The hopes and regrets of the Bank's outgoing Governor

Richard Edgar

Former Economics Editor

Sir Mervyn at his beloved Villa Park with the recent holder of England's other "impossible job", Fabio Capello, in 2011. Credit: Mike Egerton/EMPICS Sport

He may only have a few months left in office but Sir Mervyn King's schedule is showing few signs of end-of-term jinx (apart from an indulgent business breakfast this morning at his team's ground. Aston Villa was ringing with discussions of monetary policy before 8:00am).

ITV News has been given unprecedented access to film the Governor's visit to the West Midlands. He ventures from the fortress that is the Bank of England at least eight times a year to hear from grass roots businesses what's happening in the real economy. Over the past two days I've been struck by the genuine enthusiasm he has for the task, whether learning how metal bands get stamped into struts - and the export markets the company that makes them is building - to explaining to school children in one of the largest secondary schools in Europe why inflation matters to them.

In two long-form interviews this week, I asked him more about inflation and he was quick to repeat the Bank’s focus:

I stress this, we will bring inflation back to the 2% target in the medium term.

Of course inflation targeting, the Bank's main job in bringing inflation down, is very topical. The incoming Governor of the Bank, Mark Carney, started the debate before Christmas when he mooted targeting growth instead (although he has softened his line since then) and there have been calls for the Bank to be required to improve another aspect of the economy, like employment, as well as inflation. The US central bank, the Federal Reserve, has just adopted a duel mandate like that. There is speculation that the Chancellor, George Osborne, will change the Bank's remit - its job description - in the Budget next week, or at least start a consultation on the ideas.

Sir Mervyn is not persuaded this is the right approach. "I'm not sure there is any call for major change in the remit," he told ITV News. "Most important is the commitment to the target of two per cent [inflation]."

Although he acknowledged younger people might not remember or appreciate the dangers of high inflation, he explained that the institution of the Bank was there to do the worrying - because...

...what was scary when we had high inflation was businesses faced high interest rates ... mortgage repayments doubled, there was pressure on household finances ... people stopped looking at the long term and focussed entirely on the short term.

Sir Mervyn’s track record in bringing inflation to the official target of two per cent is far from stellar - since the crisis it has only fleetingly dipped to the prescibed level. The Governor described this as the very flexibility that some are calling for; raising interest rates to kill off high inflation while Britain has been floundering in the longest recovery in a century would have been daft. In fact, anchoring inflation expectations_ - where markets (and consumers and businesses) expect inflation to be over the medium term is probably the greater victory. At the moment, Britons don’t expect inflation to spiral up and that’s contributing to lower wage rises. Sir Mervyn cherishes this relative stability.

As he approaches the end of his governorship which spanned the years of stable growth before the crisis of 2007 and the turmoil which followed, I asked him what had frustrated him. Sir Mervyn paused for a moment and replied:

The way the financial crisis occurred and the way we responded to it.