Morning Line: Bernanke and King were right to defy the markets

If the central bankers reacted every time the markets cried wolf they would have nothing left in the arsenal if things get really bad.

Investors have had a worrying few days after central bankers here and in the US warned the outlook was increasingly gloomy but refused to promise any more stimulus to their countries's economies.

In the US Ben Bernanke, chairman of the US interest rate-setting Federal Open Market Committee, downgraded his growth forecast for the US but made only minor changes to the existing stimulus measures, suggesting he is ready to soften policy further but not yet.

Here, Bank of England governor Mervyn King said the outlook has deteriorated since May but did little to suggest his rate-setting committee was any more ready than its US counterpart to act – for now.   

Credit Suisse strategist Andrew Garthwaite said that made ‘the markets worry that there is a problem – but does very little to resolve that problem.'

That pushed stock markets more than 2% lower yesterday and lower again today.

Ahead of the statements markets had been rising, reflecting hopes the two men would respond to the call to arms amid growing evidence of a global slowdown.

But where others have folded in the face of pressure from the markets this pair held firm.

Chancellor George Osborne was more than willing to promise even more spending cuts than the rating agencies or the markets had demanded rather than risk upsetting the market and banking regulators have repeatedly watered down their proposals to impose tighter controls on the banks.

But King – like Bernanke – has made it clear he is not going to sweeten the pill for anyone, not even the Leviathan-like banks.

At yesterday’s inflation report conference he said he would not lend the banks more money just because they can’t find it elsewhere saying ‘any institution that depends on the taxpayer year-in year-out has to ask why they are still in the private sector.’

And he also warned the banks need to do more to reduce their financing risks by taking out longer term loans rather than focusing so much on keeping the cost of funding low.