Carney Favors Rate Plan Copied by Bernanke Over BOE Doubt
Mark Carney may be more willing to look further into the future than Mervyn King.
As Carney prepares to take control of the Bank of England, former central bank economists say his five years atop the Bank of Canada suggest he will be more inventive and open than the current governor in outlining plans to spur the U.K. recovery.
Although King pursues quantitative easing, the Bank of England rejects a Canadian crisis-fighting strategy -- later adopted by Federal Reserve Chairman Ben S. Bernanke -- of specifying how long interest rates will remain low. That stance may be revisited if Carney arrives in London in seven months to find the U.K. still stuck in a recessionary rut.
“Mervyn was very proactive in beginning gilt purchases, but he is still less pragmatic than Carney, who may be open to a wider range of options,” said Simon Wells, chief U.K. economist at HSBC Holdings Plc (HSBA) in London and a Bank of England official until last year.
Carney, 47, embraced greater transparency as an emergency tool in 2009 when he promised to keep Canada’s benchmark rate, then at 0.25 percent, low for 15 months as long as the inflation outlook didn’t change. Bernanke followed in August 2011 when the Fed said it would hold its key rate near zero at least through mid-2013, a range it subsequently extended by two years.
Such vows are aimed at adding stimulus to an economy where short-term rates are already around rock-bottom by persuading investors to contain longer-term borrowing costs because they know official rates won’t rise.
“It keeps the whole interest-rate structure down and helps the macroeconomy by boosting asset prices such as stocks and housing,” said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania.
A 2010 Bank of Canada discussion paper said its “conditional commitment likely has produced a persistent effect in lowering Canadian interest rates relative to what their historical relationship with inflation and unemployment rates would imply.”
King, 64, has nevertheless rejected proposals from former colleagues such as Andrew Sentance to chart a public course for policy, saying as recently as two weeks ago that it would reduce the central bank’s flexibility.
“We don’t pretend to tell people what our policy will be in future,” he told reporters in London on Nov. 14. “There doesn’t seem much point in having monthly meetings if you already know what decision you’re going to take. I think it’s a mistake to try and pretend that we can anticipate what those decisions would be.”
Another argument, made by then-Deputy Governor Rachel Lomax in 2007, is that the bank’s Monetary Policy Committee is “not a consensual body” so it would be hard to find agreement on the path of policy. By contrast, Carney’s current panel at the Bank of Canada sets rates by consensus.
Bank of England Deputy Governor Charlie Bean said in an interview yesterday that Carney’s hiring is a “coup” for the U.K. and predicted he will bring “new thoughts.”
“When any new governor is going to come in, it’s always an opportunity for change,” said Bean, who agreed to extend his own term for a year to assist the handover. “Having run the Bank of Canada, he will have particular things he may think useful for us to import.”
Carney has followed transparency in other ways where King has not. He has delivered about double the number of speeches King has in the past four years. Canada’s policy reports also contain specific base-case projections for inflation and growth, while the U.K.’s forecasts are less clear and King emphasizes the probabilities surrounding them, as he did yesterday in saying “the essence of policy making is looking at the balance of risks.”
“Perhaps that also gives an indication of where the BOE could be headed,” said Robert Wood, a former Bank of England official until his move earlier this year to Berenberg Bank.
King’s institution also came under fire this month when an independent review said its forecasting capabilities have deteriorated and that its projections for growth and inflation were too optimistic.
While the Bank of Canada always releases statements after each policy decision, the Bank of England tends to only do so when changing tack. Canadian policy makers also include a “policy inclination statement” in their announcements, often repeated in speeches, that’s aimed at giving investors a sense of where borrowing costs may be headed.
“Over time, some modest withdrawal of monetary policy stimulus will likely be required,” the Bank of Canada said in its last statement. “The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.”
Still, Carney has found that this approach can have pitfalls. Investors priced out any chance of interest-rate increases after his Oct. 15 speech failed to repeat the bank’s policy statement, only to reverse course when it reappeared at the next week’s rate announcement.
Saved from having to pursue asset purchases by an economy that bounced out of the 2009 recession and witnessed no bank bailouts, Carney may be more skeptical than King “about the efficacy of further gilt purchases,” said Jens Larsen, chief European economist at RBC Capital Markets in London who worked at the Bank of England until 2010.
King argues that his asset-purchase program, which now totals 375 billion pounds ($601 billion), helped avert a deeper slump even as the U.K. suffered its first double-dip recession since the 1970s.
If Carney shifts U.K. policy away from bond buying, it will remove support from the gilt market, Michael Amey, a portfolio manager at Pacific Investment Management Co. in London, said yesterday on Bloomberg Television’s “On The Move” with Francine Lacqua.
Carney has “been more keen on forward guidance on interest rates rather than pure QE, and we know that Governor King has not been particularly keen on forward guidance,” Amey said. “That’s something that we’ll be looking at.”
Circumstances can change an official once in office. Having voted more than any other colleague to raise interest rates when he was deputy governor, King, who became governor in 2003, recently chose to set aside concerns about inflation to encourage economic growth.
Both King and Carney back inflation targeting against critics who say it failed to prevent the worst financial turmoil since the Great Depression. Canada last year studied whether to change its goal from the current midpoint of 1 percent to 3 percent before renewing it.
Carney, who will become the first outsider to run the Bank of England since 1983, says his regime should still be flexible in leaning against asset bubbles, something Citigroup Inc. economists say the U.K. central bank failed to do in the pre- crisis boom when it tolerated high credit growth and low savings. Carney has recently cited record household debt as Canada’s biggest risk.
Carney may not have been as “resolute as King” in ignoring three years of above-target inflation, said Derek Holt and Dov Zigler, economists in the capital-markets unit of Bank of Nova Scotia (BNS) in Toronto.
Carney raised borrowing costs three times in 2010 to the current 1 percent. King has held the U.K. benchmark rate at 0.5 percent even with inflation above the 2 percent goal since late 2009.
“The relatively hawkish stance of the BOC suggests the BOE may enjoy a slightly less dovish culture in future, albeit with the same policy mix,” according to Philip Rush, an economist at Nomura International Plc in London.
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