MercoPress. South Atlantic News Agency

Maradona skills and inflation expectations

Bank of England governor Mervyn King reached for an unusual ally to help him explain monetary policy to the populace at large - Diego Maradona.

The Argentinean footballer, Mr King acknowledged in the annual Mais lecture at City University's business school, is not usually associated with the theory of monetary policy.

A committed Aston Villa and England fan, Mr King recalled the England versus Argentina game in the 1986 World Cup when Maradona scored twice.

"Maradona's first Hand of God goal was an exercise of the old 'mystery and mystique' approach to central banking. His action was unexpected, time-inconsistent and against the rules. He was lucky to get away with it," the governor said.

But the second goal, when the striker ran 60 yards from inside his own half, beating five England players before sticking the ball into the back of the net, was an example of the power of expectations in the modern theory of interest rates, Mr King added.

"The truly remarkable thing ... is that Maradona ran virtually in a straight line. How can you beat five players by running in a straight line?"

The answer is that the English players reacted to what they expected Maradona to do - run left or right - rather than what he actually did.

"Monetary policy works in a similar way" added Mr King, explaining that the Bank of England and other central banks around the world have experienced periods in recent years when they have had to do little because market interest rates, as opposed to official rates, have moved in expectation of a move in official rates, thereby doing some of the central banks' work for them.

Right now, for example, two-year fixed-rate mortgages, based on market interest rates, are moving down in response to the weakening outlook for consumer spending and the anticipation in markets that the Bank of England may be cutting rates later in the year.

Mr King said the point about the Bank's activity was the ability of the policy framework to condition inflation expectations.

Separately, official data showed inflation remained steady at 1.9% last month, just below the Bank's 2% target. The Office for National Statistics said strong rises in utility and petrol prices were offset by weaker food prices and airfares.

The Bank of England said in its quarterly inflation report last week it expects inflation to head above its target in the next few months but to fall back later in the year as some temporary upward effects wear off. Oil prices have fallen by nearly a fifth from the record levels hit this year. (The Guardian)