MARK CARNEY has not even taken up residence at the Bank of England yet but already he is stirring up controversy – not what central bankers are supposed to do.
Carney is proposing a new mandate for the Old Lady of Threadneedle Street. Instead of targeting only inflation – a task the outgoing governor, Sir Mervyn King, has honoured in the breech – his successor proposes giving the Bank an explicit role in promoting economic growth
This is hardly a novel suggestion. On Wednesday, for instance, the United States Federal Reserve announced it would keep interest rates at near zero until the US jobless rate fell to 6.5 per cent (from its current 7.7 per cent).
Unlike the Bank of England, the Fed already has a dual legal mandate to maintain low inflation and full employment, but until now it has never treated the two goals with equal enthusiasm. I suspect this is because politicians like to take ownership of fighting unemployment, leaving the central bank to take the blame for inflation.
But Carney is going further than the Fed by suggesting a new policy target known as “nominal gross domestic product (GDP)”.
Simply, this is real output growth plus price rises. To get your target, you add the average real rate of growth in your economy (2.5 per cent in the UK) to a rate of price inflation you can live with (2 per cent).
The nominal GDP target rate in this case is 4.5 per cent. If you fall below 4.5 per cent – from recession or deflation – the central bank cuts interest rates and boosts the money supply. If you overshoot – from a boom or inflation – it raises rates and squeezes credit.
Will it work? It certainly exposes a central bank to more political criticism and therefore market uncertainty. And no target regime in the world will compensate for the Bank of England’s habitual over-estimation of growth and under-estimation of inflation.
On the other hand, nominal GDP lets the Bank of England respond in equal measure to changes in the real economy and in prices.
A word of warning. Carney’s record at the Bank of Canada shows he leans towards promoting jobs, which should win him friends in the UK.
But Carney has been lucky because high commodity prices have raised the value of the Canadian dollar, curbing local inflation while allowing him to keep interest rates low and encourage record consumer borrowing.
This is not a trick he can repeat in Britain, where imported inflation is squeezing consumer spending.
France and Spain will taste bitter euro-fudge
I DO so love euro-fudge. The latest slab of this addictive confection was cooked on Thursday with agreement to give the European Central Bank (ECB) supervisory powers over the eurozone’s biggest banks – or not, as the small print suggests.
Yes, the ECB will now set liquidity and capital rules for institutions with assets of more than €30 billion (£24bn). But that means mostly French banks, not German ones – one up to Chancellor Merkel.
The UK gets to opt out but still has a vote on future bank regulations that impact on the City – one up to George Osborne.
And did I mention Germany is still playing hard to get over bailing out Spain’s insolvent banks?
Now everyone can have a good Christmas before reality bites in the New Year, when the French and Spanish realise they’ve been had.