Mervyn King’s reappointment as Governor of the Bank of England removes an element of uncertainty from the financial markets, but it hardly provides reassurance. For the man who once said that his aim was to be “boring” has become the most controversial figure in the City.

The manner of his reappointment has only added to the whispering. If Gordon Brown and Alistair Darling were sure that they wanted the Governor to serve a second term, they should have announced it six weeks ago. At a time when the banking world was being rocked by the credit crisis, the drag of a looming US recession and the biggest rogue trader fraud in history, the Government added to the uncertainty by leaving the appointment of the Governor hanging. Despite the calls for an immediate appointment, the Prime Minister and the Chancellor took their time. By dithering over Mr King’s future, they sapped his credibility. Did Downing Street have its reservations about Mr King? Did the Prime Minister and the Chancellor have another candidate in mind? Did they end up choosing to reappoint the Governor because, in uncertain times, they preferred continuity to the risk of change? The longer they waited to make the appointment, the more such questions were asked in the City. When Mr King’s reappointment was announced yesterday, there was a marked absence of applause from the Square Mile.

Mr King has three blots on his copy book. It is less than a year since he was obliged to explain, publicly and embarrassingly, why inflation had run ahead of the target set down by Parliament. It was the first time in the ten years of Bank independence that the cost of living had exceeded its preset limits. To be fair, global pressures, notably rising oil and food prices, fuelled prices. Mr King also correctly identifed the destabilising power of consumer debt and rocketing house prices. But his inflation record is paling. It is a more serious problem now than it was a year ago.

Mr King’s second blot came when he misjudged the nature of the financial crisis that hit at the end of last summer. The markets needed injections of cash liquidity. They got lectures on central banking theory, risk and moral hazard. The Governor’s third problem is that he failed to get a grip on Northern Rock. He shares the burden of blame with the Treasury and the Financial Services Authority. But Mr King’s reputation has been damaged by the first bank run since in Britain since the reign of Victoria.

Financial markets need the Governor of the Bank of England to be utterly convincing when it comes to curbing inflation and ensuring that the country’s financial infrastructure is sound. It is especially important now because bankers are increasingly out of favour with politicians and the people. Policymakers are bound to look at huge financial losses and bankers’ giant bonuses and see an opportunity to interfere. Some rethinking of inadequate systems of risk management may be required. But there is a growing danger that financial sector regulation will become too general and too heavy-handed. The Sarbanes-Oxley Act did enormous damage to the US economy. Mr King will stand between zealous reformers and the free market.

Mr King is undoubtedly a talented economist, highly regarded for his intellect, integrity and his hawkish stance on inflation. He heads into the second half of his tenure at the Bank widely respected, but with a battered reputation. He still has much to prove.