London: The world’s central banks made a “mistake” during the coronavirus lockdowns by printing more money, which is now the cause of soaring inflation rates, former Bank of England governor Mervyn King says.
King, who led the UK’s central bank from 2003-13, said there was a difference between the way major economies dealt with the global financial crisis and the impact of the COVID pandemic.
Former Bank of England governor Mervyn King said politicians to “front up” and explain the consequences of soaring inflation. Credit:Bloomberg
Addressing a crisis in British politics caused by the Truss government promises of billions of pounds of unfunded spending, King said there was a need for politicians to “front up” and explain the consequences of soaring inflation, the reduction on living standards caused by confronting Russia’s invasion of Ukraine, and help future generations cope with the increased national debt.
He said mortgage rates are “clearly going to go up” in Britain but noted this was also happening elsewhere. He said all central banks “made the mistake” during the lockdown period of “thinking that they should print a lot of money to support the economy”.
There has been growing political backlash against central banks around the world for failing to act quickly, or boldly, enough to restrain surging prices, with they should have quickly turned back from quantitative easing, which was used to inject money into major economies.
The Reserve Bank of Australia has come under scrutiny for undershooting its inflation target for more than five years pre-pandemic, and incorrect forward guidance during COVID-19 that interest rates were not expected to rise until at least 2024.
Australia’s Reserve Bank governor Phillip Lowe acknowledged in July the bank’s pandemic monetary policy moves, including dropping the official interest rate to record lows, had contributed to high and rising inflation.
He said last month he was open to a discussion about whether 2 to 3 per cent was the appropriate target range, noting many other countries had chosen 2 per cent as their anchor point of choice.
King said “all central banks in the West” had failed in their duty to control inflation, and said they had fallen into a mindset of resorting to printing money whenever there was bad news.
“During COVID, when the economy was actually contracting because of lockdown, central banks decided it was a good time to print a lot of money,” he told the BBC. “That was a mistake. That led to inflation. We had too much money chasing too few goods. And the result was inflation. That was predictable. It was predicted, and it happened.”
“That was the wrong policy and all central banks – not just ours but the Federal Reserve, the European Central Bank – are all facing now very high inflation rates of close to 10 per cent. We’re all in the same boat.”
Soaring prices have delivered the sharpest squeeze on consumer spending power in decade, with Britain’s Consumer Prices Index rising 10.1 per cent last month from 9.9 per cent the month before. That matched a 40-year high reached in July and exceeded economists’ expectations for 10 per cent.
The figures leave inflation well above the Bank of England’s 2 per cent target, adding to pressure on policy makers to lift the key rate significantly next month.
King warned whoever succeeded Liz Truss as British prime minister this week that there “isn’t enough money there among the rich to get it back” when it comes to meeting the “strong case” for extra spending in certain areas to help recover from the lockdown.
“The challenge is if we want European levels of welfare payments and public spending, you cannot finance that with American levels of tax rates. So, we may need to confront the need to have significantly higher taxes on the average person.”
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