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Halfway through his term as Bank of England governor, Mark Carney’s report card reads favourably: a strong economy, a secure financial system and more resilient banks.
But to what extent does Britain’s recent economic and financial success reflect the skill of the man holding one of Britain’s most powerful unelected posts and how much credit should go to his predecessors?
The Old Lady of Threadneedle Street certainly cuts a more formidable figure these days. One of the Conservative-led government’s first moves in the wake of the financial crisis was to scrap the discredited City watchdog, the Financial Services Authority. Its banking supervisory role was handed to the Bank of England, along with an array of other regulatory powers.
“The breadth of the Bank’s responsibilities and the powers and tools available make it one of the most powerful central banks in the world,” says David Strachan, a former regulator now at Deloitte.
On his appointment in late 2012, Mr Carney was initially billed as the man to help restore Britain’s economy to growth, but this feat was already achieved by the time he took office in the summer of 2013.
Mr Carney’s big initiative on becoming governor was “forward guidance” — an attempt to give more detailed hints on where interest rates were likely to head. This, he argued, would enhance stability and encourage responsible borrowing by consumers and companies.
Initially the BoE said it would not raise rates from their historic lows until unemployment fell below 7 per cent, something it forecast would take at least three years. In the event, joblessness plunged below that threshold in just seven months, wrongfooting the BoE.
“Mr Carney had a bad start: forward guidance was one of those ideas that must have sounded great in his interview but should have been quietly shelved once he got the job,” says professor Francis Breedon of Queen Mary, University of London.
Andrew Tyrie, chairman of Parliament’s Treasury committee, describes the period as a “misfire”, adding, “I have the impression that it took Mark a little while to adjust to the openness and vigour of discourse on monetary policy in this country.”
Mr Carney refuses to accept his initial guidance on interest rates was an error, though he accepts that it would have been better if the BoE had forecast the labour market more accurately.
He also bridles at the suggestion that he quickly ditched the policy at the start of 2014, but accepts that its replacement — guidance suggesting “limited and gradual” rises in interest rates — was more successful. “It’s necessarily more fuzzy than a hard . . . guidance, but that’s also appropriate,” he says.
The big question throughout Mr Carney’s tenure has been when the BoE will raise rates, something the governor has twice appeared to promise, only to find that circumstances have changed.
Dubbed by an opposition MP an “unreliable boyfriend” for this changing guidance, Mr Carney is unrepentant. “I’m married to the inflation target,” he jokes, “That is my fidelity . . . I’m not going to . . . follow through [on rate rises] . . . if it is the wrong thing to do.”
Michael Saunders, an economist at Citi, says: “There is criticism from markets that he flip-flops, but for companies and wider world these flip-flops are relatively minor.” A former senior official is less forgiving, saying that constant promises of rate rises in the future are inadequate. “At some stage you’ve got to put your money where your mouth is,” the official says.
The governor now acknowledges that the UK is living in a “low for long” period of interest rates. This means the BoE will depend instead on its extensive regulatory powers to ensure the health of Britain’s financial system.
Responsibility for financial stability, the governor says, will be at the heart of Bank policymaking. Low interest rates for a long time, “is an environment in which vulnerabilities can build up, without question, so that does call for activist macroprudential policy,” he says.
Outsiders have long been unsure whether the BoE is seeking to protect banks from the economy or the economy from the banks. Mr Carney suggests that its Financial Policy Committee can do both if need be.
The least well-known of the BoE’s structures, the Financial Policy Committee was created in 2012 and has wide-ranging powers to order banks to curtail certain types of lending if it believes they are too risky.
It brings together the top leadership of the Bank and that of two other entities, the BoE’s Prudential Regulation Authority (PRA), which supervises banks and insurers, and the conduct regulator, the FCA.
“Most people understand that the Bank’s controlling of interest rates can have an impact on their mortgage,” says Mark Garnier, a Tory MP on the Treasury select committee. “But I think only a tiny percentage of people really understand what the FPC is for, or the profound effect it can have.”
His committee colleague Mr Tyrie believes that “on macroprudential policy, the bank has moved a long way from the days when the FPC appeared too shy to say boo to a goose”. But although it is more active, the FPC has still not yet formed a consistent strategy to address the potential dangers of rapidly rising lending in times of low interest rates.
Some economists, such as Danny Gabay of Fathom Consulting, believe the BoE has already been “negligent” in allowing Britain’s longstanding addiction to borrowing to return far too soon. “The governor is playing along with it as he did in Canada — lots of warnings and no action and as Canada slips into recession, it doesn’t look so clever,” he says.
If that was not enough for Mr Carney, the risks of a damaging policy error are now far wider than preventing a recession and ensuring the stability of the financial system. The central bank is also charged with supervising the safety and soundness of the country’s largest lenders and insurers.
“There is a danger with the expanded remit of the BoE that if any of it goes wrong, it lands at the door of the governor,” says Barney Reynolds, a regulatory partner at Shearman & Sterling. “And [banking] regulation is more likely to go wrong than monetary policy.”
This regulatory part of the BoE’s work has received generally warm praise under the leadership of Andrew Bailey, one of Mr Carney’s deputies and head of the PRA. He is a career central banker and formerly the chief cashier at the BoE; his signature can still be spotted on older bank notes.
The perceived success of the integration of banking regulation into the BoE is a victory for Mr Carney’s management of policy at the bank. In the other areas, where policy today will have effects only much later, he recognises that “time will tell”.
Outsiders are quicker to offer judgments. Professor Jagjit Chadha of Kent University says: “the distance travelled since Mark Carney’s appointment had mostly been predetermined by policy before his appointment, so he has been lucky”.
But, counters Kevin Daly, chief UK economist at Goldman Sachs, fortune favours the brave. Mr Carney’s “can-do attitude” has helped sustain the recovery and ensured ever since that “the UK has been the strongest comparable economy bar none”, he says.