John Aglionby Closed Live Blog: Tuesday, 11th March, 2014

Bank of England Governor Mark Carney faces a grilling from MPs on three separate subjects this morning. The Treasury Select Committee will ask him about the BoE’s latest inflation report and its revision to forward guidance, Scottish independence, and the allegations of manipulation of the forex market.

By Sarah O’Connor and John Aglionby

Mark Carney is bracing himself for a marathon session in front of the Treasury Select Committee today. He usually charms this influential group of MPs, but there are likely to be a lot of tough questions.

There will be three sessions, all of which will be worth watching.

9.30am – 11am: The governor and MPC members Paul Fisher, David Miles and Martin Weale will testify on last month’s Inflation Report. There will be questions on when interest rates are likely to rise, how much disagreement there is between MPC members about that crucial judgement, the BoE’s new fuzzy version of forward guidance and the roaring housing market.

11am-12pm: *Carney* will stick around for an hour on his own to answer questions on his recent speech in Scotland. As a reminder, that speech was an unexpected and significant intervention into the debate over Scottish independence and did Alex Salmond no favours. Expect questions on the substance of the speech – and on whether the Treasury put him up to it.

12pm–1.00pm: Paul Fisher, head of markets at the BoE, will join Carney for a grilling over the central bank’s role in the forex scandal. The alleged events happened before Carney joined the bank, but the TSC is likely to use them to push its case for more radical reform of the BoE’s governance structure. On the BBC’s Today programme this morning, Tory committee member Andrea Leadsom said:

“I do think it raises the bigger question, which is the oversight of the bank of England itself. We’ve given to the bank, and particularly the governor, these enormous swingeing powers.”

Markets update: Sterling is currently at 1.662 to the dollar, down 0.13 per cent.

Most focus is likely to be on the alleged forex market manipulation.

Carney will be under pressure to explain why the BoE did not act more decisively to examine allegations of forex market manipulation after it became aware that something might be wrong as far back as 2006.

According to minutes of its committee that looks at forex markets, it was noted at the July 4 2006 meeting that:

“There was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix. This was not in the interest of customers if the market was forced away from where it should be when the fixing snapshot was taken. It was noted that ‘fixing business’ generally was becoming increasingly fraught due to this behaviour.”

Two years later, in May 2008, the same committee held a discussion on “issues around market fixings”. The meeting’s minutes say:

“There was considerable discussion on this topic with the large majority of members expressing concern about the lack of transparency among some methodologies and the impacts in managing order flow and pricing liquidity at times of concentrated benchmarked interest such as the 4pm London fix.”

Last week the BoE suspended a member of staff and launched a new investigation into allegations that its officials condoned or were aware of market manipulation.

At least a dozen authorities across the US, Europe and Asia are conducting or assisting investigations into whether traders have colluded to rig crucial price benchmarks. The scandal has so far prompted the suspension or dismissal of 22 traders in nine banks.

The hearing has started

Forward guidance – Carney’s big monetary policy idea – is firmly in the spotlight in this first session. Its latest iteration (some say abandonment) has caused some confusion. Meanwhile forward guidance was attacked this week by the Bank for International Settlements, the central bankers’ bank, which warned the policy was encouraging investors to load up on risk because they thought they would be warned well in advance about any rise in interest rates,

Andrew Tyrie, the committee chairman, kicks off the hearing with a question on what the BoE is going to focus on now in its forward guidance.

Carney says the MPC would not consider interest rate increases until unemployment fell below 7.0 per cent (it is currently 7.1 per cent) and assessments of spare capacity in the economy. The latter is now very much in focus

Carney is asked how much spare capacity he thinks there is in the labour market. He says all members of the MPS have different views. His view is that the equilibrium rate of unemployment has gone down to about 6 per cent. That is part of the spare capacity. There is also a degree of underemployment – one of the highest levels on record, and one of the highest levels of self-employment.

He concludes that it is slightly higher than 1.5 per cent

Carney says that spare capacity, as far as the MPC is concerned, refers to the labour market and not the output gap.

Carney’s personal view is there is some spare capacity in firms as well as the labour market – but there are different views in the committee about that.

Martin Weale – one of the more hawkish members of the committee – is now asked about spare capacity. (He was the only member to vote against the first version of forward guidance in August). If you were an MPC committee of one, would you have changed monetary policy in August, Tyrie asks? He says he voted against it, and the rapid fall of unemployment since then has reinforced his view.

Theresa Pearce takes up the questioning, asking about housing.

Carney says there are two property markets in London, one driven by cash buyers, who are largely foreign, and the other is more conventional – using mortgages.

He says he can do little to control the former element of the market.

The BoE’s concerns centre aroundunderwriting standards and that they might deteriorate, fed by an improvement inthe housing market.

“We’re taking steps to ensure that doesn’t happen”.

Secondly, a rising housing market – driven by dynamics in prime central London – might prompt people to take dangerous risks.

The Financial Policy Committee is looking at how a rise in interest rate might affect the lenders who are most vulnerable. At present that data is predominantly survey based but the BoE is starting to draw on actual data from mortgage companies

Carney says rising house prices are good for the economy if incomes are rising and thus reflects a balanced economy. But if they’re rising because of a temporary self-fulfilling prophecy, then that’s clearly bad for the eocnomy. It runs risks for the banking sector and puts many households in vulnerable positions.

Mark Garnier MP points out we’ve had ultra-low monetary policy for 5 years now. What has been the effect on the economy? Carney says the BoE’s steps have been “enormously beneficial” for the economy. It helped to arrest the decline and lay the conditions for the recovery. “We are moving to a period where the end of the recovery is in prospect…we are moving to a period where the more conventional operation of monetary policy is a possibility. Which is welcome.”

More from Chris Giles re his tweet:

Big differences on the MPC about the degree of slack in the economy have been exposed at the Treasury select committee. Mark Carney, the governor, put himself clearly at the dovish end of the spectrum saying that he thought spare capacity stood at the upper end of the BoE’s published 1 to 1.5 per cent range and said t might be “slightly higher than 1.5 per cent”.

Martin Weale, an independent MPC member, said that he did not like the focus on unemployment adopted last August for interest rate guidance and worried that newly employed people created generally less output than the average, so the spare capacity was considerably less. He said he was much more comfortable with the change in guidance the bank announced in February.

Garnier asks Carney if households are prepared for rising interest rates. He says the MPC has given the public “not the when but the how” of rising interest rates. When the time comes, the increases will be gradual and limited. “That is because we will still be living in extraordinary times a few years down the road.”

Just to add to Chris Giles’ point below on the range of estimates on the MPC on the amount of spare capacity in the economy: Martin Weale in his written statement says he thinks there is “something under one per cent” of GDP. So a lot less than Carney. Here is that statement

On a not unrelated subject:

From FastFT

The even-worse-than-usual British weather hit industrial output in January, with growth of 0.1 per cent coming in below expectations.

Economists polled by Reuters had predicted a 0.2 per cent month-on-month rise and the growth also fell short of the revised upwards 0.5 per cent figure for December. Year-on-year, growth was 2.9 per cent, compared to expectations of 3.0 per cent.

There was better news in the narrower manufacturing sector, where month-on-month growth of 0.4 per cent beat the economists’ forecast of 0.3 per cent and matched December’s number – revised upwards from 0.3 per cent. Output was 3.3 per cent higher than a year earlier.

Tyrie asks about forbearance. Carney declines to put a precise proportion on this. Capital planning purposes are the majority, he says, when pushed

Chris Giles offers a tip on how to read Carney’s mood:

What about Carney’s “bait and switch” tactics on forward guidance, asks Brooks Newmark MP? Haven’t you ended up with “fuzzy guidance” now? Carney says he’d love to answer that question. Yes unemployment has come down faster than we would have expected. “But I will say…the fact is we provided guidance which is well understood by businesses…which contributed to the strength of employment.” It’s not bait and switch because we’re doing exactly what we said we would do.

Carney is unapologetic for his short-lived link between rates and unemployment. “I have no regret we’re sitting here in March with more than half a million more people in work.” (Brooks Newmark rushes to agree on that point).

FT economics editor says Carney should learn something from colleagues across the Atlantic:

Garnier: “In a nutshell it [new version of forward guidance] gives you much more wiggle room.” Carney doesn’t disagree.

Carney now asked about the rate of growth in the UK economy pre and post his arrival. He says it’s not true that his arrival was the key determinant!

He says his job was to secure the nascent recovery and provide more certainty about how the bank would react while maintaining inflation expectation s and supporting growth. “And that’s what’s happened”.

Meanwhile, economists aren’t too worried about that bad industrial production data this morning. This from Capital Economics:

January’s official figures show that a steady recovery in industrial production is still underway. Admittedly, overall production was just 0.1% higher than it was in December. But this increase was depressed by a sharp 5.8% monthly fall in production in the oil and gas sector. Anecdotal evidence suggests that severe weather conditions in the North Sea hampered production.

Carney asked if monetary policy has changed in the last eight months, since forward guidance was introduced.

He says the MPC has operated under the same framework – ie no.

“Growing the economy at the fastest rate in the developed world brings us closer to where the first phase will no longer apply. Welre not there yet but we’ve given a sign of where we’ll go once we get there.”


Separate news: Sky news reporting that union leader Bob Crow has died

Back to Carney…

The MPs are still pushing Carney on his newer fuzzier guidance and its focus on spare capacity. Is there a danger than inflation expectations may start to build up? Carney says he monitors that very carefully, in every monthly MPC meeting. If anything, inflation expectations have become better anchored over the last few months. (That is probably because inflation itself has fallen below 2 per cent)

Chris Giles’s assessment so far:

Mark Carney is clear that the BoE has not made any mistakes in its operation of forward guidance. He repeats it is “an evolution” of policy. He says that as the recovery uses up spare capacity, there is a need for the bank to give further guidance as to its thinking and that is why the BoE has provided guidance on “not to when, but how” the bank will normalise policy. This “how, not when” is the new favourite phrase for the bank’s ditching of the link between monetary policy and the unemployment rate.

Tyrie says “haven’t we just evolved back to where we started?” That is a popular view among many city economists – that the “new phase” of guidance is in fact just a return to normal inflation targeting, albeit with a few extra bells and whistles.

Tyrie is wondering whether the Bank should publish its estimate of the output gap. Carney says he’ll get back to the committee about that.

Carney says it would be most appropriate to adjust interest rates before tweaking quantitative easing because there is more flexibility on that than interest rates.

“We should start on bank rate… it would be more difficult to adjust the quantitative easing in both directions”

Carney would quite like to publish an output gap estimate, but the committee is against him apparently.

Carney is asked if his forward guidance policy is linked to not causing a sell-off in the bond market:

“Yes, is the short answer”

David Miles is asked about QE and its effects. In the bad times, it had a powerful effect, he says. But at the time the gilts are sold, markets will be healed so the impact on asset prices etc will be much much smaller.

Andrea Leadsom says surely if you dump a whole pile of gilts on the market, it will have some effect. Miles says there is some “ivory towerish” research that says the impact could be literally zero. He doesn’t think it will have zero impact, but he also doesn’t think it will have a big one.

From the Times’ economics editor:

Carney is asked what he thinks. “We’re not going to sell £375bn of gilts. It’s a hypothetical question.”

Markets update: Sterling has not moved on anything Carney has said

One thing we’ve forgotten to do: Here’s the link if you want to watch Carney’s performance.

The committee is still asking about the unwinding of QE. It’s a good line of questioning – will have interesting implications both for markets and the public finances. Carney says there would need to be predictable rules on rolling off the gilt portfolio. One option would be not to reinvest the maturing gilts.

Andrea Leadsom: So are we looking at an extraordinarily long time in which QE is part of policy? Weale says he wouldn’t like to say how long.

Tyrie asks if there has been correspondence with the debt management office and the BoE about winding down QE. Fisher says there have been discussions. Tyrie asks to see the correspondence.

Tyrie asks if QE is monetary policy and the exclusive preserve of the BoE. Carney says yes, clarifying that that the conduct is the BoE’s preserve and says that he would consult with the DMO before unwinding QE but not the Treasury.

Carney also adds that QE should only be unwound after several moves in interest rates, not one.

Pat McFadden MP (Labour) picks up the questioning. Why has unemployment fallen so much faster than the MPC thought? Carney says they thought productivity would pick up alongside the recovery. It didn’t. “What’s interesting now with the most recent figures suggest around 2 per cent annualised growth rate, which is coming back to more normal growth rates.” (Although he stresses you should take that data with a grain of salt for now).

Carney is asked if the BoE’s forecasting is up to snuff:

“We’re engaged and in the middle of improving our capacity ability to forecast. The second thing is we’re constantly developing new economitric tools and we’re bringing people in. We need to continue developing these processes.”

Next week the BoE will announce an assessment of its review, he says.

Carney now asked why people should have more confidence inthe BoE’s projections now:

“We’ve learnt things along the way,” and gives examples of how the BoE is assessing the spare capacity in the labour market.

Tony Yates, former BoE staffer, is pleased Carney wants to bring in more good people.


“We would learn as the recovery progressed and communicate that. And that’s what we’ve done”

Megan Murphy, on FastFT, reckons she’s spotted a Carney mea culpa, sort of…

Can you tell us more about the “new normal” of lower equilibrium interest rates, asks McFadden? Miles says the normal level of interest rates probably won’t be 5 per cent (as it was before the crisis). On a global level, the “safe real interest rate” has been steadily declining over many years. Partly a reflection that people think the eocnomy is a more risky place and are willing to accept a lower rate of interest on safe assets. That effect will last for quite a long time. (If you’re interested he also gave a speech on this topic recently)

Carney is asked about the regional disparity in the UK’s economy.

He says there are “more challenging times in the north”.

“In terms of specific start ups versus exit, we don’t go down to that level. Part of the reason for the challenging times in the north is because there has been some adjustment in the north already.”


“We have seen less adjustment than historically in terms of new company formation versus exit and that stability helps with wage generation.”


“My eulogy [for recycling labour] did not have a regional element.”

Weale also asked about regional disparities and dodges the bullet too. He says they’re taken into account but doesn’t give details.

Danny Blanchflower, former MPC member (and thorn in the BoE’s side) points out the risks of not returning to a “normal” interest rate of about 5 per cent.

John Mann continues his regional disparity probing.

Martin Weale says “No”. The BoE’s “agents” give data on different parts of the country but adds it won’t be a key determinant on the economic recovery.

John Mann asks a simple question of Miles: “What is the future path of interest rates”. Miles, with a shrug: “I don’t know.” It’s more useful to say what would be the drivers of the decision on the future path of rates.

Mann also raises the BIS’s criticism of forward guidance here’s that story, as a reminder And extracts a promise from Carney to look at regional economic disparities, and a statement that he is not influenced by political timing.

Carney returns to productivity – the judgement they got wildly wrong in August. Given they got it so wrong, they thought it prudent to lower their estimate of how much productivity will respond to the recovery from here on out.

More on political timing from Chris Giles:


“There is no danger of my vote, or anyone else on the committee … being influenced by political timing”

How much is the productivity puzzle to do with measurement error? Carney says he suspects there’s an element of that. Points out the latest revisions to Q4 raised productivity growth quite a lot. But you can’t explain it fully that way. (He avoids another swipe at the beleaguered Office for National Statistics)

Question on SME financing:

Fisher says the situation has improved, slowly.

“There’s been a decrease in the average cost of funding”

David Miles says he’s detected more optimism from SMEs inthe last six-12 months than at any time during his tenure on the MPC.

David Miles: “Relative to where we were in the years leading up to the financial crisis, we’ve learnt a painful less that economies are not that stable” – and that there is therefore a greater gap between the BoE’s bank rate and cost of financing available to businesses.

Carney says credit conditions surveys show an improvement in conditions but that it’s not where it should be. Gross SME lending is up 24 per cent, he says, but that net lending is down due to the commercial property market

George Mudie MP says QE was forced on the Bank by the government. Carney says the specific decisions about timing of QE purchases are the preserve of the MPC. Mudie insists the idea was pushed on the bank by the chancellor (this was while Carney was in Canada). So it is really purely your decision when you exit QE? Isn’t that just as sensitive as going in?

BoE Governor Mark Carney makes a point during the Treasury Select Committee hearing

Carney responds on QE exit – we’ll consult with the Debt Management Office but these are operational decisions on monetary policy. (He’s really very firm on not consulting the Treasury about exiting QE)


“The demands on liquidity have changed in order for market functioning.”

“What we’ve done is put in place much tougher liquidity requirements for banks”

“The functioning of a whole hosts of markets will require greater use of collateral.”

Carney: There will be a prudent reduction in the asset purchase facility but the balance sheet will not return to what it was – either for the BoE or other central banks

Meanwhile the FT’s Chris Giles (at the hearing) has filed a news story from his laptop, leading on those divisions we’ve learned about between MPC members on the amount of slack in the economy.

Tyrie asks about recordings of MPC meetings. Fisher says the recordings are destroyed once the minutes are published but that “it’s very hard to make transcripts”. Tyrie is not convinced.

Fisher says it’s a very free-flowing discussion and if the recordings were kept it would change the nature of the debate.

Tyrie asks Carney to take a look at whether recordings should be kept or if transcripts made – as the US Federal Reserve does.

Here are the Fed’s latest transcripts – they make great reading.

Fyi, this session is already overrunning….

Back to a more basic topic. How worried is the Bank about the recovery? Carney says it won’t sustain itself unless investment and exports pick up. The very recent data suggest the recovery might be broadening to business investment, but it’s early stages.

A sobering thought from Carney: “In the absence of a pick up in productivity growth…we’re not going to see the pick up in real wages that would lead to a sustained period of above trend growth.”

The MPs rightly point out that the BoE has become a lot more conservative about productivity growth. Yes but we expect a lot of business investment, Carney says. If we don’t see it, the recovery will disappoint.

How important is the housing market in sustaining consumer confidence? Carney says we’re seeing very little home equity withdrawal (it’s something they’re watching closely). It might be helping confidence, though hard to say for sure.

Meanwhile the falling savings rate isn’t too much of a concern, Carney says. It has just declined from precautionary levels to more normal levels.

The discussion about the MPS’s recording equipment (or perhaps lack thereof) has generated much chatter on Twitter….

Carney: The adjustment in house prices should be driven by households’ expectations of higher incomes to come. To the extent to which those higher incomes are not materialising, we would expect to see a slowing in the housing market. (Providing underwriting standards hold up).

We’re not targeting house prices, Carney stresses. Just making sure risks to the financial system aren’t great.

David Miles is more optimistic now than at any time he’s been on the committee, at least for the near-term economic prospects.

Miles: One thing that would not be sustainable would be to rely on the savings rate to keep falling in order to support consumption growth. “That would be building a forecast on a heap of sand.” But he says that isn’t what the Bank’s forecast is based on. It’s predicting business investment growth etc.

Tyrie brings the first session to an end after Miles wraps up with an optimistic note on the broader EU’s growth prospects

That’s all for the monetary policy part of today’s session. Five minute break, then we’re onto Carney’s Scotland speech. As a refresher, here’s the write-up we gave the speech on the day.

From FT reporter Sam Flemming in the room:

Biggest surprise to MPs on the TSC so far appears to be Paul Fisher of the BoE revealing that the recordings of MPC meetings are routinely destroyed, depriving future generations of an accurate record of what took place in the meetings. Mr Fisher says attempts to take down an accurate record of the free flowing debate were unsuccessful. But the Fed seems to manage it.

Here’s a quick summary of what we heard:

Mark Carney expects there to be several hikes in interest rates before QE is touched.

Carney accepts he has no control over the part of the housing market that is driven by (mostly foreign) cash.

Carney and Martin Weale differed on the amount of spare capacity in the economy, with Carney putting the amount at more than 1.5 per cent of national income and Weale saying he thought it was less than 1 per cent.

Committee chairman Andrew Tyrie is not impressed that not only does the MPC not transcribe the recordings of its meetings but that the recordings are destroyed once the minutes have been written.

David Miles says he’s detected more optimism amongst SMEs than at any time since he joined the MPC

And we’re back. Carney testifying for this session on Scottish independence.

Stewart Hosie (SNP) gets the first question. How can you align economies to get the full benefits of a currency union? Carney says you need some fiscal arrangements that smooth misalignments. The underlying structures of the economies are also important: there is a reasonable range of disparity in economies that are in successful currency unions.

Carney asked about fiscal arrangements between Scotland and England and the sharing of resources.

Carney says the issue that he was trying to get across relates to the pooling of sovereignty around banking union and whether it’s viable to have a currency union that’s not also linked to fiscal flows.

Hosie asks if Carney has a preferred set of rules for a currency union. Carney says it depends on the circumstances of the union and extent of fiscal federalism. The fundamental criterion is medium and long-term debt sustainability.

SNP’s Stewart Hosie asks Carney to repeat again that his speech was “technocratic” and not a judgement on merits of Scottish independence (no agenda in that question!)

Jesse Norman asks if the small size of the Scottish economy and its exposure to the oil and gas industry.


“The performance of the Scottish economy is more volatile because of the industrial structure.”

“One of the moderators is the policy of the UK government.” – ie when energy prices are low then more transfers come in from London.

Norman goes on to the Panama option – if Scotland adopts Sterling without any union. Carney says it depends on how the arrangement is struck as to how effective it would be.
Carney says he has not done any work on the composition of the MPC if Scotland were to be independent and have a currency union.

Journalists seem to be hoping we can hurry through this session and get onto the forex scandal.

Carney not having much fun either, as Ben Chu from the Independent points out. A lot of hesitation and tip-toeing from the governor.

Carney says there’s not a separate Scottish, Welsh or Dorset moment during MPC discussions….

A very good question from Tyrie: if the FPC concludes a proposed currency union poses great risks to financial stability, is it the FPC’s duty to speak up? One word answer from Carney: Yes. Has FPC discussed this? No.

Tyrie a bit perturbed the FPC hasn’t discussed this. He points out the permanent secretary to the Treasury (Sir Nick MacPherson) has seen it his duty to speak up. Indeed Sir Nick wrote a very strong letter to the chancellor, which you can read about here

Carney now asked about FPC composition if Scotland does independent and why he hasn’t been asked by the Treasury to undertake any contingency planning.

“There’s been no instruction from government to think it through”

But Carney says he thinks it’s understandable considering the views of the government and the opposition.

BoE would continue to be the settlement agency for banks in Scotland in the event of independence. But how it conducted other functions would depend on Scotland’s relationship with the EU and other bodies like the EEA.

Carney now asked about deposit guarantee scheme provisions in the event of independence. The questions are getting into pretty hypothetical long grass…

Do you need a full-on banking union to make a currency union work? Carney says the key question is it’s not clear in EU context that the domicile of Scottish banks in Scotland would remain in Scotland, given the location of head-office like activities in the rest of the UK.

In another part of parliament at Treasury questions, the Treasury and BoE are catching heat for the lack of women on the MPC.

There is a lot of speculation the soon-to-be-announced new deputy governor will be a woman.

Carney asked if BoE would be willing to be the lender of last resort for Lloyds and RBS if Scotland adopted sterling outside a currency union.

Carney replies: “It depends”. “We can act as lender of last resort to branches and subsidiaries of foreign banks but we don’t have to. We’re conscious of the exposure to the public balance sheet of those activities.”

Would RBS have to move under EU rules to the remaining UK? Carney: “It’s a distinct possibility but I wouldn’t pre-judge it”.

FT economics editor Chris Giles is surprised the FPC has done no contingency planning…

What Carney said about RBS is attracting a bit of notice:

Carney says that if the sterling area was seen as possibly only temporary, it would increase the amount of currency reserves required.

And to build up reserves, you need to run a balance of payments surplus, he adds.

Faisal Islam, economics editor of Channel 4 news, has detected a shift in tone by Carney from his speech in Edinburgh:

More on the BoE’s destruction of the MPC meeting recordings (which is attracting a lot of attention)

Carney is asked if Scotland joined the EU and the European Banking Union what would the implications be for the BoE.

Carney says there would be advantages to the arrangement because of the impeding new single supervisory mechanisms and single resolution mechanism. But there is no common deposit scheme that would need to be built up. And the lender of last resort issue would have to be addressed.
Does it make it more viable? Carney says there’s a wide range of factors that determines viability.

“It’s a bit like being pregnant. you can’t be half viable in a currency union. You need all the components in place.”

Carney says there are political decisions that would need to be taken if there is a ‘yes’ vote and the BoE would execute any decisions in response to directions from its political masters. He reiterates that he’s not a constitutional lawyer.

Carney: “What we will do and what we have done is provide technical assistance and perspective to the interested parties.”

ECB is even worse on transparency of meetings than the BoE, points out City AM

Carney says arrangements could be put in place to be consistent with a durable currency board. However, careful thought needed on orders of magnitude and the fiscal cost of doing that, the time over which those reserves could be built up. If it’s temporary it’s more difficult than if it’s viewed as permanent.

Here’s a bit more context on whether RBS would have to move if Scotland votes for independence, from FastFT:

RBS chief executive Ross McEwan said last month the state-backed bank needed to think about the “implications” of independence for its Edinburgh headquarters.

Before UK chancellor George Osborne’s February speech categorically ruling out a currency union between an independent state and the rest of the UK, most chief executives were reluctant to speak out on Scottish politics.

Since then, more companies have come forward to voice their concern about a pro-independence vote, including Shell and fellow Scotland-based financial services companies Standard Life and Alliance Trust.

Carney pushes back against MPs’ assertion that he doesn’t support a currency union. He isn’t trying to shoot it down or support it, he says.

More on RBS move. Keep the name RBS, just change the location of the S, suggests Reuters’ Jamie McGeever:

Long pause from Carney before he answers a question on whether Scotland could set up its own financial conduct regulator. “Everything you say will be taken down,” Tyrie quips. Eventually Carney says: There have been changes to regulation in a variety of jurisdictions. It’s not beyond the ability of man to set up a new conduct authority but would take time.

Carney is now asked what would the remaining part of the UK need to be satisfied about to take on a currency union with an independent Scotland.

Carney says there could be “very considerable cost to financial stability… from any unplanned change to those currency arrangements put in place”. So the rest of the UK would have to satisfied about the durability of the union while preserving the freedom of movement of labour, capital and goods. There would also have to be some form of fiscal arrangement put in place to address a contingent liability. Eg, there’s no bailout clause in the Maastricht Treaty but “in the teeth of the global crisis” the situation was changed.

The biggest news from this session is still Carney’s assertion there would be a “distinct possibility” that RBS would have to move to rest of UK under EU rules. Channel 4′s Faisal Islam points out he was much more reticent about this last time he was asked.

Carney goes back to that RBS point in answer to a question about the size of Scotland’s financial sector. “In an EU context there is a question of whether ultimately those institutions would remain head-quartered in Scotland or re-domicile,” he repeats. If the latter were the case it shifts the exposure, although also shifts the economic activity from Scotland.

Carney repeats a long-held view that the eurozone needs stronger fiscal federalism to be sufficiently viable.

“I have views but not that I am willing to share” on the sort of fiscal rules required in currency union. “You’ve played a very elegant straight bat to every question,” says Tyrie. Another five minute break and we’re onto forex – probably the most newsworthy session of the lot.

Carney’s back. It’s now forex…

Carney says he’s not confirming the identity of anyone – ie the person who has been suspended. Carney says it’s not a disciplinary action

Fisher says it was not considered to suspend the person’s boss. Fisher says he doesn’t want to discuss it because that could identify the person involved

Carney interjects, saying the decision to suspend was taken by governors based on the evidence that became apparent during the investigation. He says employees meet BoE standards 99.99 per cent of the time.

Carney says that if one of the issues is around escalation then he says the BoE is taking steps to address that.

Tyrie: Have any Court minutes been redacted in respect to this issue, and if so why? Carney: we first became aware on 16th October, informed Court then. At subsequent meeting of Court in November, on advice of counsel, we decided to keep it secret, so redacted the minutes.

Tyrie asks about the appointment of an external scruitineer.

Carney is not a member of the oversight committee. They have retained external counsel. “I have not been told that is the case” – just read it in the press.

Carney says best practice would be to have external expertise – not just legal expertise to run a review. The same applies to a review of the bank’s policy functions. Law firm Travers Smith is the law firm doing the review

Carney has on several occasions hidden behind the fact that he’s not on the oversight committee. Handy.


“We have relentlessly followed up these allegations and we will continue to do so.”

The FT’s investment banking correspondent, Daniel Schaefer is now also watching proceedings:

Tyrie: BoE has had evidence of attempted fixing for 8 years, hasn’t it Mr Fisher? Fisher: No it hasn’t. The allegations about the dealers has come up very recently. What’s recorded in the minutes is slightly different.

In the middle of the decade there was a growing influence of other traders – algos, large hedge funds – that may go into market at any time and put on large positions. So you have the banks trying to manage a position, along comes a large hedge fund, creates volatility ahead of the fix.

What you see in the minutes is this concern by the dealers about third parties moving the rates around.

Pat McFadden takes up the questioning:

Fisher says he’d never come across the allegations before they were alerted to them last year. The later minutes, in 2008, show how complicated the process of fixing is and why the traders and the fixers were brought together.

McFadden asks if the minutes were ever escalated. Fisher says no, with regard to concerns about rigging markets.

Fisher says that the allegations raised in October are different to what was reported in the minutes.

The Libor scandal has prompted the BoE to revise its escalation structures, Fisher says

Carney says the BoE individuals are subject to the same rules as anyone else but they are held to a hgher standard than others in the market. He reiterates that there is no information that anyone at the BoE was involved in or condoned market manipulation.

Carney says one of the questions is what are we going to do about changing our policies and how they are followed and how we will reinforce that through changes of culture.

Staff have been rebriefed and attest that they’re following the escalation policy and are not aware of any situation in the past when they did not escalate a situation when they should have done.

Carney says that in the new strategic plan -to be launched next Tuesday – are measures to reinforce cultural changes that have been introduced.

Carney says a root and branch review will be conducted on how the BoE conducts market intelligence and how it is used.

Sam Fleming, FT’s regulation correspondent, is also in the room.


“The institution has to be beyond reproach. We have to have the highest standards of integrity.

“We take actions that these [errors] do not happen again.

“The other thing we need to do is to more clearly understand what the principles are around what is a fair market.”

“What we saw in Libor and what’s being investigated in the FX markets are symptomatic of a group of individuals… who have lost sight of what a real market is and that’s unacceptable.”

Carney wants a “true, fair and open market”.

David Ruffley MP points out the oversight committee wasn’t involved until February. Carney says Court was briefed all along.

Ruffley wants to know why Travers Smith was appointed in Feb? Was it because the executive already involved them in the autumn?

Carney says – yet again – he doesn’t speak for the oversight committee. But his view would be, for efficiency, to use the same external counsel that was in place.

Why exactly was the employee suspended? Ruffley wants to know details. Carney says for reasons of fairness and due process he’ll give a more general answer. It’s to do with control procedures – records management and escalation. So no more info than in the press release, then.

Carney says it’s imperative the BoE look at all aspects of the situation and reconfirm integrity of the employees of the central bank. So the report will be broader than just looking at what happened with this one suspended employee.

Tyrie asks to see Travers Smith’s mandate in order to have confidence that all probes are being done externally.

Carney asked about specifics of what happened on October 16. We had information from a member of the private sector and head of enforcement at the FCA. Then there was conversation between the BoE’s general counsel and the FCA that day, Carney says.

Carney says all relevant information has been shared with the FCA, inc evidence gleaned from emails, chatrooms and discussions.

A lot of inflation jokes on Twitter about Carney’s decision to create another deputy governor post.

Carney asked why, if speculation about the forex market had been rife for several months before October, the BoE did not act until after October. He replies that there were discussions with the FCA about potential dynamics that could be relevant. The BoE was updating its records management and escalation policies at the time too.

Carney says that he was not aware of any requests for the BoE to investigate actions within its walls prior to the allegations coming to light in October.

Carney says it has been supporting investigations of other central banks around the world and looking at where-do-we-go-from-here.

Carney asked if there are any other issues of manipulation that the BoE has to answer. He says that he’s not aware of any but is aware that the BoE has to undertake the most thorough review possible of what has happened.

“I would not want to leave you with the impression that we have done something and can relax”.


“We cannot come out of this at the back end with a shadow of doubt about the integrity of the Bank of England.”

FT’s Chris Giles points out creating a new deputy governor post not straightforward. But possibly an opportunity to fix some other things.

What exactly is the BoE’s oversight committee investigating? They’re looking at whether any officials were involved or aware of manipulation. It’s pretty comprehensive, Carney says, but looking specifically at BoE employees.

Carney says the BoE has a higher standard – there are actions he could take that would reach above and beyond the standards of the FCA.

George Mudie MP (who started his questions by admitting others had already made his points) asks a rambling question which culminates with: “You seem to have passed this over to the old duffers on the Court. And the bigger thing you’ve given over to Mr Wheatley [of the FCA].”

Carney agrees it was an “unscripted” question from Mudie. But he says he hasn’t passed the buck. Internally we have to be fair in how we discharge this. We’ve spared no expense in conducting the investigation. But those decisions have to be conducted fairly.

The forex investigation will report to the G20

Tyrie picks up the questioning again. He asks Fisher about the July 2008 minutes which say that the market could be subject to manipulation.

Fisher says the allegations now are that traders have been colluding. This was not the case n 2008, when the traders implied they would have preferred a wider window to make a fix rather than specific manipulation.

Andrea Leadsom steps up next. This surely goes back to 2006, she says, pointing to the minutes. Issues were being raised, regardless of whether they were precisely the same issues. So shouldn’t someone have raised them back then? Was there no written guidance on escalating misconduct before 2012 (the oldest policy the TSC has seen)?

Leadsom is not letting go of this. “Surely if you’re a BoE senior person, if you heard something…on manipulation of forex rates you would escalate that? So what was the Bank’s policy on escalation prior to 2012?”

Leadsom interrupts Carney to push the point again. “How come the libor scandal happened yet the BoE didn’t see fit to put in place an escalation policy until 2012?” Fisher says there wasn’t anything in the 2006-2008 minutes that pointed to rigging. “It didn’t ring any alarm bells?”

Fisher: It’s not our policy to go out hunting for rigging of markets.

Here’s a reminder of the minutes they’re discussing:

July 4 2006

“There was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix. This was not in the interest of customers if the market was forced away from where it should be when the fixing snapshot was taken. It was noted that ‘fixing business’ generally was becoming increasingly fraught due to this behaviour.”

May 2008

“There was considerable discussion on this topic with the large majority of members expressing concern about the lack of transparency among some methodologies and the impacts in managing order flow and pricing liquidity at times of concentrated benchmarked interest such as the 4pm London fix.”

Fisher: the shocking thing in all these investigations has been allegations of dealers from different firms colluding. And there’s no hint of that here in the minutes.

Tyrie says he’s “quizzical not to say sceptical” about the explanation Fisher is giving on these minutes.

Tyrie picks up from Leadsom, agreeing with her that it would have been a good idea after Libor to go bach through

Fisher: Over the years we’ve made a number of improvements over the forex market structure but we don’t have the power to go out and investigate whether there was rigging.

After a genteel start, the MPs are starting to push harder now, particularly on Fisher. Andrea Leadsom in the vanguard.

Carney tries to come to Fisher’s rescue, saying that the dealers want a quiet life – ie that they can deliver a fix to their clients. Others, however, were upsetting this. Therefore there might have been colluding by the dealers and that is what is against the principles of fair markets.

Carney says FCA is responsible for conduct. But BoE does gather market intelligence.

If we’re in possession of any info that could be helpful their efforts, at a minimum we need to be aware of it in senior ranks and should share it.

Tyrie asks if the Travers Smith mandate was written without reference to Mr Fisher. Fisher says yes, because the investigation could eventually lead to him.

Tyrie goes to the big issue:

At the heart of this is a governance structure that’s still opaque, complex and byzantine and we desperately need to sort it out. Now it’s been subjected to its first test and it’s not doing very well.

Carney agrees governance could be buttressed. He suggests a dedicated resource within the organisation, akin to the IMF’s internal evaluation office.

Tyrie brings the hearings to a close

We’ll post a summary of the five hours of testimony in a few minutes

Here’s a summary of what we’ve learned:

Carney announced in wake of the forex scandal that he will create a fourth deputy governor post to deal with markets and banking.

Andrew Tyrie said the BoE’s “opaque, complex and byzantine” governance structure was failing its first test. Carney did not violently disagree.

Paul Fisher, head of markets, said it was not the BoE’s job to go hunting for rigging of markets. MPs said the 2006 and 2008 minutes, which referred to attempts to move the market, should have “set alarm bells ringing” for the BoE.

The BoE’s strategic review into how it functions, which has involved McKinsey and Deloitte, will be published next week.


Carney said there was a “distinct possibility” that RBS would have to re-domicile to the rest of UK under EU rules.

Mark Carney and Martin Weale differed on the amount of spare capacity in the economy, with Carney putting the amount at more than 1.5 per cent of national income and Weale saying he thought it was less than 1 per cent.

Carney expects there to be several hikes in interest rates before QE is touched.

Carney expects the BoE’s balance sheet to be larger than it was before QE even after the asset purchases have been unwound.

Carney accepts he has no control over the part of the housing market that is driven by (mostly foreign) cash.

Committee chairman Andrew Tyrie is not impressed that not only does the MPC not transcribe the recordings of its meetings but that the recordings are destroyed once the minutes have been written.

David Miles says he’s detected more optimism amongst SMEs than at any time since he joined the MPC