Old Lady of Threadneedle Street and her new master

Friday 8 February 2013

Mark Carney gained his reputation for an ability to steer a vulnerable economy through a financial crisis with bold decisions on interest rates when he became governor of the Bank of Canada in 2008.

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He will take up his new post as governor of the Bank of England in July with high expectations. Those hoping for a more radical approach than that of Sir Mervyn King will have been heartened by Mr Carney's appearance before the Treasury Committee at Westminster yesterday.

In a wide-ranging discussion the overall impression was that nothing was ruled out but that maintaining stability would be important. Having previously suggested that it could be helpful for monetary policy to take GDP or unemployment rates into consideration as well as inflation, he said the success of current policy of targeting 2% inflation set a high bar for any alternative. Six months before taking up his post such caution was a diplomatic necessity but his view that there is merit in debating the framework in Britain and coming to a relatively quick conclusion on it is as clear a signal as possible that the Old Lady of Threadneedle Street can expect to be shaken out of her old ways by the new governor.Is that what's needed? With the Coalition Government's austerity measures having failed to stimulate the necessary growth or meet the original deficit reduction timetable, the Chancellor has signalled his desire for more support for the economy from the Bank's monetary policy committee. This week's report on the UK economy by the Organisation for Economic Co-operation and Development also called for a more comprehensive strategy that also promotes growth.Mr Carney forestalled suggestions of political pressure by saying: "Part of the reason for independence is that difficult decisions on the macro side will not always be met with shouts of joy."However, he indicated the possibility of a change in the procedure of fixing interest rates at monthly meetings of the MPC, instead allowing longer-term rates, as is the case in Canada, conditional on stable inflation forecasts. A significant benefit is that the longer timeframe encourages people to borrow to buy a house or invest in a business with clarity about interest rates. This appears to have been more successful in stimulating the economy than the UK policies of quantitative easing and the Funding for Lending, which gives homeowners and businesses greater access to cheaper loans. House prices in Canada have now risen to the point where there are fears of a bubble that may be about to burst.Mr Carney, in ruling nothing in or out, may have added to the belief that it was his flexibility which gained him the appointment. But coinciding with the new governor's appearance before the committee yesterday, the Bank's monetary policy committee voted to keep interest rates at 0.5%, providing a reminder of the limited scope for manoeuvre.With inflation above target in 38 out of the last 44 months, he will have to live up to his reputation for surefootedness.

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Old Lady of Threadneedle Street and her new master

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