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A 10-point guide to Carney at the Bank of England

Mark Carney starts work at Threadneedle Street on Monday. It's not going to be easy.

 

by Chris Marshall on Jun 28, 2013 at 12:58

A 10-point guide to Carney at the Bank of England

Mark Carney’s arrival at the Bank of England is crucial for the UK economy, savers, investors… everyone.

So let’s start with a 10 point run-down of what you need to know:

1. A reminder: the former governor of the Bank of Canada and Goldman Sachs executive was a surprise choice for governor of the Bank of England, replacing Mervyn King who has led the Bank’s £375 billion quantitative easing stimulus programme – but also consistently above-target inflation, while suffering accusations of lording it over his colleagues.

2. Carney has said his mission is to build 'escape velocity'. He is seen as decidedly pro-stimulus, saying earlier this year that central banks aren’t yet ‘maxed out’.

3. Amid grand expectations for a more radical leader on Threadneedle Street, he is also under pressure from chancellor George Osborne and financial markets for stimulus.

4. But, though still some 4% off its pre-crisis GDP growth peak, recent business surveys and data suggest the UK economy is improving quite nicely – so that reduces the pressure for now (though green shoots don't always grow intro trees).

5. BUT, remember, it’s one man one vote on the monetary policy committee (MPC). Whether we get more QE depends more on what happens in the economy than Carney’s individual preference for continuing the easy money policy. The MPC is also, loosely, bound by its 2% inflation target (and inflation rose more than expected in May, to 2.7%)

6. Nothing is expected to happen at the MPC’s meeting next Thursday. Carney is too new to the job to join the two MPC members who have recently voted for stimulus (alongside King). If he does it will only mean an early defeat.

7. There is little that economists agree on (about anything), except that Carney’s new policy of choice will be ‘forward guidance’ on interest rates as practised by Ben Bernanke at the US Federal Reserve. This could be used to push back markets rate rise expectations, while reducing uncertainty for businesses and consumers. Interest rates probably won't be cut lower than the current 0.5% though.

8. Save the Date. The Bank’s quarterly inflation report and accompanying press conference (8th of August) is when the action happens, providing Carney an opportunity to set out potential policy measures. Schroders sums these up neatly (see below). But of course much could have happened by then in the economy and global markets to waylay any current predictions.

1. Increasing QE (creating new money to buy government bonds);
2. Using QE money to buy corporate bonds as well (this was done previously in a small way);
3. Using QE money to buy mortgage backed bonds (the US Fed does this);
4. Cut interest rates even closer to zero from the 0.5% they've been held at for four years;
5. Cut the deposit rate for banks, taking it into unprecedented negative territory, forcing them to lend more;
6. Introduce supplementary targets for the MPC (eg, the unemployment rate, again like the Fed);
7. Cancel current holdings of government bonds, effectively making QE purchases a permanent give away;
8. Through the fnancial policy committee, lower capital requirements for banks, and therefore encourage more lending.

Source: Schroders

9. Expect the Bank of England to be more open under Carney. He’ll have a higher political and media profile than King. The lines between monetary and fiscal policy will be increasingly blurred, some commentators suggest. He could try and talk down the pound.

10. It’s not all monetary policy under the Bank of England’s new all-powerful role. Carney also has the huge task of getting banks to balance banks to rebuild their capital buffers, while also lending more.

Good luck!

2 comments so far. Why not have your say?

Colin Ryder

Jun 28, 2013 at 22:06

In point #10, please can you explain the reference to 'King'?

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john zee

Jun 29, 2013 at 13:56

Central bankers are so WAY overrated. It is commercial banking that rules the roosts and central bankers are made to oblige. Failure to make banks whole is therefore failure of the economy. Look at ALL previous bailouts! In reality, when an economy performs, it is businesses with a vision that makes this happen, which makes banks actually lend. There is no financial direction that could ever enforce a central banks wishes or jawboning on behalf of those businesses (I.e. our economy), thus central banks are essentially failed entities.

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