We live in the age of the cult of the central banker. As governments of both left and right have retreated from economic interventionism, it is Ben Bernanke in the United States, Mario Draghi in Europe and Haruhiko Kuroda in Japan who have led the fightback against recession. Few of the new masters of the universe are more feted than the Canadian Mark Carney, who takes office as governor of the Bank of England on 1 July. Since being named as Mervyn King’s successor six months ago, he has been continually hailed as a saviour for the British economy. When it was pointed out to George Osborne that the Office for Budget Responsibility had forecast that the measures included in his most recent Budget would have “no impact on the level of GDP”, he replied that the estimate did not take into account the changes that Mr Carney would make. The Chancellor is a self-described “fiscal conservative” and “monetary activist”. He is banking on Threadneedle Street to deliver the recovery that he has not.
The appointment of Mr Carney (who is profiled by Alex Brummer on page 20) was a shrewd one. As our economics editor, David Blanchflower, a former member of the Bank’s Monetary Policy Committee (MPC), has written, he was “the best person available” for the job. Untainted by any of the recent banking scandals, he performed admirably as governor of the Bank of Canada, cutting interest rates aggressively in March 2008, a year before the Bank of England and the European Central Bank did. Mr Osborne was right to prefer him to the City’s candidate of choice, the deputy governor Paul Tucker, who ignored early warnings of the manipulation of LIBOR by Barclays and responded sluggishly to the financial crisis.
But if Mr Carney, in the words of one of his defeated rivals, has been “launched on the nation as a messiah”, there are good reasons to believe he will be a false one. The base rate is already at a record low of 0.5 per cent, where it has been for more than four years, and the Bank has already performed £375bn of quantitative easing (QE), the equivalent of nearly a quarter of annual GDP. With growth still anaemic and inflation at just 2.4 per cent, there is a strong case for further loosening but Mr Carney will need to overcome the resistance of the MPC, which has voted against additional QE for 11 consecutive months. Unlike in Canada, where the governor has sole responsibility for policy, he will require the support of a majority of the other eight committee members, six of whom have consistently opposed new stimulus.
Where Mr Carney is more likely to prevail is in following the example of the US Federal Reserve and offering “forward guidance” on interest rates. This would entail a commitment to keep rates low until a certain economic threshold has been met (the Federal Reserve has adopted an unemployment target of 6.5 per cent). Although the markets already expect the base rate to remain at 0.5 per cent until 2016, this would have the beneficial effect of dampening expectations of a rise should growth exceed current forecasts. The principal reason to remain sceptical of Mr Carney’s potential is the inherent limits of monetary policy. When consumers are unwilling to borrow and banks unwilling to lend, it is the state that must act as a spender of last resort and stimulate growth through measures such as temporary tax cuts, housebuilding programmes and infrastructure spending. It is Mr Osborne’s reluctance to accept this truth that does much to explain the parlous performance of the British economy, which has grown just 1.1 per cent since 2010 and remains 2.6 percentage points below its pre-recession peak. The Chancellor is fond of citing the example of Mr Carney’s native Canada, which eliminated its deficit in just three years in the mid-1990s, but it was the concurrent boom in the US, not an “expansionary contraction”, that enabled it to do so.
As even the new governor has said, “Some people may be expecting central banks to do too much” – and none more so than Mr Osborne. Until the government marries monetary activism with fiscal activism, Britain will not have a recovery worthy of the name.