Carney Backs BOE Evolution Over Revolution in Favoring Guidance
Bank of England Governor-designate Mark Carney signaled more evolution than revolution is imminent when he takes over the U.K. central bank in July.
His first extended comments on U.K. monetary policy since being named to the post three months ago showed him welcoming debate on an altered remit rather than backing immediate change. The remarks yesterday, alongside his doubting of alternative policy goals previously floated, suggested that he is likely to advocate tweaks rather than replacement.
Carney favored allowing the Bank of England greater flexibility in meeting its oft-breached inflation target and promoted the case for handing investors more insight into the future path of policy. The Bank of Canada governor, who will replace Mervyn King, spent four hours addressing Parliament’s Treasury committee at the same time as his future colleagues were announcing they would sustain stimulus.
“He sees merit in the forward guidance as policy instrument and he stressed the importance to have a debate,” said Mauro Giorgio Marrano, an economist at UniCredit SpA in Milan. “The main change after his arrival could therefore take place on this aspect should more easing be required.”
While Carney said “slack in the economy” warrants sustaining aid, he focused less on whether that would mean further asset purchases and more on how to use communications to secure cheaper market borrowing costs and encourage greater spending by households and businesses.
The 47-year-old will inherit an economy currently flirting with a third recession since 2008 as inflation enters a fourth year above the central bank’s 2 percent goal.
In a further sign that a radical makeover is not in the offing, Carney commended the BOE’s stance in the face of surge in headline inflation to more than 5 percent at one point.
“The Monetary Policy Committee has quite appropriately looked through a series of one-off upward shocks,” he told lawmakers. “It has appropriately provided stimulus to an economy facing very large headwinds.”
The MPC echoed Carney’s language in a statement accompanying its decision to leave its target for bond purchases unchanged at 375 billion pounds ($589 billion). It said it was “appropriate to look through the temporary, albeit protracted, period of above-target inflation.”
Carney drew inspiration from his own work in Canada, three years after its central bank announced it would keep its interest rate at a record low until mid-2010 unless the inflation outlook changed. He also praised the Federal Reserve’s strategy of setting unemployment and inflation parameters which would need to be met before stimulus is unwound.
“To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy, and potentially inflation picks up,” Carney said. Fed-style thresholds would help convince investors of the dedication to stimulus, he said.
U.K. officials have resisted telegraphing, with King and other policy makers arguing it would be wrong to lock in future decisions and saying it’s hard to commit nine people to agree on a policy path amid turnover on the MPC.
“Things like communication will change, but it may not be on day one,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc and an ex-BOE official. “In five years, when he leaves, they’ll be communicating in an open and transparent way.”
Although Carney pressed for a review of the Bank of England’s 2 percent goal -- largely unchanged since inflation targeting was introduced in the U.K. two decades ago -- he indicated a preference for keeping it in place alongside more tolerance if it’s breached for a lengthy period.
A delay in meeting the mandate can be worthwhile if there is a threat to the stability of the economy or financial markets. The U.K. has been slow to recover from the recession, contracting anew in the fourth quarter and facing drags from a fiscal squeeze and a sluggish euro-area economy.
The BOE highlighted the flexibility of its existing framework yesterday. While inflation may remain above 2 percent for the next two years, longer than King forecast last month, the MPC said its remit is to deliver price stability, but “in a way that avoids undesirable volatility in output.”
“We already have a fair amount of flexibility in U.K. inflation targeting,” said Simon Wells, chief U.K. economist at HSBC Holdings Plc.
Michael Saunders, chief western Europe economist at Citigroup Inc. in London, said Carney laid the ground for a switch to a band of 1 percent to 3 percent with the bank aiming at the center over time. That would “retain the crucial commitment to low inflation, but make the flexibility of the framework clearer,” he said.
Having triggered the debate on possible reform in December, Carney said yesterday he had already held talks on the issue with Chancellor of the Exchequer George Osborne. Even if it ended with the status quo and so long as it was short enough to avoid fanning uncertainty, a review could reinforce the bank’s credibility by increasing understanding of its work, he said.
Still, he was less supportive of shifting to another target. He said he was “far from convinced about the merits” of eyeing a level of nominal gross domestic product, while a higher inflation goal would risk “destroying the hard-won gains” earned from securing price stability.
“The benefits of any regime change would have to be weighed carefully, not only against the potential risks, but also against the effectiveness of other unconventional monetary measures under the proven, flexible inflation-targeting framework,” he said. “The bar for change is very high.”
Poised to become the first foreigner to run the British central bank since its founding in 1694 and the recipient of a 250,000-pound housing allowance on top of a 480,000-pound base salary, Carney added a benchmark outside economics for measuring the success of his five years in the U.K.
“More generally, I would like to achieve an exit in 2018 that is less newsworthy than my entrance,” he said.
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