Bank of England Governor Slams Bank Bonuses  

The governor of the Bank of England said he would be willing to implement further rounds of asset purchases – also known as quantitative easing - in an effort to rebalance the UK economy and issued a stark warning to the financial sector ahead of bonus season in the City of London.

Governor of the Bank of England Mervyn King
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Governor of the Bank of England Mervyn King

Speaking in the seaside resort of Brighton on Tuesday evening, Mervyn King said the Monetary Policy Committee (MPC), the central bank’s interest rate setting body, was ready to implement further assets purchases if necessary in order to keep short term interest rates low, adding inflation expectations pointed to a decline this year towards the Bank’s government set target of 2 percent.

King said inflation would continue to fall unless energy prices rose again in response to any escalation in tensions between the West and Iran. He added that he expected the fall in inflation to relieve the squeeze on real income growth and with it the pressure on consumer spending.

But he warned the UK’s path to economic recovery would be “arduous, long and uneven.”

King also waded into government policy in part blaming the coalition government’s decision to raise value-added tax (VAT) last year for the increase in inflation, while suggesting that “helped by the right policy actions,” the UK economy could recover.

He also challenged the banking sector and the government over exorbitant bonuses, warning that “the legitimacy of Britain’s market economy would inevitably be challenged if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers.”

“Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair. That sense of fairness underpins the commitment to a market economy. An even bigger tragedy would be to deny the prosperity that flows from a market economy to those who need it most.”

The central bank governor’s remarks are some of the most transparent he has issued and may suggest a hardening of tone.

"The tragedy of the financial crisis is that those who have suffered most have been those who bear no responsibility for it, and who, whether employees or businesses, accepted the disciplines of a market economy only to find that others were excused that discipline because they were 'too important to fail '," King added.

The central bank governor said the fortunes of the UK’s economy remained tied to the euro zone and that until the European debt crisis was resolved, UK banks would continue to experience elevated funding costs affecting their ability to provide credit on reasonable terms to businesses and households. This, he said, meant that credit conditions would continue to act as a headwind to the economic recovery.