Incoming Bank of England Governor Outlines Future Strategy

Mark Carney, who takes over from Sir Mervyn King as governor of the Bank of England (BoE) this summer, has given some indications of its future policy in a lengthy question and answer session with UK members of parliament (MPs).

Carney, currently governor of the Bank of Canada, is due to take over the position from King from 1 July 2013 and will serve for a period of five years, rather than the usual seven.  Among the questions raised by the Treasury Select Committee he was asked about his remuneration package, which at £874,000 a year including a housing allowance is significantly more generous than his predecessor’s. “I was offered these terms and I accepted them,” he replied, pointing out that the allowance is typically offered to top executives moving abroad.

Following the Fed

The incoming governor indicated that he might adopt policies similar to those pursued by both the US Federal Reserve (Fed) and Bank of Canada to stimulate UK economic growth, but stopped short of promising wholesale change to the monetary policy regime. The Fed said in December that US interest rates would remain at near-zero until the country’s 7.9% unemployment rate came down to 6.5% or below.

“Some lessons I think can be drawn from what the Federal Reserve has done with state-contingent guidance,” said Carney. He added that the BoE’s monthly decisions on interest rates by its monetary policy committee (MPC) might be improved if accompanied by explicit guidance on the future path of policy, a strategy he said had proved successful in buoying Canada’s economy.

Such a policy would represent a significant change of practice for the BoE, whose task is solely to keep annual inflation at 2%, except when to do so would risk causing undesirable swings in output, but has no unemployment target. Outgoing governor Mervyn King has long resisted pre-committing rate setters to a future policy path.

However, Carney praised the UK’s flexible inflation-targeting regime, which he said has served the country well. “In my view, flexible inflation targeting – as practiced in both Canada and the UK – has proven itself to be the most effective monetary policy framework implemented thus far,” he commented. “The bar for change to any flexible inflation-targeting framework should be very high.”

His comments are likely to have disappointed advocates of more aggressive central bank policies, who had hoped he would voice strong support for abandoning the BoE’s inflation target and replacing it with a new objective to restore nominal gross domestic product (GDP)- the cash value of the economy- to its previous trajectory. Instead, Carney recommended only that central bank objectives be periodically reviewed.

Early in today’s session, the new governor was asked if he plans to operate a “zero failure regime” within the bank. He responded: “The bank will make mistakes. All institutions make mistakes,” although he would only tolerate a low rather than medium level.

Carney submitted 45 pages of written evidence to the Committee in advance of today’s session, which outlined what he regards as some of the main challenges in the role; how he would describe his leadership style; and which economist has influenced him most, to which he answers that he has been influenced by “a very broad range of academic economists”.

Ahead of the session, UK chancellor George Osborne said the BoE should complement the government’s deficit reduction strategy with monetary policy that “should continue to support the economy”.
Inflation Omen

Nigel Green, chief executive officer (CEO) of independent advisor deVere Group said that Carney’s support for “flexible inflation targeting” suggested troubling times were ahead for UK bonds, pensioners and savers. He noted that UK inflation had consistently been above its 2% target since late 2009 and currently stands at 2.7%.

“Mr Carney hinted that inflation could be allowed to stray from its target and this is disconcerting for workers on the cusp of retirement and current retirees, particularly as it has been above target for much of the past six years,” said Green.

“Higher inflation would be another hammer blow to the returns offered by government bonds, known as gilts, an asset class which the over-50s have, traditionally, had great exposure to as they have been perceived as a ‘safe haven’.” It would also have an impact on corporate investment strategies and those of their treasury deprtments.

Green continued: “Whether Mr Carney intends to focus, as he hinted in a speech in December, on targeting nominal GDP – a measure that takes into account inflation and growth – remains to be seen. One thing is certain though, it has, seemingly, sparked a debate on the issue on behalf of [George] Osborne.”


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