SO WHAT is the first thing incoming Bank of England governor Mark Carney has done? An intriguing vignette was provided by the Bank last week when it issued a press notice saying his first “substantive interaction” with the media will be the Inflation Report press conference on 7 August. Please do book early.
Carney, on authoritative accounts, has left behind a Canadian press corps who held him in highest regard. He seems intent on getting off on the right foot here – good media relations being a key tool in his distinctive policy of “forward guidance” which he pioneered in Canada.
He enters the Bank with the highest expectations as a combination of working-class hero, firefighter and action man who simultaneously kept Canadian banks out of trouble while delivering a rate of economic growth that proved the envy of the Western world.
Here is someone who can surely dispel the torpor and policy exhaustion at our own central bank and who can single-handedly break the bonds of the past and energise the Bank and the UK economy into a new era of hope and recovery.
However, I suspect one of Carney’s first and most pressing duties will be to lower these runaway expectations rather than inflate them further. No other governor in the history of the Bank has taken up the role with a greater sense of imminent transformation. Until the era of the raffish Montagu Norman, who held the post for 24 years (1920-1944), a grey train of no fewer than 108 Bank of England governors seldom held the post for more than two years.
They were men of continuity and, above all, stability. They formed a train of deeply conservative, low-profile bookkeepers of the currency and national debt. But even in the 69 years since the Norman era, none of the subsequent eight governors has taken up the post with such an expectation of radical change both in substance and in style.
There are good reasons for Carney to restrain these expectations. First, he may well have a reputation as a champion of loose monetary policy, having been the first major central bank governor to cut interest rates as the storm clouds gathered six years ago. But it is not as if in the UK we have not tested radical action to near exhaustion.
Interest rates have been slashed to their lowest levels for more than a century. The Bank has also engaged in a policy of monetary easing without precedent. It has loosened monetary conditions through a massive £375 billion programme of quantitative easing. Seldom before has the UK central bank bought up more government debt.
It has also collaborated in measures designed to stimulate commercial bank lending to business, and small and medium-sized businesses in particular. Finally, the Bank has stretched its policy of inflation targeting to the extremes of credibility, the 2 per cent inflation target having been breached for most of the past four years. Today, at 2.9 per cent, the inflation rate cannot be allowed to rise much further without undermining public and business confidence in this central pillar of Bank policy.
The air of policy exhaustion around The Old Lady is there for a reason. It has already pulled every lever available to it in a period of radical monetary activism without precedent.
Nor is it the case that Carney will enjoy the same freedom he enjoyed as governor of the Central Bank of Canada. He was not burdened with an independent-minded interest rate-setting Monetary Policy Committee making decisions on a monthly basis by majority vote. Nor did he have to concern himself with published minutes summarising the arguments and showing which way each member voted. Things are different here.
Former Chancellor Alistair Darling, remarking on the Bank governorship of Sir Mervyn King, famously likened it to the rule of the Sun King, implying that he enjoyed unfettered power. How King would have smiled at that. He does not enjoy such rule over the MPC. Its members have proved themselves over the years to be wayward in their opinions to the point of bloody-mindedness. Chancellor-recommended appointees in the past have ranged from the arch Keynesian David Blanchflower to the utterly unpredictable Willem Buiter.
In recent months, no fewer than six members have regularly turned down King’s pleadings for an additional £25 billion burst of quantitative easing. They have even expressed scepticism over the “forward guidance” approach under which the Bank would commit to holding rates for a period into the future. That, say some, is not at all a good idea and may leave the governor a hostage to fortune. So a major task for Carney in the months ahead will be to persuade this box of frogs of his policy recommendations, and even if he is unsuccessful in this, to sell and promote the Bank’s policies to a weary and sceptical public.
A further burst of quantitative easing now looks questionable given the (albeit glacial) signs of economic upturn and a strengthening housing market, leading to fears that in some areas we are stoking a new house price bubble – a big concern in Canada. Cynics say Carney has got out in the nick of time.
In addition to all this, Carney now finds himself in charge of bank regulation and supervision. Does he feel that bank capital reserve requirements are too strict or too lenient? Should the banks be broken up into “good” and “bad” banks? How soon should the stricken banks Lloyds Banking Group and RBS be returned to private ownership?
The open, approachable charm of Mr Carney may mark a huge and welcome change. Bring it on. But don’t expect the magnitude of our problems to shrink before this Canadian charmer.