King’s faux pas made in first half of central bank tenure
On Twitter it can be hard to find someone with a good word to say about Sir Mervyn King, the recently retired governor of the Bank of England. He has stolen from savers to prop up the spendthrift, they claim. He wrecked retirements by manipulating gilt yields, played fast and loose with the pound, allowed banks to run amok and he has given up on inflation.
Sir Mervyn mounted a valedictory defence of his tenure before the treasury select committee in the week before his departure. Perhaps, in his recent appearance on BBC’s Desert Island Discs, he might have stuck with Edith Piaf’s Je ne Regrette rien, which was on a 2004 list of his favourite tracks, but strangely missing nine years later.
My take on his 10 years in the top job is that while he perhaps should have some regrets, it is unlikely that we’d have been better off with someone else in charge.
The King era fell into two distinct halves, and it’s the period since the banking crisis – 2007 onwards – that has been the most controversial. In March 2009, the Bank of England cut its base rate to 0.5 per cent, the lowest rate in its 300-year history and still the prevailing rate today.
It also announced a plan to create £200 billion of new money to buy gilts, with the intention of holding down long-term borrowing rates and encouraging economic activity.
Two further extensions to this quantitative easing (QE) programme came after, starting in October 2011 and July 2012, taking the total to £375 billion.
Inflation dipped in 2009 but was above 3 per cent for the whole of 2010 and above 4 per cent in 2011.
Sir Mervyn’s critics contend that this rise in prices at a time of low interest rates and restrained wage increases squeezed real incomes, especially of those in retirement.
Many also believe that QE had only limited benefit on the real economy, since much of the newly minted money was retained within the financial system to shore up balance sheets.
The treasury select committee is in the process of compiling a report on the effectiveness of QE.
I suspect it will conclude that the first instalment was effective in unfreezing the financial system but subsequent injections achieved rather less. That was certainly the tone of much of the evidence submitted to the committee earlier this year.
QE certainly lowered gilt yields; the Bank of England’s own study of its distributional impact estimated that the first £200 billion of gilt purchases lowered average yields by 100 basis points. That has been painful for those looking to buy an annuity or go into drawdown.