Economy > UK > Bank of England, interest
A difficult drive through the mist
The Guardian p. 21
Bank of England governor Mervyn King
p. 33 6 September 2007
Bank of England
the Bank's governor
the governor of the Bank of England
Bank of England governor > Mervyn King
The Bank of England's nickname, the old lady of
The Bank of England’s monetary policy committee
Bank of England's monetary policy committee MPC
Bank of England > Monetary policy
One of the Bank of England's
purposes is monetary stability.
Monetary stability means
stable prices - low inflation -
and confidence in the
Stable prices are defined
by the Government's inflation target,
which the Bank seeks to meet
through the decisions on interest rates
the Monetary Policy Committee.
A principal objective of any central bank
to safeguard the value of the currency
in terms of what it will purchase.
Rising prices – inflation – reduces the value of money.
Monetary policy is directe
to achieving this objective
and providing a framework
for non-inflationary economic growth.
As in most other developed countries,
monetary policy operates in the UK
mainly through influencing the price of money
– the interest rate.
In May 1997
gave the Bank independence
to set monetary policy
by deciding the level of interest rates
to meet the Government's inflation
– currently 2%.
Low inflation is not an end in itself.
It is however an important factor in helping
to encourage long-term stability in
Price stability is a precondition for achieving
a wider economic goal of
growth and employment.
can be damaging
to the functioning of the economy.
can help to foster sustainable
long-term economic growth.
http://www.bankofengland.co.uk/monetarypolicy/more.htm - broken URL
cut interest rates
of England base rates
Bank of England rate-setter
p. 32 6 September 2007
Bank of England / The Central Bank of the
Bank of England > Monetary policy committee
cost of borrowing
interest rates and inflation
influence spending and saving
in the economy
and the prices we pay for goods and services.
helps to maintain a stable economy
and the value of our money
base rate cut
pass on to the
interest rates through the ages
Mervyn King warns
Persistently low growth
will last until the next election,
Bank of England governor warns
as he cuts 2013 growth forecast to 1%
14 November 2012
This article was published on guardian.co.uk
at 13.46 GMTon Wednesday 14 November 2012.
It was last modified at 15.05 GMT
on Wednesday 14 November 2012.
economy risks suffering from a triple-dip recession amid a period of
persistently low growth that will last until the next election, the governor of
the Bank of England has warned.
Sir Mervyn King cut Britain's growth forecast to 1% next year and warned that
output was more likely than not to remain below pre-crisis levels over the next
three years. "There seems a greater risk that the UK economy may be in a period
of persistent low growth," he said on Wednesday.
The UK economy emerged from a double-dip recession in the third quarter of this
year, when the economy grew by 1%, but King warned that this was driven by
one-off factors. "Continuing the recent zig-zag pattern, output growth is likely
to fall back sharply in the fourth quarter as the boost from the Olympics in the
summer is reversed – indeed output may shrink a little this quarter," he said.
If that period of contraction continues into 2013, the UK could drop into a
At the same time, the Bank significantly raised its inflation forecasts.
Inflation is now is expected to reach around 3% in the near-term and not fall
back significantly until the second half of 2013, later than previously thought.
UK inflation jumped to a surprise five-month high of 2.7% last month, driven by
rises in tuition fees and dearer food bills. Energy price rises over the next
few months are likely to drive it even higher.
King said the outlook for inflation was the main reason why the monetary policy
committee decided not to expand the quantitative easing (QE) programme in
November. He said there were limits to what monetary policy could do to boost an
economy undergoing far-reaching adjustments in the wake of the financial crisis
and amid severe headwinds from the eurozone debt crisis.
But economists said the bank may still engage in more QE in the future. Howard
Archer of IHS Global Insight said: "With economic recovery currently looking
feeble, fragile and far from guaranteed, we believe that the Bank of England
will ultimately decide to give the economy a further helping hand with a final
£50bn of QE. This seems most likely to occur in the first quarter of 2013."
Labour said this gloomy outlook proved the coalition government's economic plans
were not working. The shadow chancellor, Ed Balls, said: "This sobering report
shows why David Cameron and George Osborne's deeply complacent approach to the
economy is so misplaced. Their failing policies have seen two years of almost no
growth and the Bank of England is now forecasting lower growth and higher
inflation than just a few months ago."
UK risks triple-dip recession, Mervyn King warns,
emergency action revealed to tackle
crisis since second world war'
Sir Mervyn King announces emergency measures
to help UK banks
and boost business lending
by at least £80bn
Thursday 14 June 2012
Larry Elliott, Jill Treanor and Ian Traynor in Berlin
This article was published on guardian.co.uk at 21.14 BST on Thursday 14 June
2012. A version appeared on p1 of the Main section section of the Guardian on
Friday 15 June 2012. It was last modified at 01.05 BST on Friday 15 June 2012.
Sir Mervyn King has announced emergency measures to help banks and boost
business lending after a warning from George Osborne that the "debt storm"
raging on the continent had left the UK and the rest of Europe facing their most
serious economic crisis outside wartime.
In a joint proposal between the Bank of England and the Treasury, banks will
receive cut-price funds provided they pass on the benefits to their business
This new "funding for lending" scheme could provide an £80bn boost to loans to
the private sector within weeks and alleviate growing fears of a second slump
since the start of the financial crisis in 2007.
In a second scheme the Bank will begin pumping a minimum of £5bn a month within
the next few days into City institutions to improve their liquidity.
With one Spanish minister warning that the future of Europe could be decided
within hours, both the governor and the chancellor used the backdrop of another
day of financial and economic turbulence in the eurozone to express deep concern
about the threat to Britain posed by Europe.
As interest rates on Spain's 10-year borrowing hit the 7% level and Angela
Merkel insisted she was running out of patience with her fellow eurozone
policymakers, King told a City audience at the Mansion House, London, that there
was a "large black cloud of uncertainty hanging over not only the euro area but
our economy too, and indeed the world economy as a whole".
Osborne said things were likely to get worse in the eurozone before they got
better and insisted that the time for decisions had come. Strongly defending the
government's handling of the economy, the chancellor said it had been the
hard-won credibility built up over the past two years that had allowed the
Treasury and the Bank to take action.
Thursday night's announcements were designed to shore up confidence before this
weekend's elections in Greece, seen as a possible trigger point for a new phase
in Europe's debt crisis.
In a speech to parliament in Berlin presaging a fortnight of crucial elections
and summitry in Europe, an exasperated Merkel bluntly told the rest of Europe to
get real about the crisis, dismissed calls for Berlin to share responsibility
for other euro countries' debt, and rejected charges that Germany was not doing
enough to stabilise the euro.
"Germany's strength is not unlimited," Merkel warned. "The way out of the crisis
in the eurozone can only be successful if all countries are capable of
recognising the reality and realistically assessing their strengths."
Merkel's uncompromising remarks came as Spain's foreign minister, José Manuel
García Margallo, said: "The future of the European Union will be played out in
the next few days, perhaps in the coming hours."
According to a report in the Spanish newspaper El País, García Margallo said:
"The three months that [IMF boss Christine] Lagarde gave is possibly too long."
García Margallo called on the European Central Bank to buy Spanish bonds, and
there was market speculation that the central bank had stepped in as the yield
on the 10-year bond fell back below the 7% mark that had sent alarm bells
ringing in the financial markets. In a dig at Germany, he added: "If the Titanic
sinks, it takes everyone with it, even those travelling in first class."
Merkel expects to come under pressure when the G20 group of developed and
developing countries meets for its summit in Mexico on Monday.
"Once again Germany will be the centre of attention," the German chancellor
said, adding that some of the formulas being proposed for saving the euro using
German money would simply amount to illusory short-lived fixes condemning Europe
to a future of high debt and economic mediocrity.
Spanish government sources said the European council president, Herman Van
Rompuy was due to meet Spanish prime minister Mariano Rajoy, Merkel, Italy's
Mario Monti and French president François Hollande at the G20. Barack Obama, who
has been pressing eurozone countries to act quickly to sort out the debt crisis,
was also expected to meet the five eurozone leaders in Mexico. David Cameron may
also join the meeting.
King raised the prospect on Thursday night that the eurozone would not emerge
from the crisis intact. Noting that funding costs for UK banks were already
going up as a result of the problems faced by the weaker nations of monetary
union, the governor said: "Any significant redenomination of their currencies,
or a default on domestic debts, would, both directly and as a result of the
consequences for all our economies, put a dent in the capital position of our
banks. As a result, investors demand a higher risk premium on loans to banks,
pushing up the cost of borrowing for homeowners and businesses."
Underlining his concern about the pressures on UK financial institutions, the
governor said Threadneedle Street would provide as much cash as banks required
"given the turbulence ahead".
Osborne said the Bank and the Treasury were taking co-ordinated action to inject
new confidence into the financial system and support the flow of credit to the
"We are not powerless in the face of the eurozone debt storm. Together we can
deploy new firepower to defend our economy from the crisis on our doorstep. The
government, with the help of the Bank of England, will not stand on the
sidelines and do nothing as the storm gathers."
Debt crisis: emergency action revealed to tackle 'worst crisis
world war', G, 14.6.2012,
A Crisis of Faith
in Britain’s Central Banker
February 6, 2011
The New York Times
By LANDON THOMAS Jr. and JULIA WERDIGIER
LONDON — A central banker need not be loved, but at the least he should
command respect — and in Britain these days Mervyn King cannot count on either.
Mr. King, the donnish governor of the Bank of England, has been accused of
presiding over the worst stagflation — a dreaded combination of stagnant
economic activity and rising inflation — happening in any major developed
economy. He has been condemned for flouting the bank’s independence by publicly
supporting the British government’s deficit-cutting strategy.
As for the issue on which he may have most closely staked his reputation — that
Britain’s large banks must increase capital levels well beyond international
standards — he so far has been ignored.
Doubts over Mr. King’s inflation strategy come as European leaders are working
to devise a unified strategy for dealing with sovereign debt woes in the region.
Germany and France are pressing for concrete steps to harmonize fiscal spending
by focusing on tax and pension issues, while weaker nations are struggling to
bring down their deficits.
But with inflationary pressure picking up everywhere, the main topic of debate
is expected to be how much longer the European Central Bank, like its
counterpart in Britain, can resist the pressure to raise interest rates.
Not long ago, central bankers in the United States, the European Union and
fast-growing emerging countries like Turkey and Brazil were being hailed. They
were seen as having salvaged their economies by flooding their banking systems
with enough money to help prevent a depression.
But now many of them are confronting the prospect that their powers are on the
wane, as inflation begins to creep up and as growth in advanced industrial
countries is hampered by high levels of government debt.
For a group accustomed to being influential — the Federal Reserve’s Ben S.
Bernanke and Jean-Claude Trichet of the European Central Bank are facing
challenges similar to Mr. King’s, if less acute — such diminution can come as a
rude awakening. In a speech last month, Mr. King acknowledged his limited
ability to combat the high levels of unemployment and increased inflation
With food and energy prices increasing and the weakness of the British pound
making imports more expensive, he said, monetary policy could not “alter the
fact that, one way or another, the squeeze in living standards is the inevitable
price to pay for the financial crisis and the subsequent rebalancing of the
world and U.K. economies.”
It sounded a bit like the last cry of the “incredible shrinking central banker.”
“It was a defensive speech, and there is a degree of frustration in the forces
that are beyond his control,” said DeAnne S. Julius, the chairman of Chatham
House, a research and analysis organization in London, and a former member of
the Bank of England’s monetary policy committee.
Ms. Julius is a critic and argues not only that Mr. King is underestimating the
inflationary winds but also that he is too extreme in urging that British banks
take on more capital. “The pressure is on — both in terms of banking reform and
inflation,” she said. “I do not think he has an easy life.”
And then there is the issue of fiscal policy.
The British public could be in for an even rougher ride this year when the
government’s £80 billion austerity program really starts to bite. That prospect
looms even larger after recent indications that the economy, instead of
continuing to grow, shrank by 0.5 percent in the last quarter.
Consumer prices rose at a 3.7 percent annual rate in December, reaching the
highest level in two years and, for a 13th consecutive month, missing the Bank
of England’s target of 2 percent.
Mr. King declined to be interviewed. But people who have worked with him paint a
picture of an innovative thinker who has an agreeable charm but can also be
pugnacious and confrontational when challenged intellectually.
“Mervyn is not blessed with any doubts about his abilities,” said Michael Foot,
chairman of the Promontory Financial Group consulting company in London and a
former Bank of England executive.
But the accumulation of pressures seems to be having its effect. His January
speech, while carrying all the quirky earmarks of a King address — he began and
ended with quotes from “Anna Karenina” — came across to many analysts as
unusually prickly rather than as a measured analysis of the British economy.
“There is a misapprehension in some quarters that the monetary policy committee
could have prevented the squeeze in living standards by raising interest rates
over the past year to bring inflation below its present level,” Mr. King said in
the speech. “That view is a misunderstanding of how monetary policy works.”
Two members of the bank’s policy making committee recently expressed public
disagreement with Mr. King’s insistence that Britain’s current inflation rate
had been driven by outside shock factors and that interest rates should not be
increased. He has also been accused by another board member, Adam Posen, of
jeopardizing the bank’s independence by talking up the Conservative-led
government’s deficit-cutting strategy.
Since the Bank of England was made independent from the Treasury in 1997, its
governors have been appointed by the government but have been viewed as
apolitical, with a focus on ensuring price stability — and with no business
sharing their views on fiscal policy. Mr. King, whose second and final term will
end in 2013, appeared to have moved beyond that understanding when he endorsed
the coalition government’s plan to cut the deficit faster than the opposition
Labour Party had suggested when it was still in power.
The fear, some economists said, is that his endorsement creates expectations
that he would be willing to neglect inflation for a while in order to let the
government’s spending cuts work.
To Mr. King’s defenders, however, those who raise such fears do not know the
heavy burden of running the Bank of England from its palace-like base on
Threadneedle Street at the heart of the City, as London’s financial district is
known. Indeed, Mr. King has plenty of fans who praise him for the power of his
convictions — unpopular as they may be.
On the subject of being too close to the Tories on cutting the deficit, his
defenders point to leaked cables in which Mr. King raised doubts about the
experience of the Conservative leader, David Cameron, and his chief economic
adviser, George Osborne.
“He is a king, a monarch in the classic sense, and he is fulfilling his duty to
advise, consider and warn,” said Michael Fallon, a Conservative member of
Parliament who has questioned Mr. King numerous times as a member of the
Treasury select committee. “Our public finances were in a deeper mess than
others, and he has helped shape that debate.”
Mr. King has also attracted a strong following — largely outside British banking
circles — for his aggressive campaign to reduce the leverage of Britain’s banks.
He laid out his case in a hard-hitting address late last year in New York.
As Mr. King pointed out in that speech, Britain’s banks pose unusual risks
because they have assets 4.5 times the size of the British economy. How to scale
that back is the subject of a much anticipated independent inquiry here, led by
John Vickers, a former Bank of England chief economist and head of the Office of
Mr. King has been careful to not prejudge the result. He has made clear, though,
that his view is that radical changes must come, saying in his speech that of
the systems one might use to organize banks, “the worst is the one we have
A Crisis of Faith in
Britain’s Central Banker, NYT, 6.2.2011,
Sterling extends losses
as BofE cuts growth forecast
Published: February 11 2009
Last updated: February 11 2009
Thez Fiancial Times
By Peter Garnham
The pound extended its losses on Wednesday as the Bank of
England signalled it was prepared to take unconventional steps to boost the UK
Mervyn King, the Bank’s governor, said the UK economy was in deep recession and
that the risks to economic growth lay “heavily to the downside” as the
government wrestled with problems in the UK financial system.
In its quarterly Inflation Report, the Bank cut its growth
forecasts sharply and predicted UK inflation would fall well below its 2 per
cent target if interest rates remained at their current level.
This heightened expectations that the Bank would deliver a further cut in UK
interest rates after lowering them by 50 basis points to 1 per cent after its
monetary policy committee meeting last month.
But it was comments that the Bank would embark on a policy of quantitative
monetary easing once interest rates fell to zero that undermined sterling.
Mr King said the central bank would ‘certainly’ be buying Gilts and the supply
of money needed to be increased.
“In other words, Mr King is talking about turning on the printing press, which
would effectively de-base the value of the pound,” said Paul Mackel at HSBC.
“On the back of Mr King’s comments the path of least resistance is for sterling
The pound fell 1 per cent to $1.4385 against the dollar, lost 1.2 per cent to
£0.8987 against the euro and fell 1.6 per cent to Y129.36 against the yen.
Meanwhile, the dollar and the yen remained supported on Wednesday after sharp
gains in the previous session.
Both currencies rallied strongly on Tuesday as disappointment following the US
government’s bank rescue plan boosted safe haven demand for the dollar and yen.
The turnaround in sentiment stemmed the recent rebound in higher-risk
currencies, with the pound one of the main underperformers reflecting the
exposure of the UK economy to the financial sector.
Analysts said the market expected to see clear and decisive guidance from the
new US administration, but were disappointed by the lack of detail concerning
the pricing of distressed assets, the epicentre of the financial system’s
“The market, correctly, doesn’t much care about tax rebates and public spending,
as it understands these well and generally deems it a sideshow compared to the
enormity and confusion surrounding bank balance sheets and lending confidence,”
said Maurice Pomery at IDEAGlobal.
“The statement failed to deliver.”
The yen rose 0.7 per cent to Y89.87 against the dollar, climbed 0.5 per cent to
Y116.37 against the euro and gained 0.9 per cent to Y58.71 against the
The dollar eased 0.2 per cent to $1.2945 against the euro and edged 0.2 per cent
lower to SFr1.1534 against the Swiss franc.
Meanwhile, the Swedish krona dropped sharply after the Riksbank, the country’s
central bank, cut interest rates by more than expected after its policy meeting.
The bank slashed rates by 100 basis points to a record low of 1 per cent and
said it might have to cut rates further. Analysts had been predicting a 50
The Swedish krona fell 1.5 per cent to SKr8.3640 against the dollar and dropped
1.8 per cent to SKr10.8350 against the euro.
Audrey Childe-Freeman at Brown Brothers Harriman said the fact that Sweden’s
yield advantage was falling by the month and had almost disappeared would weigh
on the krona in the short term.
However, she said over a longer-term perspective, the pro-active fiscal and
monetary policy mix endorsed by the Swedish authorities may be rewarded.
“Clearly that is not today’s story, but it is worth bearing in mind,” said Ms
losses as BofE cuts growth forecast, FT, 11.2.2009,
Bank of England cuts rates to 2%
Published: December 4 2008 12:00
Last updated: December 4 2008 16:20
The Financial Times
By Norma Cohen
Signs that the economic downturn is gathering pace prompted the Bank of
England’s monetary policy committee to cut interest rates on Thursday by a full
percentage point to 2 per cent, the lowest level for nearly four decades.
The last time interest rates were at 2 per cent was in the final days of George
VI’s reign in 1951 and the previous time lending costs were cut from 3 to 2 per
cent was October 26 1939, after Britain entered the second world war.
Explaining its move, the Bank said in a statement that it believed demand was
now so weak that “there remained a substantial risk of undershooting the 2 per
cent CPI inflation target in the medium term.”
The rate cut, while much larger than the Bank is accustomed to, is smaller than
the 1.5 percentage point reduction made at the MPC’s last meeting in November
and smaller than the money markets had begun to expect.
The Bank’s move was followed by the European Central Bank which cut its key
policy rate by ¾ per cent to 2.5 per cent as central banks around the world
attempt to tackle slowing rates of growth. The Riksbank in Sweden cut its
interest rates by an unprecendented 175 basis points to 2 per cent and the
Reserve Bank of New Zealand cut its main lending rate by 150 basis points to 5
The cut by the Bank suggests either that the MPC is less convinced than many
private sector economists that deflation is a real possibility, or that it has
other concerns about the impact of much lower rates, including worries over the
slide in the pound. Sterling on Thursday fell to the lowest level against the
dollar for six and a half years and to a record low against the euro.
In its announcement, the Bank pointed to “a number of fiscal measures in train”,
both in the UK and abroad, aimed at boosting demand to counteract the current
downturn. The minutes of the last MPC meeting showed that some members expressed
a desire to see how the fiscal stimulus outlined in the government’s pre-Budget
Report might affect demand before making any exceptional moves in interest
The move comes after key purchasing managers’ index readings for the
construction, manufacturing and services sectors hit record lows in recent days,
with the future orders component of each index predicting that worse is to come.
In making its interest rate decision, the Bank expressed concerns about the flow
of credit to businesses and households. “Despite the actions taken to raise bank
capital, ease funding and improve liquidity, conditions in money and credit
markets remain extremely difficult,” it said.
Ominously, the Bank concluded that it was “unlikely that a normal volume of
lending would be restored without further measures.”
Interbank lending markets have seized up again, after a brief breathing spell
following the government’s move to provide a £37bn taxpayer-funded lifeline to
the nation’s banks. That suggests that the woes of the financial sector are
still too great to allow it to resume its normal pattern of lending to
households and businesses.
The Bank noted that while CPI inflation remains high at 4.5 per cent, the weaker
outlook for activity in the near term and further falls in commodity prices have
lowered that profile. The recent decision to cut value-added tax temporarily
should also bear down on inflation in the near term, although that effect will
be reversed in 2010.
Andrew Smith, chief economist at KPMG, said: ”The battle against deflation is
on. Rates are set to fall further, possibly to zero, and soon, as policymakers
try to counteract the powerful contractionary forces at work in the economy.
“However, it is unlikely that low interest rates alone will achieve the desired
result and the UK may well have to follow the US with unorthodox measures, such
as buying up mortgage and commercial debt, to free-up lending and re-liquefy the
Ian McCafferty, chief economic adviser to the CBI, the employers’ body, welcomed
“The economy needs a significant monetary stimulus and the Bank has clearly
decided this will be best achieved by another big cut in interest rates. What is
critical for business and consumers alike is that this reduction is passed on,”
Stephen Robertson, director general of the British Retail Consortium, said:
“This is exactly the type of decisive action we need during these uncertain
times. With the threat of inflation fading, the Bank is right to concentrate on
jump-starting the economy.
He added: “The Bank’s job is not done. It must continue to cut rates in the new
year to get the economy heading in the right direction again.”
Simon Rubinsohn, chief economist at the Royal Institution of Chartered
Surveyors, was more guarded. While describing the cut as a “bold move”, he
added: “In our opinion it will not on its own be sufficient to bolster
confidence given the scale of the current financial crisis.
“Further significant job losses will be announced in the run-up to Christmas and
into the first half of 2009, putting pressure on the Bank to cut rates further.
We expect rates to fall to 1 per cent by the end of the first quarter of 2009.”
Bank of England cuts
rates to 2%,
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