King's five more years welcomed by the City

The Government has been under pressure for months to reappoint King but has dragged its feet, fuelling speculation that Gordon Brown and Alistair Darling were looking for a replacement.

King, 59, was finally given the nod today and will serve another five years at Threadneedle Street when his current term expires at the end of June. He will be 65 when his second term ends.

Jonathan Loynes, of Capital Economics, said: "Although King's reappointment was widely expected, the delay in its announcement and the criticism he received over the handling of the Northern Rock affair had injected some uncertainty."

The Governor and Chancellor were said to be at loggerheads about how to deal with the credit crunch and the Rock crisis. King at first took a hard line when liquidity dried up over the summer, refusing to follow the lead of the US Federal Reserve and European Central Bank by pumping billions of emergency funding into the money markets.

He argued that providing cheap credit to banks constituted "moral hazard", bailing out institutions for taking too many risks. But the Bank later changed tack and flooded the markets with cash. Critics said this was too little too late.

The decision to reappoint King was welcomed at Westminster and in the City. Michael Fallon MP, the 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."

Rob Carnell of ING said: "He is very well regarded as Governor and there will be a sigh of relief from the City. There was no good reason to replace him, and this removes the uncertainty. His reputation was tarnished by Northern Rock, but he came out better than either the Treasury or the Financial Services Authority."

Willem Buiter, a professor at the London School of Economics and former member of the Bank's monetary policy committee, said: "He's by far the best

person for the job. " Douglas McWilliams, of the Centre for Economics and Business Research, added his approval of the reappointment, saying it would mean continued hawkishness on interest rates from the MPC.

"The probable implication for monetary policy is that the MPC will continue to focus hard on inflation as is its remit. This means UK rate cuts will be much slower than those in the US," McWilliams said .

The UK faces choppy waters in the months ahead. Economic growth is set to slow sharply this year. However, the Bank still faces the prospect of rising inflation - making its job of setting interest rates particularly difficult.