King gets nasty

15 October 2003 By Hugo Dixon

The new Bank of England governor certainly knows how to set expectations warning of greater volatility and higher interest rates. King’s points have some validity. But like an incoming CEO, he is also cannily giving himself room to exceed expectations.

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Mervyn King, the new Bank of England governor, warned that the next decade was unlikely to be as nice for the UK economy as the last decade.

King also said that interest rates would eventually have to rise. At some point reducing the present degree of monetary stimulus will be necessary in order to keep inflation on track to meet the target, he said in a speech on Tuesday.

The governor argued that the UK had experienced a noninflationary consistently expansionary (nice) decade. This was because of better monetary policy, better fiscal policy, the impact of supply side reforms and luck.

But King said the next decade was unlikely to be as nice. He said the terms of trade would probably not improve as much as they have done. And there was no longer much spare capacity in the economy. As a result, when shocks hit the economy, it was almost inevitable that there will be somewhat greater volatility of both output and inflation.

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