The challenges facing Mark Carney at the Bank of England
The new Bank of England governor doesn’t start until July but he has some important decisions to make before then.
This is an interesting week or so for us MPC watchers; the committee is meeting on Thursday to make its latest policy decision. There is a slight possibility that it will cut rates to 0.25% but no chance at all that it will raise them. It is possible but unlikely it will do more QE.
Next week the Bank of England will release the latest in its long line of overly optimistic forecasts in its Inflation Report. Of particular concern is that their new forecasting model, Compass, apparently doesn't work. I gather that the staff are simply writing the numbers in, which, if true, needs explanation. The Bank has refused to release details of how Compass works and until they do speculation such as this will run rife.
Thankfully, there is someone around the corner who is likely to wield a big broom and sweep clean. There is a lot of work for Mark “Capable” Carney to do.
On the same morning as the MPC’s decision is released, Carney – who becomes the Bank’s new governor in the summer – will face his first grilling by the Treasury select committee. The Canadian was the best person available to succeed Mervyn King, but he is likely to face close questioning from the committee and the press given that he was a surprise choice. Carney and his wife were rather taken aback, apparently, when the British media showed up on their doorstep asking for comment after his appointment was announced. One journalist called me from outside Carney’s house to say his paper was in the market for dirt on him, but hadn’t found much other than a reputation for being rather grumpy. I am sure he is squeaky clean and the government has done due diligence. The hearing should be great viewing; I just hope he doesn’t lose his cool. Welcome to prime time.
Carney doesn’t start until July but he has some important personnel decisions to make before then. In particular, two of the three most hawkish members of the MPC are up for renewal in May and July. They should be pink-slipped. Even George Osborne might take my advice on this one as he really doesn’t need monetary tightening any time soon. The underqualified chief economist, Spencer Dale, and the external member Martin Weale should both be put out to pasture.
Carney has made it clear that he is hoping to be able to use “forward guidance”, which means a promise to keep rates lower for longer. He has also called for increased flexibility in monetary policy, with a greater emphasis on growth rather than inflation, along with morenon-conventional quantitative easing which would involve buying assets other than gilts. All of these ideas are sensible, but change at the Bank of England was never going to be easy. King, the cruel tyrant, has already pushed back: in his final speech, he shockingly went after Carney. “Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. So a long-run target of 2 per cent inflation should be an essential part of our macroeconomic framework.” Typical.
There are grounds for letting Carney earn his money without the monetary policy committee getting in the way. There are two possibilities, either the MPC is a rubber stamp or it stands in the way of change – so under either scenario it looks irrelevant. I bet Carney is already thinking along the same lines. I can’t wait.