On Wednesday, Mervyn King took on the role of the central bank’s chief toast master at the Lord Mayor of London’s Banquet – cue fine dining, full formal dress, a large hall and obviously fine wines. Central bankers are not known for their singing talent, so he entertained the audience with a slice of his views on the outlook for monetary policy in the UK, ranging from the practical (how to improve the quality of £5 notes in circulation) to the central inflationary conundrum (the impact of money supply growth on inflation).
From the perspective of us bond investors, the interesting part of his speech referred to loose monetary conditions. He warned about the corporate demand for credit and the readiness of financial institutions to lend, and was particularly concerned about the development of complex financial instruments and the spate of loan arrangements without traditional covenants. “It may say Champagne – AAA – on the label of an increasing number of structured credit instruments. But by the time investors get to what’s left in the bottle, it could taste rather flat” (David commented on precisely these concerns in our blog last week).
At first the choice of wine to accompany his speech appears appropriate for such a grand occasion. Or maybe we have a central banker with a sense of humour who compares the credit markets to a fancy bottle of bubbly, that goes POP.