BoE's King Faces Grilling on Inflation, Stimulus and Independence

14 Nov 2012

Views: 627

Font Size: a / A


Bank of England Governor Mervyn King


Bank of England Governor Mervyn King will face tough questions on surging inflation, the bank's stimulus policy and even its independence when he presents its latest economic forecasts on Wednesday.

Economists surveyed by Reuters expect the Bank to leave its medium-term forecast largely unchanged, showing annual growth of 2.0 percent and inflation at 1.8 percent at the end of 2014 - below its 2 percent target - giving it leeway for more action.

King will probably reiterate during the media conference starting at 10:30 a.m. British time that the central bank stands ready to restart its bond buying stimulus programme, which it stopped last week, should the recovery falter again.

However, an unexpected jump in inflation to a five-month high of 2.7 percent in October may force the central bank to raise its near-term inflation prediction again, making any fresh stimulus for the economy a harder sell.

"It raises the hurdle for more asset purchases in the near term. Inflation ... is probably heading up to 3 percent in the new year," said Rob Wood, an economist at Berenberg who previously worked as a forecaster at the Bank.

BoE observers are also keen to hear King's view on the success of the Funding for Lending scheme, which provides cheap funding to banks if they keep lending to businesses, as well as whether there is scope for other measures, Reuters reports.

Other BoE policymakers have said gilt purchases may be losing their effectiveness, and top regulator Adair Turner - who has applied to succeed King at the helm of the Bank next year - has recently fuelled the debate, suggesting more cooperation across policy areas might be needed to ward off deflation.

King may also face a grilling over the bank's independence after agreeing last week to hand back 35 billion pounds in interest paid to the Bank by the government over the last three years on its 375 billion pound holdings of government bonds. It bought the bonds as part of its quantitative easing policy of injecting cash into the economy.

Economists have warned that the move further blurs the line between fiscal and monetary policy, putting the bank's cherished independence at risk, and also carries future risks. The government's budget watchdog warned the step would entail longer-term costs once interest rates start to rise.

King has always stressed that the Bank could only venture into more unconventional policies as an agent for the government because such policies ultimately put taxpayers' money at risk.

As his 10 years as governor are drawing to a close, he may also be pressed on longer-term issues, in particular after three reviews into the BoE's operations and forecasting record showed flaws in its governance and structure.

Tags: Business, World

Comments: 0


Add your comment

Please leave your comment below. Your name will appear next to your comment. We'll also keep you updated by email whenever someone else comments on this page. Your comment will appear on this page once it has been approved by a moderator.