Wednesday 30 / October / 2024
London: Bank of England (BOE) Governor Mark Carney has been the only "adult in the room" since the UK vote to quit the European Union, former BOE policy maker Danny Blanchflower. It's an assessment many would agree with. Unfortunately, Carney looks like he may be planning a Brexit of his own.
Prime Minister Theresa May, former Foreign Secretary William Hague and former Justice Secretary Michael Gove have all made comments in recent weeks that undermine the central bank's cherished independence. Carney has been roundly chastised for his gloominess both before and after the referendum on EU membership. Serious political magazines are even speculating that Treasury Select Committee member Jacob Rees-Mogg, one of his most outspoken critics, might be his replacement.
Carney says he'll decide by the end of the year whether to leave the BOE in 2018 — his initial plan when he was appointed — or to serve the full eight years of his term until 2021. But during testimony to a House of Lords committee this week, he dropped an enormous hint that he's already decided to go. Asked about the central bank's attitude to a particular policy path, Carney had this to say:
"I don’t want to bind ... (long pause) ... the Bank of England two years' hence."
I'd bet my lunch money that he hit the pause button because he was about to use the time-honored phrase "I don't want to bind my successor." Which in turn suggests he expects to have a successor within two years.
Carney was at pains to stress that should he leave it will be an "entirely personal decision." But, to my ears at least, he sounds distinctly like he is preparing the ground for a departure while trying to minimize the potential aftershocks:
Like everyone, I have personal circumstances which I have to manage. This is a role that requires total attention, devotion and I intend to give it for as long as I can. No-one should read anything into that decision about government policy.
It's not just personal considerations about where Carney wants his kids to go to school that will influence his choice. Nor will it be a simple desire to get away from the backseat drivers and sniping from the sidelines. Take a look at the chart below and ask yourself why any central banker would want to preside over an economy with Britain's post-Brexit characteristics:
The day after the Brexit vote, Carney held an emergency televised press conference, pledging an extra 250 billion pounds ($305 billion) of financial support for the financial system. David Cameron had already resigned as prime minister; there was a risk of Britain being leaderless for months, and the pound was already in a free-fall. Looking statesmanlike — presidential, even, — Carney sought to reassure traders and investors that the central bank had done its homework and stood ready to intervene to ensure financial stability. (You can watch the video of his address here.) For the rest of the day, the pound held steady.
Nevertheless, Tory politician Rees-Mogg suggested earlier this month that Carney isn't fit for office:
"On every occasion he wants to talk down the economy and find doom and gloom, which doesn't seem to me to be the job of the governor of the Bank of England. He never seems to want to recognize the result of the referendum and get on with it. It looks like he is a sore loser."
Yet the predictions in the chart, from economists in the private sector, reinforce Carney's pessimism about the UK economic outlook. The accusation that his despondency is somehow part of a "Project Fear" to reverse the referendum decision is unfounded.
What does seem clear is that the various perceived assaults on his independence are contributing to the pound's persistent weakness and the accompanying rise in UK government bond yields. Asked what would happen if central-bank independence was subverted, Carney said "if it were to be called into question, one would expect to see a risk premium for UK assets." And asked subsequently if he's seeing anxiety in financial markets, he said "markets have taken note of the comments."
The UK's 10-year borrowing cost has doubled since mid-August to about 1.15 per cent. The pound dived below $1.21 on Tuesday, and is down 17 per cent against the dollar this year. Goldman Sachs reckons that leaves the UK currency still overvalued by as much as 10 percent; if Carney announces he's leaving, I'm pretty confident sterling won't remain overvalued for very long.
The government seems to be belatedly recognizing the risk of its central bank chief walking away. My Bloomberg News colleague Svenja O'Donnell reported on Wednesday that the prime minister's office sought to reassure Carney that her criticism of the "bad side effects" of monetary policy in a speech earlier this month was clumsy, and that she wants him to remain. I suspect, though, such overtures are too little, too late.
When Carney took over at the Bank of England in 2013, Avery Shenfeld, the chief economist of Canadian Imperial Bank of Commerce, described him to me as the Ringo Starr of central banking: "He may not be the best drummer in the world, but he's joining the best band."
Back then, the economy was humming at a sufficient pace for Carney to warn in June 2014 that interest rates might have to rise. Post-Brexit, he's presided instead over an emergency rate cut. Socially, politically and economically, the UK no longer looks like the harmonious nation he migrated to from Canada. If he goes prematurely, the government will have only itself to blame.
