King defends Bernanke over communication of Fed policy

Ben Bernanke "could hardly have been clearer" when he spelled out the future of the Federal Reserve's monetary policy, and markets have "jumped the gun" in interpreting his latest comments as an indication the Fed will increase interest rates, according to Bank of England governor Mervyn King.

King believes market reactions to Bernanke's press conference last week – stock market indexes across the globe fell sharply – do not reflect the quality of the Fed chairman's communication.

He observed that "almost any announcement by central banks causes volatility at present", and suggested this is as much to do with uncertainty surrounding economic recovery as it is with the reaction of central banks to new data.

"No-one can really know how we can create the economic conditions where central banks will choose to raise interest rates," he said.

King, appearing before the Treasury select committee, acknowledged that central banks will have to unwind their monetary easing at some point but stressed that – in the UK, at least – "that point is not today".

He also berated national authorities for failing to implement economic reforms in five years since the financial crisis, and urged them to take advantage of the time created for them by central banks – in line with the thrust of the latest annual report published on July 23 by the Bank for International Settlements.

King insisted it would be "folly" to consider raising interest rates until countries across the globe have introduced supply-side reforms as well as changes in real exchange rates and trade balances.

Bank of England framework

In his final public appearance before he steps down later this week, King revealed he was open to the prospect of merging the Bank of England's monetary and fiscal policy committees at some point "down the road".

King said it would be "premature" to consider unifying the two at such an early stage in the FPC's existence, but he "would not object" to revisiting the prospect in five years' time.

He raised concerns, however, about the ability to secure the requisite expertise for the combined committee, while at the same time limiting its membership. King said his preference was for – at most – a nine-member committee, and this would be "very hard" to limit the combined committee to nine members or less.

King, in his final public appearance before standing down later this week, praised the UK's new regulatory structure. He said the decision to return bank supervision to the Bank of England – in the form of the Prudential Regulation Authority (PRA) – had provided a weight to the central bank's judgements that it otherwise would have lacked.

The PRA, he said, turns the FPC's recommendations into reality and makes it possible for the committee to gain some leverage with financial institutions.

However, King warned against politicians interfering in the relationship between the Bank of England and the commercial banks it is supervising. "Very often the first response of someone leaving the [central bank's] building is to ring number 11 or number 10," he said. "There were certainly calls made to try and put pressure on supervisors".