It has been a bad week for Mervyn King. Accused of being excessively political around the time of the election last Thursday by Adam Posen and others including Kate Barker on the MPC, he has now been outed in the wikileak revelations as fond of a gossip with the US ambassador.
Embarrassing? For sure.
Damaging? I don’t think so, but I’m not sure.
The leak mostly contains views that the governor expressed publicly, or views that were blindingly obvious.
There is the obvious statement that King expressed publicly: “For the next ten months, the UK faces the challenge of adopting deficit-reduction measures, controlling inflation and addressing rising unemployment”.
To me, it was pretty clear that Jean-Claude Trichet, European Central Bank president, was leaving all options open when he gave evidence to the European Parliament late on Tuesday. That can only mean the chances of a significant scaling-up of the ECB’s government bond purchases have increased. It may not happen, but at least the possibility would appear to be on the table. Here are my answers to some of the obvious questions:
Why? The ECB could decide that at least parts of the bond markets have become dysfunctional, pricing in risks of default that do not reflect the fundamentals of countries such as Spain. The original purpose of its Securities Markets Programme, launched in May, was to restore the proper functioning of the monetary transmission mechanism, which was a way of saying it would correct dysfunctional markets. An escalation of the bond purchases could also be justified on monetary policy grounds – if there were a risk of asset price deflation.