Carney’s Policy Autopilot Gives Time for McKinsey RevampScott Hamilton
Mark Carney picked a good time to implement sweeping changes at the Bank of England.
With the governor and his officials committed to avoiding raising interest rates for months to come, no economist surveyed by Bloomberg News predicts any change at their meeting this week. The policy hiatus is providing breathing space for an institution distracted by his McKinsey & Co.-inspired revamp.
“Doing this in the middle of 2009 would have been much more difficult than doing it now,” said Rob Wood, a former BOE economist who now works at Berenberg Bank in London. “Policy right now is on autopilot.”
Carney’s renovation of the three-century-old institution began shortly after he took over nine months ago with the introduction of forward guidance. As he beds down the integration of the bank’s regulatory and financial-stability functions, he’s also overseeing changes to the management regime as well as to the composition of the rate-setting Monetary Policy Committee.
The overhaul includes appointing the BOE’s first chief operating officer, bringing in McKinsey to review strategy, hiring Nemat Shafik to fill a newly created fourth deputy post and giving her a seat on the MPC. Between when Carney took over as governor last year and when Shafik starts in August, all five internal members of the nine-person MPC will have changed.
Nothing to See
Under its forward guidance, the MPC plans to not raise its key rate until unemployment, currently 7.2 percent, falls to 7 percent. All 50 economists in a Bloomberg survey forecast the benchmark rate will stay at a record-low 0.5 percent when the panel announces its decision on April 10. The meeting will take place on April 9 only, cut short to allow some officials to attend International Monetary Fund meetings in Washington.
The curtailed meeting “does not exactly suggest an agenda brimming with contentious debate,” said Philip Shaw, an economist at Investec Securities in London.
Data this week will provide insight into how the economy performed in the first quarter. Industrial production probably rose 0.3 percent in February, economists said before a report tomorrow. The Office for National Statistics will publish trade data the following day and construction output on April 11.
The changes to the MPC begin in June when Chief Economist Spencer Dale and Andrew Haldane, executive director for financial stability, swap roles. A month later, external MPC member Ben Broadbent will become deputy governor for monetary policy and Shafik joins Aug. 1 as deputy for markets and banking. She’ll replace Markets Director Paul Fisher on the MPC.
“Until we get the new bums on seats and unemployment has been below 7 percent for a few months, it doesn’t seem like much is going to change,” said Simon Wells, an economist at HSBC Holdings Plc in London and a former BOE official. “With inflation going lower, it only strengthens that view. I think it is a case of steady as she goes for now.”
While officials have agreed to keep rates low until more slack in the economy is used up, there are still policy issues up for debate. Chief among them is the amount of spare capacity, which may prove key in the timing of eventual exit from stimulus. They are already divided, with members including Martin Weale and David Miles expressing different views.
“I wouldn’t underestimate what’s on their plate at the moment,” said Tony Yates, a reader in economics at the University of Bristol who spent 20 years at the BOE. “It’s more than will be suggested by thinking, ‘They can just leave rates on hold for a while and get their management MBA textbooks out.’ I don’t think it’s like that.”
Another issue for policy makers is the potential risk posed by surging house prices. Goldman Sachs Group Inc. forecast home values will increase about 10 percent over the next year after a similar gain in the past 12 months. Economists Kevin Daly and Sebastian Graves said in an April 4 report that they expect the BOE’s Financial Policy Committee to take action to rein in housing-market risks as early as June.
Carney’s reorganization was spurred by the bank being given unprecedented new powers to regulate the financial system last year. The governor is also still dealing with the aftermath of the BOE absorbing and trying to retain Financial Services Authority staff as part of the change.
Yates said while staff may welcome the shakeup, there will be “a lot of dislocation” internally. “There will be a lot of people looking over their shoulders wondering what their jobs are going to be and who they’ll be working for,” he said.
Last month, Carney unveiled more detail of his sweeping changes to the organizational structure with a 15-point plan aimed at integrating monetary policy, financial stability, markets and supervision in the biggest overhaul of the institution this century. The proposals, to be implemented over the next three years, include creating three directorates and expanding the chief economist’s role.
“Organizational change raises uncertainty among people in the institution,” Wood said. “If it works well it should make the bank operate better in the future. I don’t think it’s a bad thing even if it proves to be a distraction for a while.”