King warns successor Carney on interest rate plans

Outgoing Bank of England governor Mervyn King has urged successor Mark Carney not to spell out how long interest rates will remain low when he takes charge.

In an interview with UK television channel Sky News, King stressed his opposition to one of the changes that the Canadian is expected to make – signalling how long interest rates will remain low.

“What none of us can know of course, is what the right decisions will be down the road,” King said. “They will have to be made month-by-month, according to how the economy develops.”

King – who steps down at the end of June – also said the Bank cannot be run as a “a one-man show”, displaying concern that expectations of the new Governor are too elevated.

However, King (pictured) also said Britain was fortunate to have Carney and that “everyone will admire what he will achieve”.

Others are also worried about how much flexibility the new governor will really have if inflation remains more entrenched than anticipated.

The Ernst & Young ITEM club, the influential think-tank, has estimated that despite the Bank’s forecast for inflation to fall back to 2% by early 2015, it will not drop below 2.6% in 2014 or 2015.

Carl Astorri, ITEM’s senior economic adviser, said: “As well as becoming a risk to the MPC’s credibility, persistent levels of high inflation may tie their hands when it comes to creating a more flexible system.”

When Carney takes over from King on 1 July, one of his primary tasks will be to evaluate the possibility of using guidance such as “intermediate thresholds” such as unemployment targets in the UK.

However, ITEM has warned that this could prove less effective if inflation remains persistently above the 2% target.

“In this environment, alternative monetary policy remits, such as setting ranges for intermediate or proximate statistics like core inflation and nominal GDP, would appear to be more attractive propositions.”

Official inflation figures for April, to be revealed this week, are expected to show a slight fall to 2.7%, from 2.8% the previous month.

However, ITEM expects CPI to average 2.9% for the year.

The consultancy has calculated that high inflation has already cost the UK economy nearly 3% off growth over the past three years, during which CPI averaged 3.5%.

According to ITEM, if inflation had stayed at the target 2% over this time period the British economy would be £10bn larger at present and 650,000 fewer people would be unemployed.

However, there are signs of a tentative recovery in the UK economy.

The first GDP estimate by the Office of National Statistics has shown a 0.3% expansion in Q1 2013, expected to be re-confirmed on Thursday.

 

This article was first published on Investment Week

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