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BoE's King Wins Second Term as Head of Central Bank

Reuters
Wednesday, 30 Jan 2008 | 5:10 AM ET

Bank of England Governor Mervyn King won a second term as head of Britain's central bank, the Treasury said on Wednesday, ending months of speculation that he was out of favor because of the run on Northern Rock bank.

Reuters had reported last month that King would get the nod to run the BoE for another five years when his term ends on June 30, but there have been numerous reports suggesting Prime Minister Gordon Brown would choose another candidate.

King, who turns 60 this year, has come under much fire over the last year for his handling of the credit crunch hitting financial markets.

The former London School of Economics professor initially took a hard line this summer when interbank lending virtually dried up as financial institutions became wary of each others' exposure to risky U.S. mortgage lending.

King's take was that people should have been aware of the risk they were taking and bailing them out with extra cash when their bets went wrong would only encourage such behavior.

Moral hazard is not an abstract issue, argued King, who has also taught at Harvard and MIT. City of London financiers were predictably angry.

But then Northern Rock, Britain's fifth-biggest mortgage lender, fell foul of the credit crunch and had to seek emergency help from the Bank of England in September, prompting the first run on a British bank in more than a century.

King's critics screamed for blood. They said Northern Rock would not have happened if he had not been so dogmatic. The BoE changed tack and started throwing money at the markets but many complained it was too little, too late.

Communications

At the BoE since 1991, first as chief economist, then deputy governor and finally the top job in 2003, King has admitted that in retrospect the central bank could have been better at communicating its message as the credit crunch took hold.

But he maintains that he had long been warning of the dangers of too much risk-taking in financial markets.

Blunt and ready to speak his mind, King's relationship with the government has been strained. Last month, he caused a stir when it was reported that he had told a prominent newspaper columnist that Gordon Brown's government was in paralysis.

One senior Treasury official branded him "naive" in his approach to the media.

But even his firmest critics say King's record on the economy has been good. The economy has grown continuously since the Monetary Policy Committee was set up in 1997. Inflation has been low, only once breaking out more than one percentage point above the central bank's 2 percent target.

Ever the hawk, King keeps warning the next decade could be much worse. Policymakers were facing the most challenging environment, he said last week.

Growth is slowing but inflation is rising. The Monetary Policy Committee faces a tricky balancing act.

Contact Europe: Economy

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