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It's goodbye to Mervyn King, but not to the slump It's goodbye to Mervyn King, but not to the slump
(about 1 hour later)
In his valedictory appearance before MPs as governor of the Bank of England on Tuesday, Sir Mervyn King warned that a sustainable recovery is still a distant prospect, despite signs that the economy is returning to health.In his valedictory appearance before MPs as governor of the Bank of England on Tuesday, Sir Mervyn King warned that a sustainable recovery is still a distant prospect, despite signs that the economy is returning to health.
Growth will be weak and interest rates will remain at ultra-low levels until global policymakers grapple with the underlying problems created by the banking crash, he said.Growth will be weak and interest rates will remain at ultra-low levels until global policymakers grapple with the underlying problems created by the banking crash, he said.
King, who will hand over to his successor, Mark Carney, on Monday, dismissed calls for a speedy return to "normal interest rates", which have grown louder in recent months after the economy avoided a triple-dip recession. Instead, he criticised governments for failing to take advantage of the opportunity offered by massive money-printing programmes to rebalance their economies.King, who will hand over to his successor, Mark Carney, on Monday, dismissed calls for a speedy return to "normal interest rates", which have grown louder in recent months after the economy avoided a triple-dip recession. Instead, he criticised governments for failing to take advantage of the opportunity offered by massive money-printing programmes to rebalance their economies.
"Until markets see in place policies to bring about that return to normal economic conditions, there is no prospect for sustainable recovery, and without that prospect for sustainable recovery, markets understand that it will not be sensible to return interest rates to normal levels," he said."Until markets see in place policies to bring about that return to normal economic conditions, there is no prospect for sustainable recovery, and without that prospect for sustainable recovery, markets understand that it will not be sensible to return interest rates to normal levels," he said.
When asked by Tory MP Andrea Leadsom if governments had "blown" the window created over the past five years, Sir Mervyn said they had "failed to take advantage of the time we have created". He added: "They haven't blown it yet – there's still time." When asked by Tory MP Andrea Leadsom if governments had "blown" the window created over the past five years, King said they had "failed to take advantage of the time we have created". He added: "They haven't blown it yet – there's still time." King was giving evidence to the Treasury select committee before his retirement at the end of the week and his replacement by Carney, the outgoing governor of Canada's central bank.
King was giving evidence to the Treasury select committee before his retirement at the end of the week and his replacement by Carney, the outgoing governor of Canada's central bank.
Carney will take over against a backdrop of falling stock markets and increased borrowing costs for indebted governments. Markets were spooked earlier this month by concerns that within months, the US Federal Reserve will begin winding down its $85bn (£55bn) a month quantitative easing programme, where it pumps cash into the economy by acquiring its own debt from financial institutions.Carney will take over against a backdrop of falling stock markets and increased borrowing costs for indebted governments. Markets were spooked earlier this month by concerns that within months, the US Federal Reserve will begin winding down its $85bn (£55bn) a month quantitative easing programme, where it pumps cash into the economy by acquiring its own debt from financial institutions.
The Fed, alongside the Bank of England and the Bank of Japan, has pumped more than $3 trillion into the global economy, largely by purchasing government bonds to offset a collapse in credit that followed the financial crash in 2008. The Fed, alongside the Bank of England and the Bank of Japan, has pumped more than $3tn into the global economy, largely by purchasing government bonds to offset a collapse in credit that followed the financial crash in 2008.
Rattled investors have interpreted remarks on a QE slowdown by the Fed's chairman, Ben Bernanke, as a sign that higher interest rates are around the corner, with a knock-on effect on global growth.Rattled investors have interpreted remarks on a QE slowdown by the Fed's chairman, Ben Bernanke, as a sign that higher interest rates are around the corner, with a knock-on effect on global growth.
King told MPs that markets had "jumped the gun" in betting that interest rates will go back to higher levels in the near future, from 0.5% currently in the UK. He said Bernanke had been clear when he talked about tapering the stimulus to the US economy. King told MPs that markets had "jumped the gun" in betting that interest rates will go back to higher levels in the near future, from 0.5% in the UK. He said Bernanke had been clear when he talked about tapering the stimulus to the US economy.
Bernanke "certainly wasn't announcing the end of QE", King said, adding: "Certainly I think that 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, I think is a premature judgment about where we are and no central bank has moved rapidly down that course. The Federal Reserve has merely said that the easing in which it is still engaging may taper at some point depending on economic conditions." Bernanke "certainly wasn't announcing the end of QE", King said, adding: "Certainly 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, I think is a premature judgment about where we are and no central bank has moved rapidly down that course. The Federal Reserve has merely said that the easing in which it is still engaging may taper at some point depending on economic conditions."
He added: "People have rather jumped the gun thinking this means an imminent return to normal levels of interest rates. It doesn't."He added: "People have rather jumped the gun thinking this means an imminent return to normal levels of interest rates. It doesn't."
King also raised concerns over bank lobbying and bemoaned the "disaster" of austerity in some parts of the eurozone. King warned homeowners in their 30s and 40s they might be in an "unsustainable position" if interest rates return soon to normal levels.
He said politicians and officials had "clearly come under tremendous pressure themselves from banks. They've been lobbied," he said. He said: "If there are changes around the world that lead long-term interest rates to go up – it's unlikely, but if they do go back up quickly – then some of those households will have levels of debt that won't look so attractive given the new lower level of house prices."
King also raised concerns over bank lobbying and bemoaned the "disaster" of austerity in some parts of the eurozone. He said politicians and officials had "clearly come under tremendous pressure themselves from banks. They've been lobbied," he said.
"They have passed on concerns … various conversations have taken place with others and I think it is very important that people simply should say if they are lobbied. There were certainly calls made to No 11 and even in some cases to No 10 to try to put pressure on supervisors to modify, be more reasonable in their judgment.""They have passed on concerns … various conversations have taken place with others and I think it is very important that people simply should say if they are lobbied. There were certainly calls made to No 11 and even in some cases to No 10 to try to put pressure on supervisors to modify, be more reasonable in their judgment."
The chairman of the committee, Conservative MP Andrew Tyrie, reacted furiously to the claim that the Prudential Regulatory Authority (PRA), which oversees the banking industry, and ministers were under pressure to tear up the rule book for some banks.The chairman of the committee, Conservative MP Andrew Tyrie, reacted furiously to the claim that the Prudential Regulatory Authority (PRA), which oversees the banking industry, and ministers were under pressure to tear up the rule book for some banks.
"Pressure has been brought to bear on the PRA, as a result of calls by the banks to No 10 and No 11. The governor said that this should not happen. It is essential that the chancellor look into this and give us reassurance. Representations of the views of banks are desirable. Attempts to influence the independent regulator are unacceptable," he said."Pressure has been brought to bear on the PRA, as a result of calls by the banks to No 10 and No 11. The governor said that this should not happen. It is essential that the chancellor look into this and give us reassurance. Representations of the views of banks are desirable. Attempts to influence the independent regulator are unacceptable," he said.
George Osborne said on Tuesday night: "If there's unacceptable pressure, I absolutely say that is not acceptable. The PRA is completely independent and it's made its independent decisions on capital in our banks. We empower our regulators to do their job.
"Of course, banks, consumer groups, anyone else can make their case. But ultimately it's an independent body that makes the judgment."