Consumer boom is over, says Bank boss
By Anatole Kaletsky and Gary Duncan
Mervyn King takes charge as new Governor of Bank of England
timesonline.co.uk
THERE will be no speedy return of the “feelgood factor” for Britain, according to the new Governor of the Bank of England, Mervyn King, who takes over this morning from Sir Edward George.
He says that one of the biggest challenges he faces will be maintaining public confidence over a period when consumer spending and growth in living standards will be held back in order to fund increased spending on public services.
“The feelgood factor that has been there won't be there in the same way,” Mr King told The Times yesterday.
“Households will have to accept that part of the output they are producing is going to finance public expenditure and to reduce the trade deficit rather than going to household consumption.”
He admitted that he believes this makes the task that he faces harder than it has been in recent years.
He predicted that the Bank might become a less popular institution once voters realised that there could be no return to the unsustainable consumer boom of recent years when people became accustomed to growth rates of 4 per cent in living standards every year.
Outlining his agenda for his term as Governor in an exclusive interview with The Times, Mr King highlighted his concerns over the “compensation culture”.
Amid mounting unease among savers and investors over scandals such as the Equitable Life affair, the new Governor said he was worried by attitudes towards financial risk.
“We create a culture in which consumers feel that when uncertain and bad things happen they should be compensated,” he said.
He indicated that the Bank would not allow itself to be deflected from its management of the British economy by the debate on euro membership.
The first academic economist to become Governor of the Bank of England, Mr King stated that he had three main priorities: the rebalancing of the economy away from its dependence on consumer spending as manufacturing revives; the development of the international financial system; and the mismatch of attitudes towards risk.
“We have somehow to find ways to educate consumers into the fact that there are risks and if they choose to bear risks, they must accept the consequences of that,” he said.
The increasingly international activities of major financial institutions made it impossible for any regulator to keep abreast of all their activities, he warned. But he voiced his confidence in the “strong and sound” banking system that Britain enjoyed.
Mr King indicated that he anticipated a rougher ride from the public than his predecessor, Sir Edward George. As well as paying tribute to Sir Edward’s unique personal qualities — “I could never hope to fill Eddie’s shoes” — Mr King also noted an economic issue that could make the Bank a less popular institution in the years ahead.
The Bank took control of interest rates when the British economy had a lot of spare capacity and it was possible to enjoy a long period of very good output growth. In the first five years of the Bank’s independence, the public generally supported the Bank’s explanations of its economic policy moves. In future, he said, “conditions will not be as favourable”, for the Bank.
“It is much easier if you do the explaining of monetary policy against a background where household spending is growing by 4 per cent a year than if spending is growing by 2 per cent,” said Mr King.
This low rate of consumption growth was probably the best that Britain could expect in a period when the rising pound was no longer reducing the price of imports and when the public sector was making increasing demands on the economy, as evidenced by the recent increase in National Insurance rates.
While carefully avoiding any direct comment on the Government’s political priorities, Mr King repeatedly noted that the rapid growth of public spending was bound to have substantial consequences for the structure of the economy, and to reduce the scope for increases in consumer spending.
In a two-hour interview, which ranged from the new Governor’s respect and affection for Bank traditions to his sympathy for Britain’s under paid academics, Mr King touched on several other areas of potential friction between the Government and the Bank.
On the euro, Mr King was adamant that the Bank would do its utmost to support Government policy, whether it was to join or to stay out. "The job of the Bank is very clear. It is to make a success of whether the British people decide to do."
But there was one outcome he would try at all costs to prevent: "a decision to join the euro because people feel that we can't manage our own monetary policy".
In "one or two countries" the public "felt they should join the euro to get a better monetary policy", but he was determined that Britain should not be in this group.
Instead, the decision should be based on weighing a large benefit against a large cost.
The benefit was that, inside the euro, Britain would be able to "exploit a large single market more fully". The cost was that Britain would "lose the advantage of being able to run our own monetary policy".
The eurozone's "one-size-fits-all monetary policy" should always be recognised as a disadvantage, but economists and politicians were bound to have differing views. |
