point to leaked cables in which Mr. King raised doubts about the experience of the Conservative leader, David Cameron, and his chief economic adviser, George Osborne.

“He is a king, a monarch in the classic sense, and he is fulfilling his duty to advise, consider and warn,” said Michael Fallon, a Conservative member of Parliament who has questioned Mr. King numerous times as a member of the Treasury select committee. “Our public finances were in a deeper mess than others, and he has helped shape that debate.”

Mr. King has also attracted a strong following — largely outside British banking circles — for his aggressive campaign to reduce the leverage of Britain’s banks. He laid out his case in a hard-hitting address late last year in New York.

As Mr. King pointed out in that speech, Britain’s banks pose unusual risks because they have assets 4.5 times the size of the British economy. How to scale that back is the subject of a much anticipated independent inquiry here, led by John Vickers, a former Bank of England chief economist and head of the Office of Fair Trading.

Mr. King has been careful to not prejudge the result. He has made clear, though, that his view is that radical changes must come, saying in his speech that of the systems one might use to organize banks, “the worst is the one we have today.”

A Crisis of Faith in Britain’s Central Banker, NYT, 6.2.2011,
http://www.nytimes.com/2011/02/07/business/07king.html

Sterling extends losses

as BofE cuts growth forecast

Published: February 11 2009
11:14
Last updated: February 11 2009
11:14
Thez Fiancial Times
By Peter Garnham

The pound extended its losses on Wednesday as the Bank of England signalled it was prepared to take unconventional steps to boost the UK economy.

Mervyn King, the Bank’s governor, said the UK economy was in deep recession and that the risks to economic growth lay “heavily to the downside” as the government wrestled with problems in the UK financial system.

In its quarterly Inflation Report, the Bank cut its growth forecasts sharply and predicted UK inflation would fall well below its 2 per cent target if interest rates remained at their current level.

This heightened expectations that the Bank would deliver a further cut in UK interest rates after lowering them by 50 basis points to 1 per cent after its monetary policy committee meeting last month.

But it was comments that the Bank would embark on a policy of quantitative monetary easing once interest rates fell to zero that undermined sterling.

Mr King said the central bank would ‘certainly’ be buying Gilts and the supply of money needed to be increased.

“In other words, Mr King is talking about turning on the printing press, which would effectively de-base the value of the pound,” said Paul Mackel at HSBC.

“On the back of Mr King’s comments the path of least resistance is for sterling to weaken.”

The pound fell 1 per cent to $1.4385 against the dollar, lost 1.2 per cent to £0.8987 against the euro and fell 1.6 per cent to Y129.36 against the yen.

Meanwhile, the dollar and the yen remained supported on Wednesday after sharp gains in the previous session.

Both currencies rallied strongly on Tuesday as disappointment following the US government’s bank rescue plan boosted safe haven demand for the dollar and yen.

The turnaround in sentiment stemmed the recent rebound in higher-risk currencies, with the pound one of the main underperformers reflecting the exposure of the UK economy to the financial sector.

Analysts said the market expected to see clear and decisive guidance from the new US administration, but were disappointed by the lack of detail concerning the pricing of distressed assets, the epicentre of the financial system’s problems.

“The market, correctly, doesn’t much care about tax rebates and public spending, as it understands these well and generally deems it a sideshow compared to the enormity and confusion surrounding bank balance sheets and lending confidence,” said Maurice Pomery at IDEAGlobal.

“The statement failed to deliver.”

The yen rose 0.7 per cent to Y89.87 against the dollar, climbed 0.5 per cent to Y116.37 against the euro and gained 0.9 per cent to Y58.71 against the Australian dollar.

The dollar eased 0.2 per cent to $1.2945 against the euro and edged 0.2 per cent lower to SFr1.1534 against the Swiss franc.

Meanwhile, the Swedish krona dropped sharply after the Riksbank, the country’s central bank, cut interest rates by more than expected after its policy meeting.

The bank slashed rates by 100 basis points to a record low of 1 per cent and said it might have to cut rates further. Analysts had been predicting a 50 basis-point move.

The Swedish krona fell 1.5 per cent to SKr8.3640 against the dollar and dropped 1.8 per cent to SKr10.8350 against the euro.

Audrey Childe-Freeman at Brown Brothers Harriman said the fact that Sweden’s yield advantage was falling by the month and had almost disappeared would weigh on the krona in the short term.

However, she said over a longer-term perspective, the pro-active fiscal and monetary policy mix endorsed by the Swedish authorities may be rewarded.

“Clearly that is not today’s story, but it is worth bearing in mind,” said Ms Childe-Freeman.

Sterling extends losses as BofE cuts growth forecast, FT, 11.2.2009,
http://www.ft.com/cms/s/0/9aacf07e-f82b-11dd-aae8-000077b07658.html

Bank of England cuts rates to 2%

Published: December 4 2008 12:00
Last updated: December 4 2008 16:20
The Financial Times
By Norma Cohen

Signs that the economic downturn is gathering pace prompted the Bank of England’s monetary policy committee to cut interest rates on Thursday by a full percentage point to 2 per cent, the lowest level for nearly four decades.

The last time interest rates were at 2 per cent was in the final days of George VI’s reign in 1951 and the previous time lending costs were cut from 3 to 2 per cent was October 26 1939, after Britain entered the second world war.

Explaining its move, the Bank said in a statement that it believed demand was now so weak that “there remained a substantial risk of undershooting the 2 per cent CPI inflation target in the medium term.”

The rate cut, while much larger than the Bank is accustomed to, is smaller than the 1.5 percentage point reduction made at the MPC’s last meeting in November and smaller than the money markets had begun to expect.

The Bank’s move was followed by the European Central Bank which cut its key policy rate by ¾ per cent to 2.5 per cent as central banks around the world attempt to tackle slowing rates of growth. The Riksbank in Sweden cut its interest rates by an unprecendented 175 basis points to 2 per cent and the Reserve Bank of New Zealand cut its main lending rate by 150 basis points to 5 per cent.

The cut by the Bank suggests either that the MPC is less convinced than many private sector economists that deflation is a real possibility, or that it has other concerns about the impact of much lower rates, including worries over the slide in the pound. Sterling on Thursday fell to the lowest level against the dollar for six and a half years and to a record low against the euro.

In its announcement, the Bank pointed to “a number of fiscal measures in train”, both in the UK and abroad, aimed at boosting demand to counteract the current downturn. The minutes of the last MPC meeting showed that some members expressed a desire to see how the fiscal stimulus outlined in the government’s pre-Budget Report might affect demand before making any exceptional moves in interest rates.

The move comes after key purchasing managers’ index readings for the construction, manufacturing and services sectors hit record lows in recent days, with the future orders component of each index predicting that worse is to come.

In making its interest rate decision, the Bank expressed concerns about the flow of credit to businesses and households. “Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult,” it said.

Ominously, the Bank concluded that it was “unlikely that a normal volume of lending would be restored without further measures.”

Interbank lending markets have seized up again, after a brief breathing spell following the government’s move to provide a £37bn taxpayer-funded lifeline to the nation’s banks. That suggests that the woes of the financial sector are still too great to allow it to resume its normal pattern of lending to households and businesses.

The Bank noted that while CPI inflation remains high at 4.5 per cent, the weaker outlook for activity in the near term and further falls in commodity prices have lowered that profile. The recent decision to cut value-added tax temporarily should also bear down on inflation in the near term, although that effect will be reversed in 2010.

Andrew Smith, chief economist at KPMG, said: ”The battle against deflation is on. Rates are set to fall further, possibly to zero, and soon, as policymakers try to counteract the powerful contractionary forces at work in the economy.

“However, it is unlikely that low interest rates alone will achieve the desired result and the UK may well have to follow the US with unorthodox measures, such as buying up mortgage and commercial debt, to free-up lending and re-liquefy the financial system.”

Ian McCafferty, chief economic adviser to the CBI, the employers’ body, welcomed the cut.

“The economy needs a significant monetary stimulus and the Bank has clearly decided this will be best achieved by another big cut in interest rates. What is critical for business and consumers alike is that this reduction is passed on,” he said.

Stephen Robertson, director general of the British Retail Consortium, said: “This is exactly the type of decisive action we need during these uncertain times. With the threat of inflation fading, the Bank is right to concentrate on jump-starting the economy.

He added: “The Bank’s job is not done. It must continue to cut rates in the new year to get the economy heading in the right direction again.”

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, was more guarded. While describing the cut as a “bold move”, he added: “In our opinion it will not on its own be sufficient to bolster confidence given the scale of the current financial crisis.

“Further significant job losses will be announced in the run-up to Christmas and into the first half of 2009, putting pressure on the Bank to cut rates further. We expect rates to fall to 1 per cent by the end of the first quarter of 2009.”

Bank of England cuts rates to 2%,
FT, 4.12.2008,
https://www.ft.com/content/
07ee3a02-c1eb-11dd-a350-000077b07658

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