The Bank of England risks triggering a recession in the UK by tightening interest rates too much in a bid to stamp out inflation, its former Governor Mervyn King warned.
(Bloomberg) — The Bank of England risks triggering a recession in the UK by tightening interest rates too much in a bid to stamp out inflation, its former Governor Mervyn King warned.
King said in an interview with Bloomberg podcast Merryn Talks Money that the central bank is ignoring signals from money supply data, which had predicted soaring prices before the BOE acted.
The comments add to concerns about the impact that the BOE’s sharpest series of rate rises in three decades is having on the economy. Money supply economists correctly predicted the sky-high inflation and are now warning that a collapse in the data could point to recession.
“The risk is that having ignored money when inflation was rising, they’re now ignoring money when inflation is actually about to fall,” King said in the interview. “What we could see, therefore, is a mistake in both directions over a period of three or four years.”
“If they carry on for the next six months or so, tightening monetary policy, it could well be that they generate both a recession as well as a sharp fall in inflation.”
After rocketing in 2020 and early 2021, money supply growth in the UK has tumbled and was flat in May, the latest available data. For monetarists, growth and inflation are a function of the quantity of money in circulation and its velocity — the number of times it changes hands.
However, the BOE re-accelerated its most aggressive hiking cycle in three decades last month, hiking rates by half a percentage point to 5% after signs that price and wage pressures are proving much stickier than expected.
Inflation data released on Wednesday suggested that price growth is finally cooling with the inflation rate falling below 8% for the first time in 15 months in a larger than expected cooling.
The BOE has faced fierce criticism for its handling of double-digit inflation. King said they could now be over-correcting after miscalculating the initial surge.
“It’s quite possible that having lost control of inflation and therefore having lost a good deal of credibility that central banks will see that the safest course for them is one of overkill now so that they do bring inflation back to 2%,” he said.
“Having made a big mistake, it would have been better to have tightened much faster in 2022, even better not to have printed the money in 2020 and 21.”
King accused central banks and the economics profession of “group think” and said policymakers had “printed far too much money through quantitative easing.”
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