THE man some call a “rockstar of finance” certainly wowed his fans on his London debut.
Three days into his new job as governor of the Bank of England, Canadian Mark Carney was chairing his first meeting of the bank’s monetary policy committee (MPC). For the 51st month in succession, the MPC decided to keep the bank rate at a rock bottom 0.5 per cent. Nor did its nine members waver from their majority view of recent months, that the bank’s asset purchase programme – funded by electronically printing new money – should stick at the whopping £375 billion already committed.
Carney reportedly watched his predecessor play cricket last weekend, rather than grab a first taste of Glastonbury. But what he did next was more Sir Mick Jagger than Sir Mervyn – soon to be Lord – King. On Wednesday, as the MPC deliberated, markets were heading rapidly south again, spooked by the unfolding democratic crisis in Egypt and rocketing bond yields in one of the eurozone’s walking wounded, Portugal, embroiled in a fresh political crisis of its own.
Normally meetings of the MPC end with the bald decisions being announced, while the minutes of what transpired follow two weeks later. At the end of this two-day meeting, on Thursday, Carney chose to release a more detailed text right away. It signalled that market suspicions that official interest rates might soon rise again were “not warranted by the recent development in the domestic economy”.
Markets took this as forward guidance, an innovation Carney is expected to introduce formally next month, when he delivers his first quarterly inflation report. Within hours his opposite number at the European Central Bank, Mario Draghi – like Carney an old Goldman Sachs hand – was delivering much blunter forward guidance. Rates in the eurozone would stay at present lows or lower “for an extended period of time”.
It may sound like boring financial gobbledegook. But this is the central banking equivalent of a climactic guitar riff. The market audience roared approval. The FTSE, which had plunged 74 points on Wednesday, soared by 192 points on Thursday. With a series of recent indicators pointing to a strengthening UK economic performance, Carney couldn’t have wished for a better start to his £874,000-a-year, five-year gig.
However, he knows one swift market bounce doesn’t make or break his reputation. Yesterday, once strong US jobs growth numbers emerged, the FTSE went into reverse after early further gains. US bond yields had soared, anticipating something America’s central banker, Ben Bernanke, had signalled last month, that improving conditions there might mean the Fed would start tapering off its asset purchases later this year.
The challenges Mark Carney faces, leading a beefed-up Bank of England, are prodigious. Inflation remains above target, as it has been for 41 consecutive months. It is forecast to go higher still in coming months. Growth, despite recent signs of green shoots, remains anaemic. There are still a million more people without work than in the five years before the crash.
Then there’s the new side of the bank’s expanded responsibilities, sorting out the UK’s broken commercial banking system. Lending, in the words of Carney’s predecessor Sir Mervyn, making his final speech at the Lord Mayor’s Banquet in London last month, “remains lacklustre and risk premia high”. Its new Prudential Regulation Authority has decided the eight largest players are still under-capitalised to the tune of a combined £27.1bn. And £22.2bn of that is accounted for by just two, RBS and Bank of Scotland-owner Lloyds, still largely state-owned.
There are problems elsewhere, notably at the Co-operative Group, where answers are still being sought to what went wrong after its banking arm’s disastrous acquisition of Britannia, the emergence of a £1.5bn black hole and the scrapping of advanced plans to acquire more than 600 TSB branches from Lloyds.
Nearly six years on from the start of this banking crash, there is still no clarity on the overall architecture for banking reform in the UK or how quickly it can be implemented. Chancellor George Osborne, the man who personally head-hunted Mark Carney, seems to vacillate between wanting the public’s stakes in Lloyds and RBS to start being offloaded this side of the 2015 general election, or first breaking up RBS, in particular, into good and bad banks, before any sale makes sense.
While the balance sheets of the UK’s biggest banks have shrunk since their wanton exposures emerged in 2008, they still represent in aggregate four times UK annual GDP. And within that are some lingering nasties, like RBS’s Ulster Bank subsidiary, where 39 rural branches are closing and 1,800 jobs are going by 2016, a third of the total workforce.
Ulster Bank operated on both sides of the Irish border and is mired in some of the same reckless property lending that sent other banks there to the wall. Anyone who wants first-hand evidence of the sordid behaviour of some bankers at the depths of the 2008 crisis should listen to the recently released tapes of senior executives at the late and unlamented Anglo Irish Bank discussing how to handle regulators when their bank went bust. It is macho, stomach-churning stuff.
Carney’s superhuman workload doesn’t just involve helping put the UK economy back on track and cleansing the UK banking system of such excesses. At some stage he too, like Ben Bernanke, will have to begin the delicate task of bringing UK interest rates back to something like normal levels. There’s also the challenge of when and how to begin to withdraw that giant stimulus Threadneedle Street calls its asset purchase programme.
These assets are predominately government bonds. There is intense debate about who wins and who loses when a central bank injects new money into the market in this way, in the process becoming a major owner of outstanding government debt. And at some stage the process will have to be reversed, with these assets being sold back into the market. That process too holds many pitfalls, potentially disrupting annuity rates and investment returns when it happens.
Whether it happens within Carney’s five-year engagement is anyone’s guess. After all the UK Cabinet Secretary Sir Jeremy Hayward has just told some of his colleagues that sorting out UK public finances and putting the economy fully back on track could take another 20 years. If it does take that long there is, of course, another delicate matter the new bank governor may find himself involved in.
In spite of all the UK’s economic travails, the current Scottish Government, in its quest for independence, wants to retain a sterling union with the rest of these islands in the event of a Yes vote. Political leaders may come and go come 2015. Mark Carney’s the man Alex Salmond and Nicola Sturgeon will have to convince if that’s to become a realistic option.