Mervyn King criticises Bank of England’s approach amid cost-of-living crisis
Former Bank of England governor Mervyn King has criticised its approach amid a cost-of-living crisis, calling for a hike in interest rates to show a “strong, clear signal now”.
Lord King said central banks including the UK’s had made “serious mistakes in not acting sooner” as he spoke out against the policy of quantitative easing during the pandemic.
And the peer questioned current governor Andrew Bailey’s suggestion that 80% of inflation is due to outside forces such as global energy and food hikes, calling it a “debatable figure”.
The criticism came as new data from the Office for National Statistics to be published on Wednesday was expected to show that inflation hit 9.1% in the year to April.
The idea that interest rates of 1% are going to have much impact on the inflation rate is really very strange
As energy prices soared that month, the figure for the consumer prices index (CPI) is expected to give a clear demonstration of the scale of the crisis.
Experts believe officials who set interest rates at the Bank of England may need to act after the figures hit.
Lord King, who was governor during the 2008 financial crisis, told LBC radio: “I think the big challenge is they’ve got to demonstrate that they realise the need now is to give a very strong signal that they’re focusing on bringing inflation down.”
Pressed on whether he means a substantial rise in interest rates is needed, he said: “The sooner it’s done the lower it can be, but my worry would be if you defer this and creep very slowly, you end up in a situation where a year from now people are saying interest rates need to rise.”
He pointed to the Bank’s estimate that inflation will soar above 10% this year, and added: “The idea that interest rates of 1% are going to have much impact on the inflation rate is really very strange.”
Lord King said it was “predictable” that inflation would be caused by the coronavirus response of quantitative easing, or introducing new money into the system by the central bank.
The problem was that central banks also printed a great deal of money and that wasn't needed ... it put a lot of money into the system
“All central banks have fallen prey to two serious errors. The first one is that when the pandemic hit, governments stepped in and put in a lot of money for furlough schemes or raising unemployment benefit. That was very sensible,” Lord King said.
“The problem was that central banks also printed a great deal of money and that wasn’t needed … it put a lot of money into the system.
“It’s an idea that we pursued at the end of the financial crisis, when we were trying to stop the amount of money in the economy from falling. What happened this time was that it grew very rapidly… And that was a mistake because the pandemic reduced the supply of the economy. And there was too much money chasing too few goods…”
Lord King, who stood down as governor in 2013, added: “And I think central banks around the world have made serious mistakes in not acting much sooner … including ours.”
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