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Rapid fall in sterling will raise inflation, says Mervyn King

The outgoing governor of the Bank of England (BoE) Sir Mervyn King has expressed concern that sterling’s rapid fall in 2013 will further increase inflation and compress household budgets.

King told ITV News: “We are moving to a properly valued exchange rate. I think we’re probably there”.

“Basically we’re at the same level [of sterling] we were after the impact of the financial crisis. We’re certainly not looking to push sterling down. We’re looking to ensure recovery in the UK economy and gradually bring inflation back to our 2 per cent target.”

King’s latest comments on pound are in stark contrast to what he said at the start of this year and in the autumn.

In November 2012, King said that sterling’s rise in 2012 was not a welcome development. Again in January 2013, he said that the 25 per cent fall in sterling since 2007 before its rise in 2012 was certainly necessary for a full rebalancing of our economy.

King, however, has indicated that the BoE now thinks that sterling’s declining value in 2013 has gone far enough. “There is momentum behind the recovery that’s coming,” he said supporting George Osborne’s strategy of fiscal consolidation alongside monetary activism.

“The strategy was based on a gradual shift back to reducing the budget deficit and as a consequence, the BoE will have the responsibility for trying to support the recovery. That’s the strategy. I totally agree with it,” King concluded.