Global markets have "jumped the gun" in betting that interest rates will go back to normal levels anytime soon, the outgoing Bank of England governor, Mervyn King, has said in reaction to the widespread sell-off following Federal Reserve comments last week.
Speaking at his last hearing with the all-party Treasury committee, King raised concerns over bank lobbying and bemoaned the "disaster" of austerity in some parts of the eurozone. He advised his successor, the Canadian Mark Carney, to be true to himself.
Asked about the global shares rout, King said the Fed's chairman, Ben Bernanke, had been very clear when he talked about tapering the stimulus to the US economy. Bernanke "certainly wasn't announcing the end of QE", King said, in reference to the bond buying programme known as quantitative easing.
He said: "Certainly I think that the view that we are definitely at the beginning of the end, that we are definitely at the point where we need to raise interest rates, I think is a premature judgement about where we are and no central bank has moved rapidly down that course. The Federal Reserve has merely said that the easing in which it is still engaging may taper at some point depending on economic conditions."
He stressed that his US counterpart did not set out a clear path for rates. "Ben Bernanke made it 100% obvious it will depend on the incoming data … No one would sit down today and say this is the path of interest rates we intend to follow. That would be crazy."
In terms of the market reaction which, combined with growing concerns about China's economy, also saw losses for bonds and commodities, King suggested it was overdone.
"I think people have rather jumped the gun thinking this means an imminent return to normal levels of interest rates. It doesn't," he said.
"Until markets see in place policies to bring about that return to normal economic conditions, there is no prospect for sustainable recovery and without that prospect for sustainable recovery, markets understand that it will not be sensible to return interest rates to normal levels."
Alongside the hearing, the Treasury committee also published a BoE note that confirmed policymakers would not rule out cutting interest rates below zero – which would mean commercial banks paying the Bank to hold reserves. The paper from Charlie Bean, the Bank's deputy governor responsible for monetary policy, was in response to a committee request for more information after the topic of such an unusual move was raised at a hearing earlier this year.
Bean did not rule out such a cut to rates but said other actions were more likely.
"At the present juncture, the committee believes that further asset purchases and targeted policies to restore the functioning of the monetary transmission mechanism, such as the Funding for Lending Scheme, represent more reliable tools for stimulating aggregate demand than does a further reduction in bank rate. But a reduction in bank rate, including below zero, remains an option which the monetary policy committee will keep under review lest circumstance change in the future," he said.
At his final hearing before handing over to Carney in July, King also answered questions on bank lobbying, banker pay and the eurozone, where he thought austerity had been a "disaster" in some parts.
On banks, he said politicians and officials had "clearly come under tremendous pressure themselves from banks". "They've been lobbied," he said.
"They have passed on concerns … various conversations have taken place with others and I think it is very important that people simply should say if they are lobbied.
"There were certainly calls made to number 11 and even in some cases to number 10 to try put pressure on supervisors to modify, be more reasonable in their judgement."
On bankers' pay, King said one factor pushing up remuneration was the help banks were given by authorities fearing that the institutions were too big to fail.
"I don't think you can blame banks if you give them a big subsidy and they look around for interesting ways to spend it," he said.
King also gave some insight into how his successor compares with his own style, describing Carney as "more persuasive" but stressed that he still had only one vote out of nine on the monetary policy committee. He said he had no intention of giving public advice to Carney, but: "He should be himself. Governors change. It is very important each governor should be himself … He must and I am sure he will be himself"
King also revealed that Jane Austen may appear on bank notes, which may go some way to calming the controversy that erupted when the Bank announced that Winston Churchill planned to replace Elizabeth Fry on £5 notes, meaning that British bank notes would no longer portray any female historical figures. King said that by the time Churchill took Fry's place there would have been another announcement.
"Jane Austen is quietly waiting in the wings," he said.
