What exactly does Bank of England Governor Mervyn King feel responsible for?

Yesterday evening the Governor of the Bank of England gave a speech at my alma mater the London School of Economics on inflation targeting over the last twenty years. Upon reviewing this I was reminded of the question I put to Channel Four when they interviewed him on live television recently.

Governor what happened to the economic re-balancing you promised after the pound sterling’s 20/25% fall in value in 2007/08?

This was on my mind after reviewing the UK’s latest trade figures of which the details are below.

In the three months ending August 2012, the deficit on trade in goods was £27.2 billion, compared with a deficit of £26.6 billion in the three months ending May 2012. Total exports fell by £2.3 billion (3.1 per cent) to £73.9 billion…

Even adjusting the numbers only helps a little.

Excluding oil and erratic items, the volume of exports was 1.2 per cent lower in the three months ending August 2012 compared with the preceding three months.

If we dig deeper into the figures we see that compared to the same three months in 2011 our exports are 1.3% lower and that includes  oil exports which were higher than a year ago.

Not much sign of the much vaunted re-balancing in those figures is there? To which we could add the UK’s industrial production and manufacturing figures.

UK Production

The seasonally adjusted Index of Production fell by 1.2 per cent in August 2012 compared with August 2011

The seasonally adjusted Index of Manufacturing fell by 1.2 per cent in August 2012 compared with August 2011

Not much sign of re-balancing there either is there? Unless of course you are talking of a re-balancing away from production! And for those interested in the excuse section we are told that there were longer summer closures this year than in the past. Due to the nice weather? Oh wait a minute, it can’t be that as that weather has to be ready to take the blame for falls in agricultural production. Can it multi-task?

If we look for a longer perspective we see that the industrial production index is at 100.2 where 2009=100. Just to give a bit more perspective the index was at 113.1 in 2007 and 110 in 2008 if one was looking for context for claims of re-balancing.

Manufacturing has done slightly better now being at 104.6 on the same basis but this compares to 113.6 in 2007 and 110.8 in 2008.

Still Mervyn King has by now familiar excuse

When events turn against him Mervyn King has shown himself to be something of a fan of the popstar Shaggy as translating his words into English I regularly hear.

It wasn’t me

It wasn’t me

It wasn’t me

These days this category includes such matters as his day job of targeting UK inflation. This has been above its 2% target since December 2009 when as discussed above the UK economy has been performing disappointingly. I do not think that this issue- above target inflation in an economic slowdown- gets the airing in the media it should. Mostly I think this is happening because the media in general bought the inflation is “temporary” press release. Indeed the inflation performance has been so poor that the recent peak of 5.2% for Consumer Price Inflation or CPI is as high as it was at any time since 1997.

Mind you Mervyn doesn’t always think that he has no power over inflation

Governor King is careful to name check himself in the story of the introduction of inflation targeting in the UK in 1992 and so bathes in the reflected glory of.

And the results in terms of low and stable inflation have been impressive. There have been pronounced reductions in the mean, variance and persistence of inflation in Britain and elsewhere. During the past twenty years, annual consumer price inflation in this country has averaged 2.1%, remarkably close to the 2% target and well below the averages of over 12% a year in the 1970s and nearly 6% a year in the 1980s.

This is somewhat odd on two counts. Firstly Mervyn is telling us that low inflation “was me” which is somewhat at variance with his claims that in the last few years it has been outside his control. Secondly I believe that inflation targeting has a role but as we review five years of economic pain calling its past record “impressive” involves yet more credit taking for the good bits and ignoring the bad ones.

Mervyn the misleader

Another common theme when one analyses the speeches of Mervyn King is that details are presented but relevant parts are (deliberately) omitted. For example consider the sentence below.

The improvement in credibility of policy is shown by the fact that whereas in 1992 expected inflation, as measured by the difference between yields on conventional and index-linked gilts, was close to 6%, today the same measure is around 2½ %.

An interesting observation from the figurehead of an organisation who is the largest purchaser of UK conventional Gilts! So far the Bank of England has bought around £365 billion of them in an attempt to raise the prices and reduce the yields. It does not buy index-linked Gilts. So according to the logic above Mervyn appears to be arguing that more Quantitative Easing would reduce inflation expectations! He is also forgetting/ignoring the implications of his own actions.

Also we get this and the emphasis is mine

Even if inflation deviates from target – as will often be the case – it is expected to return to target, and so inflation expectations are anchored

By whom Mervyn?

If you consider our existing economic situation then this is a rather disturbing view of the last few years (assuming he actually believes this fantasy)

So the framework has been tested and has proved its worth.

According to Mervyn nothing could have been done about the boom

Governor King reviews the discussion around the fact that dampening the pre credit crunch boom by for example raising interest-rates and concludes that those who have argued this (me for example) are and were wrong. However there are familiar attempts to manipulate the debate in his language.

One was that by setting interest rates at a much higher level,

Much higher Mervyn? He seems to have forgotten that back then quite small moves in official interest-rates were considered to have an effect. And if we look back trying to do something would have been better than the intellectual vacuity presented below.

At the time, the MPC argued that the rise in the ratio of house prices to incomes in the years leading up to 2007 reflected a fall in long-term real interest rates – in other words, an adjustment to a new equilibrium house price to income ratio.

As some members of the MPC from that era are being proposed as possible future Governors of the Bank of England I would suggest that the sentence above should be attached to their claims. Although of course according to Sir Humphrey Appleby and Sir Frank this makes them perfect candidates.

Mervyn King on Gambling

Not a subject you might think is the staple of central banker discussions as their thoughts should major on stability! But we did get a view as a contra-cyclical strategy against the boom -taking away the punchbowl as the party gets going- is discussed thus and the highlighting is mine.

To have deviated from our statutory remit in a direction that would have imposed real costs to output and employment would have been a big gamble

Interesting do you not think from a man who has spent £365 billion and rising on a policy which has no recorded history of ever working? Also if raising interest-rates was such a gamble we have to conclude that cutting them by 4.5% to 0.5% was one too.

I was about to write that on this basis of his thoughts I hoped that he would never take a big gamble with my money and at the same moment I recalled that he already has.


So to sum it up Mervyn thinks that those who were right did not know what they were doing and were dangerous gamblers and those that were wrong like him and were in fact taking a dangerous gamble had a perfectly reasonable basis for so doing!

Sharon Bowles MEP

I note that Sharon Bowles has thrown her hat into the ring as a potential Governor of the Bank of England. I would like to point out that I emailed her -she is a London MEP and is on the European Parliament’s finance committee- with my concerns over the balance sheet of the European Central Bank around 18 months ago. I never received a reply and I will leave it to readers to decide whether she is discourteous or did not understand the points I was raising or both.

Negative Interest Rates

One of my central themes and they continuing to spread as this from Bloomberg points out.



This entry was posted in Financial crisis, General Economics, Gilts, Growth, Inflation, Interest rates, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues. Bookmark the permalink.
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  • forbin

    hello shaun

    what can one say? the rest of the media are complicit in this fraudulant man and his works. maybe we need a new economics ? or just a return to normal ones…..:-)

    persistant in his inability to reign in inflation regardless of any geryy mandering he does I’m wondering who will replace such a skillful player ( with gold pensions )

    on the home front it seems the Beeb have been bleating about rising food prices – about time too , late to the party though , I guess they realised they couldn’t keep the game up on inflation !!


  • JohnD

    On the issue of inflation – I had a a letter from our local authority today (Great Yarmouth Borough Council) explaining that parking permits for residents were increasing by 60% next year and by 30% for business parking permits. An enormous price increase from the government!

  • Anonymous

    Hi Shaun
    I have followed you for a while and know that you have kept on the tails of the Bank of England. Why do you think that the other media such as tv and newspapers is so silent on these issues?

  • Rods

    Hi Shaun,

    Teflon King appears to me to be the perfect governor of the BOE from the chancellor’s point of view. He hasn’t a clue what he is doing or why, so no chance of out shining his boss or doing anything dangerous like thinking and finding radical solutions to our current economic problems. He is good at painting a picture of competence with his speeches when the opposite is true. Does he achieve anything useful? No, so he is a normal jobsworth civil servant, who doesn’t achieve anything, but doesn’t rock the boat either.

    So what does he stand for? He has a job title, knighthood and gold plated inflation proof pension, what more do you want or expect, somebody who can actually do the job, rather than just talking about it? Be serious if we had politicians, government economists and other civil servants who did that, we might have a set of credible, sensible and successful economic policies and a dynamic, rich low tax country, now that wouldn’t do would it! They haven’t had sensible economic policies for most of the last 100 years, which is why the country has been in terminal decline since then, so why would they want to start and do that now?

    Us serf and plebs must know out position is life, which is to slave away to keep the lords of the manor (politicians), their hangers on and their (civil) servants at the standards of living they aspire to by all slightly higher that average earners paying over 50% of their earnings in taxes and most of the rest not much under.. We are effectively back in the middle ages on this score, where the majority of our economic output is to keep this entourage a float.

  • Rods

    Hi JohnD,

    One for Shaun’s financial lexicon I think: A target of 2% inflation, means anything but, if it is a local or national Government department raising prices!

  • http://twitter.com/silentfp Chris F

    Hi Shaun – good grief – does he even bother reading what he writes? Seems to have totally forgotten his OFFICIAL purpose / job description, in favour of the US approach (“yadda yadda yadda, what you don’t know is I do whatever the banks need and suffer everyone else”).
    The BofE has been a detriment to the nation for some time now, and from the shortlist doesn’t appear to be going anwyhere different. Thanks for pointing this out on a regular basis though.

  • Patrick, London

    Hi Shaun… a nice line in suppressed rage there I think… :)

    You quoted him as saying “in other words, an adjustment to a new equilibrium house price to income ratio.”
    So, is a 5% mortgage rate on an average house in an average area that is around 8 times the average salary… the new 14% on a 1980s average home priced at 3.5 times the average salary? Have we topped out and property payments are as expensive as they’re gonna get?

    Or… does this supposed new equilibrium only extend to prices and incomes, and the banks are free to slowly ramp up interest rates over the next 24 months?Or have I misunderstood?

  • Anonymous

    Hi Forbin
    Yes I saw some of that on the BBC. Yet as ever they are late to the party as many of the prices have calmed down as corn has dipped back to around US $7.40 per bushel for example. The real story was in mid-July so perhaps that to now is the BBC’s lead in time…

  • Anonymous

    Hi John D
    That is quite a move. I suspect it is related to the efforts to keep Council Tax down, as in charge more for everything else to get in some revenue! However there is some irony here as Council Tax is not in the CPI…..
    So should parking permits rise more generally than just in Yarmouth there may be an upwards influence on the official inflation target.
    But if you have to pay an extra 60% you have my sympathy.

  • Anonymous

    Hi Rods
    Mervyn King has identified problems and if we look at what was seemingly a good year for him on this front (2002) he questioned the rises in house prices and the switch from RPI to CPI as an official inflation target.
    The catch is that he never seems to do anything about them.

  • Anonymous

    My pleasure.

  • Anonymous

    Hi Patrick
    You make an interesting point. If they continue to raise some mortgage rates (SVRs for example) they can raise their margins particularly if compared to the Funding for Lending Scheme rates.
    However I also get the impression that should we see house prices slip away that they will continue to try to bail out the market…

  • therrawbuzzin

    Yup. Definitely a politician.