Lansons Conversations

Carney sets out his vision for the Bank of England

On July 1 Mark Carney will take over from Sir Mervyn King as Governor of the Bank of England. A surprise – and well received – appointment, little was known about the Canadian central bank governor in Britain when Chancellor George Osborne revealed that Carney will be King’s successor. A further surprise followed when it was revealed that Carney was granted a series of concessions to entice him into accepting the role. Carney’s term as Governor will run for five years, as opposed to eight, and he will also receive an increased salary of £480,000 as well as an additional £250,000 housing allowance. It is clear that Osborne wanted Carney for the job, as was most evident when the Chancellor announced to Parliament that: “He is quite simply the best, most experienced and most qualified person in the world to be the next Governor of the Bank of England and to help steer Britain’s families and businesses through these difficult economic times.” What is interesting, and will become more apparent in coming months, is the extent to which Carney will be granted concessions on policy, should he seek to obtain any. Monitoring the dynamic between the Governor and the Chancellor will prove to be imperative. In the lead up to July 1 more and more will be learnt about Carney’s intentions for the role. A good starting point, though, is yesterday’s Treasury Select Committee session where the designate Governor of the Bank of England was grilled by MPs for nearly four hours. Most of the media focus on his appearance thus far has been on his hopes of “shaking up” economic policy, yet beyond the headlines a lot can be learnt about his approach to monetary and financial policy, as well as about his leadership style. And having attended the hearing myself, I can confidently say that most of the MPs and the audience there seemed to be impressed by Carney’s performance. Monetary Policy As the press have pointed out, at the session Carney told MPs that it is important that UK monetary policy is “reviewed periodically”, saying that in Canada it is done every five years. It appears that he expects to undertake a thorough review of the UK’s economic policy regime when he arrives at Threadneedle Street. Insisting that more can be done under the current inflation framework, he outlined the need for “flexible inflation targeting” to stimulate the economy.  This, he said, could include offering guidance to reassure investors that the MPC would not tighten policy until the economy has fully recovered. This is a marked shift from his position in December, when he suggested that the inflation target could be replaced by a nominal GDP target, which could force the Bank to do more to kickstart growth. At the Committee he said he was “far from convinced” about the benefits of overhauling the inflation target; it is potentially significant that the Treasury, which sets the MPC’s remit, seemed to be against the idea. Interest rates are another area that may be subject to change by the new Governor. Carney drew on his experiences at the Bank of Canada, where he had previously pledged that interest rates would be frozen for 15 months, conditional on a stable inflation outlook. He said: “In the UK there is a valid discussion to be had about the potential use of this tool to provide additional stimulus when appropriate.” Although he praised the MPC’s instruments, particularly funding for lending, he pressed the need for the Committee to evaluate its tools and to consider “fresh initiatives”. Discussions also touched on QE. Cautious not to advocate further easing, the incoming Governor accepts that the benefits of QE decline as the scale of QE increases. He was also clear that he does not support the approach mooted by Lord Turner to use monetary financing to fund Government spending. Overall Carney’s appearance before the Committee does suggest that monetary policy will look different under his command. Yet, perhaps this should be taken more lightly than it first seems it should; such decisions would need to be taken by the Government, and Carney himself insisted in his written evidence that had not looked at whether UK monetary policy should be altered. Financial Policy Reading the press reports on Carney’s appearance before MPs could lead many to think that the policy debates focused solely on monetary policy. However, this was not the case. The second half of the session was dedicated to financial policy, and resulted in the incoming Governor commenting on many policies that are within the Government’s, and not the Bank’s, control. Debates opened on income inequality and unemployment, with Carney believing that central banks have a role in dealing with such issues. Sympathetic to the Occupy movement, he remarked that: “Senior officials at banks appeared to escape unscathed from the crisis and received large payouts.” Attention then turned to the Government’s plans to reform the banking system. Carney welcomed the Vickers ring-fence and the plans to “electrify” it, provided that full separation is assessed on an institution by institution basis. He described the ring-fence model as “superior” to the Volcker rule, advising policymakers not to implement both. He also argued that banks’ leverage should be more constrained than incoming legislation provides for. He agreed with the Vickers “logic” that leverage should be raised as higher PLAC requirements are introduced, explaining that Canadian banks had come through the crisis because of their 20 to 1 leverage ratio. Continuing, Carney asserted that it is the Bank’s responsibility to ensure that institutions are adequately capitalised. Although he said he would “hesitate” to say that it is the Bank’s responsibility to direct banks’ activities, he did hope that banks would be able to raise extra capital without shrinking their balance sheets. Cutting back on lending to non-UK institutions or disposing of assets were two alternative suggestions that he proposed. The designate Governor then delved into the Government’s remit with regards to competition, by assuring MPs that he is “very open minded” about account portability. He feels that the PRA’s competition duty strikes the right balance between encouraging competition and ensuring financial stability. Carney, despite being careful not to directly criticise or support Government policy, did explore topics for which the Bank has no mandate. Though, as he maintained that he “won’t be commenting much on fiscal policy” so he “wouldn’t expect the Chancellor to comment on monetary policy”, it is possible many of his comments were the result of the politicised nature of Commons committees. Concluding Thoughts The “rock star” central banker charmed the often hard to please Treasury Select Committee, despite dodging hard questions and backtracking on the policy suggestion he had mooted in December. Carney views himself as a communicative, consensus-seeking “managing director”, ready to establish a shared vision for the Bank and admit that it “will make mistakes”. He is a man for details, and though he concedes that he is not yet familiar with all British issues that will come under his remit, including the state owned banks and the British insurance industry, he seems assiduous enough to come to the Old Lady in July fully prepared to take on the job at hand. It seems that there may well eventually be some significant changes at the Bank of England under his tenure, but these will likely be evolutionary and gradual. After all, he did remark: “I hesitate as a foreigner coming in and changing the longer traditions of the institution.”