Inflation crisis was caused by economic groupthink, says Lord Mervyn King

Lord Mervyn King headed the Bank of England from 2003 to 2013. Photo: Geoff Pugh

Former Bank of England governor Lord Mervyn King criticized “groupthink” at the central bank for fueling the inflation crisis.

Lord King said the lack of dissenting voices at the Bank of England meant he was not was able to act quickly and decisively enough to stop the rise in inflation. to a more than 40-year high.

During a debate in the House of Lords, Lord King said: “It is alarming that not only in the [Bank of England] Monetary Policy Committee, but also in the Open Market Committee There were no dissenting voices at the Federal Reserve to challenge the view that inflation was a temporary phenomenon.”

The former governor, who headed the Bank of England from 2003 to 2013, said he understood how “this groupthink came about” but complained that its influence had led “to the problems we now face.” all too familiar.”

Lord King said the crisis of “the lack of intellectual diversity on the Monetary Policy Committee” reflected the failure of the entire “academic economics profession” to challenge consensus.

As a result, in both the UK and the US, “at the point where it really mattered, we saw no serious problems with the prevailing opinion.”

Britain experienced its worst bout of inflation since the early 1980s, when The rate of consumer price growth will peak at 11.1% in October 2022.

The surge prompted Bank policymakers to raise interest rates to a 16-year high of 5.25%. However, officials only began raising borrowing costs in December 2021, when inflation had already risen to 5.4%.

Lord King said: “In 2020 and 2021, when inflation began to rise, there was not a single dissent ” voting on the MPC and the lack of mention of monetary data in the Bank's report. The bank rate exceeded the pre-pandemic level only in May 2022.”

He warned that economists were “foolish” to ignore the impact of the rapid increase in the amount of money circulating in the economy following the Government's decision to spend billions of pounds to support families and businesses during the pandemic.

Officials were unable to understand what they were talking about “This growth in the money supply tells us,” Lord King said.

The former Bank Governor also reiterated that the expansion of the Bank of England's responsibilities to include a focus on climate change and the city's competitiveness had led to “an inevitable decline in focus on the mission monetary policy.”

“It is frankly ridiculous to suggest that central banks can have any serious impact” on climate change, he said, and called for such fringe goals to be “discarded.”

Lord King said: “The expansion of central government mandates for banks increases the likelihood that governors will begin to behave like politicians and try to gain popularity by entering areas far beyond monetary policy.”

The scathing assessment of his successors came weeks after a highly critical report on the Bank's forecasting abilities.

Former Federal Reserve Chairman Ben Bernanke said the Bank of England's ability to control inflation had been undermined ” significant shortcomings” in its economic forecasts.

Mr Bernanke warned that the accuracy of the Bank's forecasts had “deteriorated significantly” since the pandemic, as part of a highly critical independent review.

The bank's governor, Andrew Bailey, agreed with the findings and said Threadneedle Street needed to “adapt and evolve” its forecasting process.