Banks are not 'helpless' says ex-Bank of England governor as he slams 'serious mistakes'

17 May 2022, 21:13 | Updated: 17 May 2022, 22:46

By Sophie Barnett

Former Bank of England governor Lord Mervyn King has criticised central banks around the world for "making serious mistakes in not acting sooner" as he told LBC's Tonight with Andrew Marr that interest rates need to be hiked.

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Lord King, who was governor during the 2008 financial crisis, told Andrew that "words aren't enough" at this stage - as thousands of families face a cost of living crisis in the UK.

He said central banks around the world, including the Bank of England, have "made serious mistakes in not acting sooner" as he spoke out against the policy of quantitative easing during the pandemic.

Lord King criticised his former bank's approach amid the cost-of-living crisis, calling for a hike in interest rates.

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And the peer questioned current governor Andrew Bailey's suggestion that 80% of inflation is due to outside forces such as global energy and food hikes, calling it a "debatable figure".

He also claimed "the rest of the world has imposed a tax on the UK" and admitted "most people are going to be worse off because of higher food and energy prices".

Read more: 'Don't ask for pay rises' Bank boss warns despite 'apocalyptic' food price rises

He said the Bank of England must send a "strong, clear signal" that they're working to bring interest rates to 1%.

"I think the big challenge is they've got to demonstrate that they realise the need now is to give a very strong signal that they're focusing on bringing inflation down," he told Andrew.

Pressed on whether he means a substantial rise in interest rates is needed, he said: "The sooner it's done the lower it can be, but my worry would be if you defer this and creep very slowly, you end up in a situation where a year from now people are saying interest rates need to rise."

His comments come after the Governor of the Bank of England Andrew Bailey warned there is "very real income shock" coming from energy prices and "apocalyptic" food prices.

You can also listen to the podcast Tonight with Andrew Marr only on Global Player.

Mr Bailey said he felt "helpless" as he defended the Bank of England's monetary policy despite households being battered by soaring inflation.

He also doubled down on his claim that workers should not be demanding big pay rises.

Mr Bailey, who earns £570,000 a year, told MPs that big earners should "think and reflect" before asking for large salary increases to help curb rising inflation.

The Office for National statistics recorded inflation at 7 per cent in March and later this week is expected to unveil over 8 per cent inflation for last month.

The Bank of England has said inflation is likely to peak at 10.25 per cent during the final quarter of 2022.

Lord King said it was "predictable" that inflation would be caused by the coronavirus response of quantitative easing, or introducing new money into the system by the central bank.

"All central banks have fallen prey to two serious errors. The first one is that when the pandemic hit, governments stepped in and put in a lot of money for furlough schemes or raising unemployment benefit. That was very sensible," Lord King said.

"The problem was that central banks also printed a great deal of money and that wasn't needed ... it put a lot of money into the system.

"It's an idea that we pursued at the end of the financial crisis, when we were trying to stop the amount of money in the economy from falling. What happened this time was that it grew very rapidly... And that was a mistake because the pandemic reduced the supply of the economy. And there was too much money chasing too few goods..."

Lord King, who stood down as governor in 2013, added: "And I think central banks around the world have made serious mistakes in not acting much sooner ... including ours."