Carney shows his mettle

The reason George Osborne, the chancellor, picked Mark Carney as his central bank governor has become even clearer.

Not only is Mr Carney often acclaimed as one of the world’s best central bankers, he is also far more willing than the incumbent, Sir Mervyn King, to act aggressively if growth fails to pick up in the UK.

In his first speech since winning the top job at the Bank of England, Mr Carney, now governor of the Bank of Canada, suggested three measures that central banks could take in “exceptional times” such as the present.

When central banks had exhausted the possibility of cutting rates, Mr Carney said, they could pledge to keep rates on hold for an extended period.

If that did not work, then they could promise to keep rates low until unemployment fell. Both are measures that Sir Mervvn has rejected. If neither of those had the desired effect, Mr Carney suggested, there is a more radical alternative: scrap the inflation target in favour of a nominal gross domestic product target.

Danny Gabay, director at Fathom, an economics consultancy, said: “The current membership of the Monetary Policy Committee gives the impression that it has run out of steam. What Mr Carney said on Tuesday is that there are so many other things the BoE can try.”

Jens Larsen, economist at RBC Capital Markets, said: “The contrast with Mervyn King’s approach is quite stark.”

Any decision to scrap the inflation targeting framework rests with the chancellor. Mr Osborne was fully aware of the views expressed by Mr Carney on Tuesday before appointing him.

There are no plans as yet to dump the monetary policy framework. But the Treasury renews the BoE’s mandate each March, on the day of the Budget, so there is ample opportunity to scrap inflation targeting before Mr Carney is due to depart from Threadneedle Street in 2018.

Economists praised the radical nature of Mr Carney’s suggestions.

Stephen King of HSBC said: “If you’re taking over a central bank it’s perfectly reasonable to ask these sorts of questions. Indeed, if you’re not asking those sorts of questions, then it suggests you think it’s just business as usual.”

Gerard Lyons, the outgoing chief economist at Standard Chartered hired this week as an adviser to London mayor Boris Johnson, said Mr Carney’s ideas were a “welcome addition to the debate”.

But views were mixed on whether any of the suggestions would have the desired effect.

Even the most radical of the three, the abandonment of the inflation target, would do little to revive the economy if the problems befalling the UK owed more to the supply-side of the economy than a lack of demand.

Mr King said: “There is over-optimism about what you are expecting to achieve from growth in terms of monetary policy.”

He added that dumping the inflation target would neither boost trade nor guarantee that the BoE’s ultra-low interest rates would be passed on to businesses and households.

Richard Barwell, economist at Royal Bank of Scotland, said: “We have a real problem, not a nominal problem. I don’t see how shifting to a nominal GDP target will help.”

“If we adopt a nominal GDP target, and the problems are on the supply side, then we could just get inflation of 4 to 5 per cent.”

The pound barely reacted to Mr Carney’s comments. Sterling traded flat against the dollar and lower against the euro on Wednesday.

“Any changes would be made over time and the markets have become very short term,” said Paul Robson, currency strategist at Royal Bank of Scotland. Mr Carney will not join the Bank until July 2013.

Additional reporting by Alice Ross.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from and redistribute by email or post to the web.