- Pound dropped to its weakest level since 1985 on Monday
- Sterling decline may help to bolster inflation: King
After seven years of interest rates at a record-low 0.5 percent, the U.K. can expect that period to carry on for the foreseeable future, according to former Bank of England Governor Mervyn King.
Even as the pound plunged to a three-decade low against the dollar on Monday, a BOE interest-rate increase is unlikely, King said in a BBC interview. A weaker sterling and an increase in import prices was “going to have to happen” to rebalance the economy, he said.
“If the bank’s own forecasts are correct, and we are moving toward a slowdown in the economy, then they will leave interest rates lower for longer,” King said. “It would be a very peculiar reaction at this juncture to raise interest rates despite the fall in sterling. The Bank of England has been trying to push inflation for a while without a lot of success. This will help it in its cause.”
King also defended his successor at the BOE, Mark Carney, who has faced criticism from some within the ‘Leave’ campaign for his prediction that the U.K. could face a technical recession in the aftermath of the vote to exit the trading bloc.
“The bank had no choice but to make a judgment about the short term,” King said. “The bank was very careful not to get involved in the speculative judgments to which the government fell prey. Central-bank governors are always criticized. I don’t think that means to say they are wrong.”
While the pound extended its record selloff on Monday and European equities dropped to levels last seen in February amid the aftershocks of last week’s vote, King sought to reassure markets.
“I’m not saying it’s nothing to worry about, but there’s no reason to extrapolate this into a sort of mindless panic,” he said. “Foreign-direct investment undoubtedly will probably fall and be on hold for a period, and that was the largest likely short-term economic impact of leaving the EU. But that reflects the uncertainty, and at some point that uncertainty will disappear.”