- BOE governor says he didn’t guide the stance of officials
- FPC members Kohn and Sharp say they weren’t pressured
Mark Carney denied that the Bank of England undermined its independence in the run-up to the U.K.’s referendum on its European Union membership by highlighting the risks of a decision to leave.
“It’s extraordinary, in all senses of the word,” the BOE governor responded on Tuesday when asked by U.K. lawmakers about the charge that he shaped the views of financial-stability officials. “That’s not the way the committee works. The chair doesn’t guide conclusions.”
Before the June 23 vote, the BOE warned repeatedly that a decision to leave the EU would create uncertainty that could weaken the pound, deter investment and lead to a recession. Those comments were condemned at the time by supporters of the “Leave” campaign, though Carney has since pointed out that the risks identified have started to manifest.
Sterling is trading around $1.31, near a 31-year low and down from $1.50 just before it became clear that the “Leave” campaign had won. By July 7, a total of seven property funds with about 18 billion pounds ($24 billion) of assets had frozen withdrawals as investors sought redemptions amid concerns that international companies might scale back or shut London operations, reducing the value of property.
Carney declined to be drawn on the likelihood of monetary action, citing the BOE’s quiet period before the next decision on Thursday. While the nine-member Monetary Policy Committee won’t have substantial data on the economic fallout from Brexit, officials may choose to act pre-emptively. Thirty of 54 economists surveyed by Bloomberg predict the benchmark interest rate will be lowered on July 14, with a majority of those seeing a 25 basis-point reduction to 0.25 percent.
Testifying alongside the governor in Parliament, external Financial Policy Commitee members Richard Sharp and Donald Kohn said they weren’t pressured to form certain views. Asked by Treasury Committee chairman Andrew Tyrie whether the BOE was guilty of “startling dishonesty,” Sharp replied “absolutely not” -- a position Carney backed.
“What’s in the record, and the FSR, are the views of the FPC,” the governor said. “They’re not pre-judged or pre-decided. They’re based on robust evidence and discussion.”
Carney said he did talk with U.K. Chancellor of the Exchequer George Osborne about the risks surrounding Brexit, and that he’s prepared to look at ways of sharing details of those discussions with lawmakers if it was in the public interest.
“I’d be wary of establishing a precedent that limited free-flowing discussion between future governors, future chancellors,” he told Tyrie. “We can create a process which relies on the discretion of you as chair so that we are not putting things in the public domain that could be immediately sensitive.”
Carney’s comments come after the publication of the record of meetings of financial-stability officials held in the wake of the vote. The FPC discussed the risk that cutting the countercyclical capital buffer imposed on banks, freeing them to lend more, may instead prompt the institutions to reward investors. The record reiterated a readiness to take further measures if warranted.
The political uncertainty in the U.K. may ease now that Home Secretary Theresa May is on track to succeed David Cameron as prime minister on Wednesday. Her only rival pulled out of the Conservative Party leadership contest, speeding up the process by two months. May worked at the BOE from 1977-83 in the economics area in the central bank’s financial-institutions and monetary-policy groups.
Still, the questions about Britain’s future trade status with Europe and the rest of the world may take months or years to settle and could hamper investment and hiring decisions, Carney said.
“The financial-stability risks have been more immediate,” he told lawmakers. “Longer term, the underlying performance of the economy is one of the key determinants of financial stability and the decisions that Parliament will take in coming years will be hugely important in determining that trajectory.”
While the uncertainty may mean there is less foreign direct investment in Britain than there would otherwise have been, the British economy should continue to grow in the longer term and the decline in the pound will make sterling assets more attractive to overseas investors, Carney said. “We’re seeing increases, but not sharp increases in risk premia in the U.K.”
The pound’s drop could also help narrow the current-account deficit. If sterling stays at present levels, the gap could shrink by about a third, he said. The BOE has warned the shortfall, large historically and compared with other nations, is a source of vulnerability.
BOE financial-stability officials also published a redacted portion of text from their March meeting, which shows they received briefings on the central bank’s contingency plans, which included “managing funding and liquidity risks in sterling and foreign currency.”
Carney has increased the number of the BOE’s liquidity operations since the vote to leave the EU. At an auction of funds in exchange for collateral on Tuesday, banks were allotted 2.01 billion pounds, compared with 3.1 billion pounds at an operation in the days following the vote and 1.35 billion pounds last week.
The governor said the BOE’s comments and actions before and since the referendum, with multiple public appearances, show the institution has become far more open about its intentions. He hit back at lawmaker Jacob Rees-Mogg, a Brexit supporter who is one of his most prominent critics, who said there had been a “lack of appearance of impartiality” by the BOE.
“The BOE and the Financial Policy Committee are well aware of their statutory responsibilities,” Carney said. “I think those who cast it into question should consider their motivations and their judgment."