Financial markets had “jumped the gun” in thinking global interest rates were about to shoot upwards, Sir Mervyn King warned on Tuesday as the Bank of England governor prepared to hand over the running of the central bank.
In his last appearance before a parliamentary committee, the outgoing governor defended the US Federal Reserve’s guidance last week on interest rates, insisting that it would be economic data that determined monetary policy around the world.
His comments follow those on Monday of Richard Fisher, head of the Dallas Fed, who defied the “feral hogs” in markets that he thought were testing central banks and came as Mario Draghi, president of the European Central Bank, told a business audience in Germany that “the overall economic outlook still warrants an accommodative stance”.
Central bankers are now engaged in a frantic attempt to calm the market reaction to the Fed’s musing about reducing its asset purchase programme known as quantitative easing as the US economy heals, fearing that, if the market turmoil persists, the likely recovery in the second half of the year will be jeopardised.
In his 103rd and last appearance at the Treasury select committee before he retires at the end of the week, Sir Mervyn warned that governments had not taken sufficient advantage of the recent extraordinary period of low rates to create a sustainable world economy.
Sir Mervyn insisted that comments from Ben Bernanke, the Fed chairman, on the timing of a scaling back in US quantitative easing “will depend on the incoming data” and were not a definitive guide to the future path of interest rates.
“Nobody will sensibly sit down today and say ‘this is the path of interest rates we will follow’. That would be crazy,” he said.
Saying that central banks were nowhere near the point of raising interest rates yet, he added: “I think people have rather jumped the gun in thinking this means an imminent return to normal interest rates; it doesn’t.”
He said policy makers still had time to put in place policies that would allow rapid growth and a reduction in trade imbalances, but voiced concern at the lack of progress to date. “I have been very disappointed by the failure of the world to put in place the policies that would create the conditions in which it would be desirable to return to a normal level of interest rates,” he said.
In Berlin, Mr Draghi sought to limit knock-on effects from the Fed’s change of stance on funding costs in the eurozone. He strongly defended the ECB’s policy of “outright monetary transactions” which has stabilised bond markets in the eurozone without ever being implemented.
“OMT is even more essential now as we see potential changes in the monetary policy stance with associated uncertainty in other jurisdictions of the integrated global economy,” he added, clearly referring to the recent statements by Mr Bernanke.
Equity markets regained some of the recent ground lost on Tuesday with the FTSE 100 rising 1.21 per cent to 6,101.91, but the comments by European central bankers did little to reverse the past month’s rise in global government bond borrowing costs.
In a sign that Mark Carney might have more joy than Sir Mervyn in persuading the Monetary Policy Committee to restart purchasing assets through quantitative easing, one MPC member signalled he might consider the market turmoil to be sufficiently significant to change his previous vote against any further stimulus.
Martin Weale, an external MPC member, said: “I am very much looking forward to the arguments that the new governor will be making in the context of economic data which will certainly be different from those that we had in May.”
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