King goes out swinging on QE and fragile mortgage market

SIR MERVYN King used his last public appearance yesterday to make warnings on the Fed’s quantitative easing (QE) and the effect of low rates on mortgages.

Answering questions from the MPs who make up the Treasury Select Committee, the outgoing governor of the Bank of England suggested that if interest rates returned to their pre-crisis levels now, new mortgage holders would quickly be unable to make repayments.

King said: “If long-term interest rates persist at very low levels, households will be able to absorb those levels of debt. If on the other hand, interest rates go back to more normal levels quickly, some of those households will find themselves with levels of debt that won’t look so attractive, given the new lower level of house prices”, he added.

King also said that the slowing down and eventual unwinding of the Federal Reserve’s QE programme would depend on economic data, suggesting that markets had overreacted to Ben Bernanke’s most recent assertions on QE.

The governor rebuffed suggestions that a slowing down of QE purchases meant that interest rates would rise in the near future: “I think people have rather jumped the gun thinking this means an imminent return to normal levels of interest rates. It doesn’t”.