Carney’s Crisis Management Gives U.K. Only Plan to Work With

BOE's Carney: No Regrets About Dividend Policies
  • In post-vote tumult, governor emerges as anchor of stability
  • Global officials blindsided by British decision to leave EU

Mark Carney has unveiled his four-point plan to cope with the Brexit crisis and it’s just about the only one Britain has to go on.

From the moment on June 24 when the pound first hit a three-decade low, to his Bank of England press conference on Tuesday, the U.K.’s Canadian-born technocrat-in-chief has shone a path forward for the country at a time when no elected politician is around to do so. With sterling plumbing new depths, confidence slumping and contagion spreading to real-estate funds, the governor remains the country’s primary linchpin of stability.

Mark Carney on July 5.
Mark Carney on July 5.
Photographer: Chris Ratcliffe/Bloomberg

The former Goldman Sachs Group Inc. investment banker, a veteran of the 2008 market storm, will chair an initial meeting of the Monetary Policy Committee on Wednesday, as the BOE’s crisis response enters a new phase of trauma therapy for a battered economy. Officials still in firefighting mode are also poised to make a sober assessment of the policy outlook, based on scant data that’s so far pointed to a slowdown.

“The bank can be expected to take whatever action is needed to promote monetary and financial stability, and as a consequence, support the real economy,” Carney said Tuesday. “These efforts mean we can all look ahead, not over our shoulders.”

Contingency Planning

That forward-looking approach has defined the BOE since the vote outcome became clear -- just after 4 a.m. on June 24 -- and the pound slumped to its lowest level since 1985. In the hour that followed, as Carney arrived at the bank and policy makers huddled to ponder the consequences, the so-called Old Lady of Threadneedle Street swung into a contingency plan officials had spent months preparing -- including the testing of currency swap lines between key central banks.

“We’ve been in close contact,” Carney said. Officials have been “making sure that the networks we’ve built, whether they’re through swap lines or other mechanisms were in place, could be used.”

Before the vote, the BOE organized diaries to ensure key staff stayed in London. So as Group of 20 officials gathered in Xiamen, China on the day before the June 23 referendum, the U.K. sent lower-level staff and its deputy governors stayed at home. A BOE spokesman declined to comment on the schedules of the institution’s officials.

Blindsided

That meeting ended without alarm, underscoring the confidence among the close-knit fraternity of central bankers that Remain would win. Instead, they were blindsided, according to officials who spoke to Bloomberg for this story, many of whom insisted on anonymity because of the sensitivity of their roles.

“As the messages started coming through on my phone, I saw the results were going the other way,” said South African Reserve Bank Deputy Governor Daniel Mminele, who was catching up on the news at 5:30 a.m. London time on June 24 after landing home from the G-20. “Just 12 hours before, when I boarded the plane, things were looking rather different.”

Two senior euro-area central bank officials who were watching the matter closely went to bed, reckoning things were fine -- though one said he awoke early with a sense of foreboding. With the Bank for International Settlements due to hold its annual gathering in Basel the weekend after the vote, some central bankers had already arrived in Switzerland and had been doing some sightseeing, according to one of them.

Market Statement

In London, as policy makers assessed the situation on the morning of June 24, results were still coming in, but they could see the outcome was clear. Shortly after the pound’s drop, U.K. Independence Party Leader Nigel Farage was calling on Prime Minister David Cameron to quit. Investors sought reassurance.

They got it. Within three hours, before U.K. bonds had started trading, the BOE issued a statement declaring it would take all steps to meet its responsibilities. Less than two hours later, and just minutes after Cameron had resigned, Carney was filling the power vacuum with a live broadcast address to the nation, saying that as much as 250 billion pounds ($324 billion) were available to support the financial system.

As officials at the BOE scurried around in a state of intense activity, it wasn’t business as usual in Basel either. Speaking panels were rescheduled, officials were distracted, phones kept on ringing, and people came in and out of the chamber.

ECB President Mario Draghi appeared to be “shaken” by the outcome, according to Polish central bank Governor Adam Glapinski, who was at the meeting in Basel.

Soon Carney was there as well to offer reassurance. On June 25, he told his international colleagues that while the result may have been unexpected, the BOE was prepared. He flew back to London the next day. The BIS declined to comment on its meetings.

The agenda was now dominated by crisis management. Carney and Federal Reserve chair Janet Yellen both canceled trips to the European Central Bank’s annual forum in Sintra, Portugal, as the panel they were speaking on was scrapped. BOE Chief Economist Andy Haldane pulled out of a Financial Times event in London.

Political disorder spiraled. Cameron’s exit was matched by shadow cabinet resignations in the opposition Labour Party, culminating in a no-confidence vote against Leader Jeremy Corbyn. Against that backdrop on Tuesday, June 28, the Financial Policy Committee, responsible for the banking system’s stability, met for a quarterly gathering. A week later they announced they’d decided to cut lenders’ capital requirements to spur lending.

On Wednesday, June 29, Carney summoned the chiefs of the biggest U.K. banks to offer reassurances. Officials then announced he would deliver a speech on Thursday.

Westminster Drama

Even the governor may have struggled to anticipate the upheaval continuing on the other side of London. On the morning before that speech, Leave campaigner and lawmaker Michael Gove announced a bid for the Conservative leadership -- which might make him prime minister -- undermining his former ally Boris Johnson, who then scrapped plans to do the same.

Carney, standing in the BOE’s Court Room before a hastily invited audience of journalists and members of the finance industry, delivered a two-pronged message. He pledged to support the economy, and defended his own position, including his pre-referendum warnings of the dangers of a vote to leave.

“What we said in terms of the risks to the economic outlook, in terms of the risks to financial stability -- does anyone in this room not think that those risks have begun to manifest?” he asked. “So we did our job.”

Another Resignation

The FPC met again on Friday, July 1. On Monday, as political upheaval extended to the leadership of UKIP with the resignation of Farage, and as Johnson published a newspaper article calling for a plan from the government, the governor was putting the final touches to the BOE’s own plan. Its first priority is to identify financial stability risks “and be straight with the British people.”

With the election for the Conservative leadership likely to last for some weeks, even after Theresa May took a clear lead in the first round of voting, and signs of strain at some commercial real-estate funds, stability threats remain -- but the immediate dangers in the aftermath of the vote have been anticipated and pre-empted. The U.K.’s statistics office said Wednesday that inflation figures -- published on August 16 -- will be the first data to shed light on how the outcome of the Brexit vote is affecting the official data.

“Mark, his whole team, but also other central banks in Europe particularly were ready to provide liquidity to the market,” John Gieve, who was BOE deputy governor for financial stability during the 2008 crisis, told Bloomberg Television. “Everyone was prepared, to some degree, to avoid immediate instability. And that seems to have happened.”

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