Lord King: Net zero obsession ‘has fueled inflation’
Lord Mervyn King criticizes a change in focus at the Bank of England that has seen its remit expanded beyond monetary policy
King has warned that the amount of time and effort the Bank of England has devoted to net zero has weakened its ability to fight inflation.
The former bank governor, who led Threadneedle Street from 2003 to 2013, said it made “absolutely no sense” to add net zero to the bank’s growing list of responsibilities, warning that ‘climate change’ had become a “straw”. [that] Breaks the camel’s back”.
It comes after Bank of England Governor Andrew Bailey admitted in May that he had made mistakes in his UK inflation forecasts, and acknowledged that he had some “very big” lessons to learn.
Mr Bailey has also argued that there is “no excuse” for failing to tackle ‘climate change’, but he stressed that it is not the Bank’s job to help “adjust the world”.
Rishi Sunak updated the Bank’s remit as Chancellor in 2021, directing Threadneedle Street’s policymakers to support growth and enable a “transition to a net zero economy”.
In an interview with The Telegraph, Lord King said that Britain’s impact in achieving global net zero emissions was negligible and that the government had too much time passed on “arbitrary dates” to ban petrol and diesel cars as well as gas boilers.
He said:
“The Bank of England can’t do anything about climate change. It is also not clear that the greatest and most immediate risk to the stability of the banking system is coming from climate change as opposed to the pandemic or cybersecurity or over-lending to commercial assets.
So in my opinion there is no point in paying special attention to it.”
Lord King has previously criticized the massive expansion of the Bank’s remit in the years following the 2008 financial crisis, when it was made responsible for controlling financial stability risks and ensuring that banks had the ability to respond to financial shocks.
This is in addition to its primary goal of keeping inflation at 2 percent. Inflation stood at 6.8 percent in July and is not expected to reach its target until 2025, despite policymakers raising rates 14 times to 5.25 percent.
Bank of England Governor Andrew Bailey has blamed “unsustainable” pay rises for fueling inflation and called on UK workers to exercise restraint when demanding a pay rise.
Rishi Sunak hinted last month that the state pension could rise by almost 8 per cent next April as he committed to maintaining the “triple lock”, where the state pension is capped each year by the highest level of inflation, wages or 2.5 per cent.
Wage growth is currently the highest of the three metrics, and next week’s official data is expected to show wage growth reached 7.8 percent in July compared with the same period last year.
Lord King warned that the Bank’s growing list of responsibilities was undermining both its independence and the ability of policymakers to focus on inflation.
He said:
“In my view, the scope of its responsibilities has expanded too much. When the Bank became independent in 1997, essentially its only area of major responsibility was monetary policy.
What you’ve got now is a body that has a lot of people in different jobs at the top who are not doing monetary policy.
I believe this will weaken the institution’s ability to ensure that the brightest and best are focused on the most important function of the Bank of England, which is to achieve price stability.
I think there’s a real danger that if you keep adding things, eventually the straw will break the camel’s back.
And I think climate change was definitely because they did [the Bank] the number of speeches given on climate change, the amount of time and effort devoted to it, the number of top level people working on it.
You need more people making monetary policy and making sure we get it right.”
The government has set a target of net zero by 2050 and is committed to banning the sale of all petrol and diesel cars by 2030.
Mark Carney supported the net zero issue during his tenure as governor
Mark Carney, another former bank governor, was one of the biggest champions of net zero during his eight years at the helm of the bank.
Mr Carney has stressed that green measures will ultimately help keep inflation low and stable. However, others have warned that rapid action on ‘climate change’ would be costly, with Nomura recently warning that moving more quickly would make the Bank of England’s 2pc inflation target “harder to achieve” as consumers and businesses will be forced to pick up the bill.
Federal Reserve Chairman Jay Powell has also warned that central banks risk undermining their independence by getting involved in social issues like ‘climate change’ that are beyond their jurisdiction.
“We are not climate policymakers and we will not be,” he said in January.
Lord King said it would be a “mistake” for politicians to “put all the eggs in the net zero basket for the UK” or force all businesses to cut emissions sharply.
He said:
“Whatever the UK does in terms of emissions is going to have a negligible impact on world emissions.
It makes no sense for the government to arbitrarily set dates on which you can ban gas boilers or petrol cars. It makes sense to think about total emissions, that is the issue, and impose a carbon tax on that.
And if they’re not willing to do that, they’re NOT willing to say to voters: We care enough about net zero.”
There are no simple answers here. But this has become a quasi-religious debate. And that’s not really a sensible way to achieve economic results.
Both the Bank of England and the Treasury declined to comment.
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