Mervyn King still ne regrette rien

  • 13 February 2013
  • From the section Business
  • comments

Inflation is going to stay further above target, for longer. And the Bank of England is not planning to do much about it. Growth in the real economy is also going to continue to disappoint . And our central bank doesn't expect to make a big difference to that, either.

These were the headlines from today's Inflation Report press conference , the 81st that Sir Mervyn King has presented in the 20 years since the Report was first produced.

His designated successor, Mark Carney, said last week that the Report was "state of the art" when it first came out in 1993. So, in many ways, was the inflation target itself.

In 1993, we were just entering what you might call the golden age of central bank inflation targeting - when central banks were not only given the task of targeting future inflation but actually seemed to be able to do it.

Now, central banks around the world still have more or less the same target. All that's changed is the capacity to execute it - particularly in the UK. And the use of the word "flexible".

The target measure of inflation has been significantly above 2% for the best part of 7 years, and the latest central forecast from the Bank shows it staying well above 2.5% for at least the next 18 months.

Is there anything the Bank should be doing differently? Sir Mervyn King made clear, again, today that his answer to that question was no. Though he did think the government should do more on the supply side, to raise the economy's short and long term potential. What, exactly, he declined to say.

Unlike Mark Carney, Sir Mervyn does not think that quantitative easing - creating money and using it to buy government bonds - itself is encountering diminishing returns. Indeed, the current Bank of England governor thinks the general mood in financial markets suggests that monetary policy here and around the world is having, if anything, too much effect on asset prices.

True, we're not seeing anything like the same kind of effect on the real economy. But that's a reflection, Sir Mervyn said, of the inherent limits of monetary policy in today's environment. It wouldn't be resolved by the Bank doing the same thing in a different way.

The gap between him and Mr Carney, I suspect, is not as wide as even their careful rhetoric suggests. Mark Carney also thinks there are limits to what central banks can do to restore growth. But he does seem a little more willing to experiment, before concluding that monetary policy in general has been "maxed out".

Is there anything that the Bank or the government might have done, back in 2010, to make the path of adjustment any faster or easier? Again, the governor's answer was no. He told me that any more aggressive effort to stimulate the economy at that time - either fiscal or monetary - would have been "doomed to fail". The way Sir Mervyn tells it, the big disappointment since then hasn't been monetary policy or fiscal policy, but the external environment.

Some will say this is revisionist history, that the governor is forgetting the much more optimistic forecasts for domestic as well as external growth that were built into the Bank's initial forecasts. But it is indeed history.

The big lesson for right now from the report and the press conference is that inflation is going to stay higher for longer. As Sir Mervyn went out of his way to point out, this is in no small part because of government policies - notably the rise in tuition fees and administered increases in transport and utility bills - which the central bank could not predict, let alone control.

He talked a lot about the "paradox of policy" in his remarks. One wag on Twitter suggested the governor was using "paradox" as others might use the word "mistake". But Sir Mervyn was quite pointed in referring to these administered price rises as "own goals".

Tuition fees represent a tiny part of the Consumer Prices Index, but will be making an outsize contribution to inflation for several years to come. Of course, the same applied in spades to the increase in VAT a few years ago.

There might have been no better way for the chancellor to raise the money he wanted to raise, but the fact that he has made the job of the central bank harder - at the same time as insisting it take the lead in stimulating the recovery - is indeed a paradox.