Ex-BOE’s King Raps Central Banks for Losing Focus, Humility

  • Central bankers need to stick closer to their inflation remit
  • Economists shouldn’t pretend to be able to forecast, he says

It would seem that Mervyn King isn’t a fan of what central bankers have been doing since he departed their ranks.

In a discussion of the economics profession and central banking on Wednesday, the former Bank of England governor expressed concerns ranging from the “narrow” focus of macroeconomics, a lack of humility among forecasters and the risks of straying into the realms of fiscal policy. He also chided policy makers for speaking out on issues such as climate change, a cause championed by his successor.

Mervyn King

Photographer: Chris Ratcliffe/Bloomberg

Since King left the BOE in the hands of Mark Carney at the end of June 2013, the central bank has cut interest rates to a new record low in the wake of U.K.’s Brexit vote and expanded its bond-buying program. After a barrage of criticism by politicians including Prime Minister Theresa May last year sparked a debate about central bank independence, King weighed into the argument, blaming policy makers for overstepping their bounds.

“The big risk for central banks is they get sucked into using policy instruments which are in effect either genuinely fiscal instruments or other policy instruments which ought to be determined by politicians or elected governments,” he said. “And in so doing they begin gradually to undermine the case for independence of central banks.”

Northern Rock

King ran the BOE during the global financial crisis, slashing interest rates to near zero and initiating quantitative easing by buying government bonds. Although he hesitated to provide emergency cash to banks as markets seized up, he relented after Northern Rock experienced the first run on a British lender in 150 years.

Under Carney, the BOE joined peers including the European Central Bank in purchasing company debt which controversially included that of non-British firms such as Apple Inc. King said that when one lawmaker called for the bank to buy corporate debt during his leadership, he demonstrated the potential impropriety of the action by suggesting it purchase bonds of his favorite soccer team, Aston Villa.

Policy makers have also become embroiled in controversy over their economic forecasts in the wake of June’s vote to leave the European Union, which have so far proved too pessimistic. BOE Chief Economist Andy Haldane said this month that it was “a fair cop” and the profession faces a crisis.

While King said he wouldn’t wade into the debate, he said those in economics should stop being defensive about their failings and use them as an opportunity to reconsider their overly narrow models.

More Humility

Economists need to demonstrate “a lot more humility and a belief that we should not pretend to be able to forecast” because “every now and then you’ll fall flat on your face as much of the economics profession did in the last six months or so,” he said.

King also said that in a cost-benefit analysis, central banks shouldn’t get too tied up with single issues such as climate change and instead “focus on what they were supposed to be doing.”

That may not go down well with Carney, who set up a panel advising the Group-of-20 nations on how companies should disclose their environmental risks as part of his role as head of the Financial Stability Board.