Bank of England Governor Mervyn King said central bank officials are prepared to take unpopular measures to prevent banking excesses from undermining financial stability and economic growth.
“Our role will be to take away the punch bowl just as the next party is getting going,” King said in a radio address late yesterday in London. “That won’t make us popular among bankers, politicians and even at times some of you, and it’s not supposed to. But it will, I hope, reflect the trust and confidence that the citizens of this country can place in the Old Lady of Threadneedle Street,” a nickname for the central bank.
As officials prepare for a decision next week on whether to extend their bond-buying program to lift the economy from its first double-dip recession since 1975, King said the economy isn’t yet “back to health” and needs the support of low interest rates. The governor, who will retire in June 2013, spoke days before the central bank marks 15 years of independence from government in setting monetary policy.
“We have a difficult challenge and our job is to do our best to try to steer the economy back onto a steady growth path,” he said in response to questions. “For the time being that means low interest rates.”
In a BBC radio interview today, King said the U.K. will see a “slow and steady recovery” starting this year.
A report today may show that growth in services, the biggest part of the economy, probably slowed in April. An index of services may have slipped to 54.1 from 55.3, according to the median of 28 economists in a Bloomberg survey. A reading above 50 indicates expansion. Similar gauges for manufacturing and construction earlier this week also declined.
The pound fell for a fourth day against the dollar, declining 0.1 percent to $1.6183 as of 8:27 a.m. in London. U.K. government bonds were little changed, with the yield on the 10-year gilt at 2.05 percent.
As the Bank of England prepares to regain powers to regulate the banking industry, King said that the central bank is “up to the task.”
“Already we see vested interests rise up to defend their bonuses and profits,” he said. “But, as an independent central bank with over three centuries of history, we can resist those short-term pressures and take the longer view needed to prevent another crisis.”
‘Far From Over’
King said the euro area remains the biggest risk to U.K. banks and the turmoil in the region illustrates that the current crisis is “far from over.”
The U.K. economy isn’t yet “back to health” and inflation is “still too high” even after cooling in recent months, he said. “Despite efforts to stimulate the economy, the recovery is proving slower than we had hoped. It will come. But dealing with the consequences of our ‘bad banking situation’ is likely to be a long, slow process.”
Bank of England officials are preparing new economic forecasts and will announce their next policy decision on May 10. They kept the ceiling for asset purchases at 325 billion pounds ($526 billion) last month and held the benchmark interest rate at a record-low 0.5 percent.
“We are now significantly worse off than we were four years ago” after the turmoil wrought by an “overextended” financial system, King said. The increase in unemployment around the world will “seem deeply unfair, and it is. I can understand why so many people are angry.”
King called on the U.K. government to quickly adopt the reforms recommended by the Independent Commission on Banking. He also said banks must retain profits to build buffers and that officials should create a global regime for managing failing institutions that shields taxpayers from having to provide bailouts.
The Bank of England’s Financial Policy Committee, which will have the power to address “risks building in the financial sector,” will add to the bank’s powers to prevent future crises, he said.
The FPC, to be established by a bill now being considered in Parliament, is part of the central bank’s “biggest challenge for decades” as it recovers powers that it lost with independence in 1997, King said. “Although far from clear at the time, the later decision to remove from the Bank of England the power to regulate banks would return to haunt us.”
As the crisis took hold, King said the bank was left only with the power of “publishing reports and preaching sermons.” While it did that, “we didn’t imagine the scale of the disaster that would occur when the risks crystallized.”
“With the benefit of hindsight, we should have shouted from the rooftops” on the fragilities that had built up, the governor said. “And in the crisis, we tried, but should have tried harder, to persuade everyone of the need to recapitalize the banks sooner and by more.”
King said his radio address was intended to describe the policy changes needed amid the “long shadow” cast by the financial crisis.
“Fifty years from now, will our grandchildren ask why we lacked the courage to put in place reforms to stop a crisis happening again?” he said. “I hope not.”