Mervyn King finally secured a second term as Governor of the Bank of England yesterday from a government that privately expressed reservations about him but eventually accepted the inevitability of his reappointment at a time of financial turbulence.

Doubts over whether Mr King would get another five years at Threadneedle Street came immediately after the Northern Rock debacle. There was public criticism that he and the Bank had waited too long in the summer before injecting liquidity into financial markets. But far more damaging were private mutterings that Mr King had been “difficult” in his dealing with the Treasury.

After arguing that providing cheap credit to banks constituted “moral hazard”, Mr King and the Bank later changed tack and flooded the market with cash.

But with Gordon Brown and Alistair Darling, the Chancellor, preaching the need for continuing economic stability, there had for weeks seemed little likelihood that Mr King would be dropped, despite obvious tensions. The more uncertain the economic outlook the stronger Mr King’s position looked.

George Osborne, the Shadow Chancellor, accused Mr Darling and Mr Brown of “dithering” for months before announcing Mr King’s reappointment. Mr Osborne said: “It is difficult to avoid the suspicion that the Prime Minister was casting around for alternatives to the independent-minded Mr King before finally being forced to accept that there was no alternative to his appointment.”

Michael Fallon, senior Tory on the Treasury Select Committee, said: “I am reassured. This is exactly the wrong time to change the Governor. He should have been reappointed months ago when the crash first began.” Vince Cable, the Liberal Democrat Treasury spokesman, said the decision was the right one but should have been made sooner. “It’s unforgivable that the Government has played around with him for so long,” he said.

Mr King, 59, was generally being portrayed yesterday as the safe pair of hands required to help to steer Britain through challenging economic times. He is also the most experienced member of the Bank’s body for setting interest rates, having attended all 129 of its monthly meetings since the Bank of England gained independence in 1997.

A spokesman for the Prime Minister said that Mr King had been a “first-rate” Governor and Mr Darling said he was delighted that Mr King had been reappointed. The Chancellor added: “He has played a key role in delivering macroeconomic stability in the UK, and his leadership and experience will continue to prove invaluable to the Bank of England.”

MPs on the Treasury Select Committee said last week that the Bank had attached too much weight to the “moral hazard” argument of not offering solutions to the crisis that would encourage banks to take on more risk. The committee said: “In our view, the lack of confidence in the money markets was a practical problem and the Bank of England should have adopted a more proactive response.”

At a committee hearing in September, George Mudie, the Labour MP for Leeds East, accused the Bank of “watching the train hit the buffers”, but Mr King replied that the Bank had given time for Northern Rock to try to raise funding by selling assets, or arranging a takeover, before stepping in as the lender of last resort. He said that earlier interventions would have panicked the markets and “blown up the train before it hit the buffers”.

Economists welcomed Mr King’s reappointment and said that it was the wrong time to introduce a new governor. Under his leadership, the Monetary Policy Committee has been successful in keeping inflation in line with the Government’s 2 per cent target — exceeding the level by more than 1 per cent only once.

Richard Lambert, the Director-General of the CBI, said: “In tough times, we are lucky to have someone with his breadth of experience at the helm of the Bank.”

Mervyn King years

2008 Says dangers of inflation have left his hands tied over action to stave off downturn
Rogue trader costs Societe Generale £3.7bm Global stock markets tumble

2007 Surprise interest rate rise in January Warns financial institutions that BoE will not bail them out Turned down request by Lloyds TSB for backing if it took over Northern Rock Faces fierce criticism for handling of Northern Rock crisis. Bankers called his resignation
Pound breaks through $2 barrier
Inflation exceeds Bank of England target limit of 3%
Government announces savers deposits in Northern Rock will be guaranteed

2006 Calls for reform of “drowsy” IMF Warning about rising personal debt Criticises legal system after BCCI battle Mr King’s pension pot rises to £3.5m
House prices rise by 8%

2005 Plays tennis with Martina Hingis
Points finger at higher taxes as the culprit for consumer slowdown
Sharpest fall in retail sales for 6 years
Bank of England cleared of dishonesty over demise of BCCI bank

2004 Warns of house price falls
Sounds alarm over surge in public borrowing
Manufacturing recession ends
Price of crude oil exceeds $50 for first time 20 years

2003 Welcomed into new job as Governor of BOE
House prices rise 22% in year

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