Merv the Swerve

Unpredictability is not really a quality that the financial markets value in their central bankers.

Last Updated: 31 Aug 2010

And when Mervyn King, a former professor of the ‘dismal science’ (economics) took over from ‘Steady’ Eddie George as Governor of the Bank of England, there seemed very little to worry about. After all, this was the man who has regularly stated his desire to make monetary policy ‘boring’ (a big ask, we’re sure you’ll agree).

Which is why his sudden about-turn is so remarkable. Only last week, King was insisting that the Bank would not extend three-month loans to the commercial banks, citing ‘moral hazard’ – in other words, he believed (not unreasonably) that institutions who had come unstuck through excessive risk-taking shouldn’t be bailed out by the central bank.

Now, just one week later, he’s done exactly that, offering to pour £10bn of loans into the system ‘to alleviate the strains in longer-maturity money markets’. He’s even going to allow the banks to use more risky assets as collateral.

So has he changed his mind, or had his arm twisted? Either way, King is likely to face some serious stick in the coming days.

He’ll also be accused of doing too little, too late. King has apparently been under pressure for weeks from the FSA and the banks to dip into its coffers, in an attempt to stave off a Northern Rock-style crisis of confidence – but it’s clearly it’s a little late for that. What’s more, yesterday’s aggressive half-point rate cut by the US Federal Reserve seems to have restored confidence to the markets – the rate at which banks lend to each other has now dropped below the Bank of England’s proposed rate.

It seems a bit strange that the Governor is apparently coming under more pressure than Northern Rock’s management. But if King doesn’t put in a good showing before the Treasury Select Committee on Thursday, he might be in danger of becoming the highest-profile casualty of the credit crunch…

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