Comment: Central bankers a misunderstood breed

Martin Flanagan
Martin Flanagan
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IT IS fair to say Sir Mervyn King, like most central bankers, has probably been misunderstood by financial markets at various times in his tenure as governor of the Bank of England.

Misunderstanding goes with the territory, and probably has much to do with the technical, nuanced, delphic and open-ended language that the central banking brethren almost instinctively employ to keep all economic possibilities simultaneously in play.

So King may know what he was talking about at yesterday’s Treasury committee when he told MPs that he felt markets over-reacted to Federal Reserve chairman Ben Bernanke’s recent comments suggesting we might be coming to the end of quantitative easing (QE) and cheap money.

Financial markets tanked because, as one MP said, they have become as addicted to QE as a teenager on crack. This is ironic as many in financial markets have previously questioned how effective QE – essentially, money-printing – has been in freeing up bank lending, and also worried whether it causes inflationary pressures.

King said that, in reality, Bernanke was only talking about a “tapering” of QE, not its abolition. He said his US counterpart stressed that any decision on the subject would be strictly guided by the economic data coming out in America, rather than any doctrinaire judgement that it was time to end the bond-buying simply because it had gone on long enough.

The same applies to the Bank of England’s own QE programme, which King himself has wanted to extend since February only to be outvoted 
on the bank’s monetary policy committee.

King, who was making his final appearance before the Treasury committee before retiring from his post this weekend, says the markets have jumped the gun in thinking fundamental change to QE and interest rates is now on the wing.

He makes it clear that he would like to be in a position to unwind QE and get interest rates, currently at historic lows of 0.5 per cent, up to more normal levels (usually regarded at about 4 to 6 per cent). But the UK economic recovery is not strong enough to handle that yet.

The governor says the credit squeeze in China, with interbank lending rates surging, is a worrying development and we are also not out of the eurozone crisis yet. Household and banking debt levels also remain way too high.

Everyone knows that cheap money, which has been the consistent monetary backdrop since the 2008-9 recession to stop a bad situation turning into a depression, has got to end sometime.

But the outgoing King clearly feels now is not the time, and that QE may take years to fully unwind given that a glut of gilts or US treasuries on financial markets would send yields soaring, and potentially destabilise financial institutions afresh.

Words of warning over housing market bounce

THOSE bullish about a housing market recovery may be chastened by Carpetright’s warning that it “remains premature to call a wider recovery in the economy”.

The health of the housing sector is often linked to that of floor coverings and furniture, and, while the company’s business is doing better in the UK than in Europe, where sales plummeted 11 per cent over the past year, overall it plunged into the red.

And even on home turf, where it grew profits, sales and margins remain under pressure.