Mark Carney

Chris Giles

There are many uses of the phrase “new normal” in economics these days. Usually, it is used to signify lower growth or a different type of growth than in the pre-crisis period. Mark Carney went onto the radio this morning to talk about the “new normal” in monetary policy.

Interest rates would be materially lower in future than the 5 per cent rate widely seen as normal before the crisis. The Bank of England governor’s words have been widely reported as a big new statement of policy.

Is this a new policy?

No. Carney first talked about future interest rates being “well below historical norms” in his January speech at the World Economic Forum in Davos, which confirmed the BoE had ditched its original forward guidance linking interest rates solely to unemployment. The important passage was reported clearly in the FT at the time and is copied below. 

Reuters

By Philip Stephens

You may think the big commercial banks got away with it after the great financial crash. But what about the Bank of England? Britain’s central bank was asleep at the wheel when the storm hit in 2007. Mark Carney’s radical shake-up of personnel and responsibilities in Threadneedle Street is an uncomfortable reminder that failure is sometimes richly rewarded.

The blame does not lie with the present governor. Mr Carney was drafted in from Canada last year to replace the departing Mervyn King. The cutbacks in banking supervision that preceded the crash came on the now Lord King’s watch. A reorganisation that leaves Mr Carney with a total of five deputies, however, is a reminder of just how much additional power has accrued to the Bank during the past few years. When the BoE was first granted independence during the late 1990s, the then governor happily settled for two deputies. 

John Aglionby

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

 

John Aglionby

The Bank of England has promised to keep interest rates at record lows until the unemployment rate falls to 7 per cent, a radical change of monetary policy in the world’s sixth largest economy.

Mark Carney, the BoE’s new governor, unveiled the policy on Wednesday, alongside forecasts that show the central bank does not expect the unemployment rate to reach that level until at least mid-2016.

The policy, which is similar to the one adopted by the US Federal Reserve, is aimed at reassuring markets and the public that monetary policy will not tighten any time soon.

But the Bank of England said it would reconsider if inflation was set to be 2.5 per cent or higher in the medium-term, if inflation expectations were becoming out of control, or if the policy was threatening financial stability

“The message is that the MPC is going to maintain the exceptional monetary stimulus until unemployment reaches 7 per cent and then we will reconsider,” Mr Carney told his first press conference since he took on the top job last month. “We will do this while maintaining price and financial stability.”

There was a muted response from investors. The FTSE 100 fell 0.8 per cent, yields on 10-year government bonds climbed 3 basis points and sterling rose 0.5 per cent against the dollar.

Mr Carney said the economy was recovering, but remained far too weak. “This remains the slowest recovery in output on record,” he said. “We’re not at escape velocity right now.”
He stressed the 7 per cent unemployment rate was not a target, but a “way-station” on the path to full recovery.

By Sarah O’Connor, John Aglionby and Catherine Contiguglia. All times are London time

 

Claire Jones

(Getty)

1. Wednesday’s inflation report press conference has been billed as a massive day for the MPC, in particular the new governor Mark Carney. Why?

The Bank of England is set to unveil a framework for what is known in central bank parlance as forward guidance. That involves telling markets -and the public – that central bank cash will remain ultra-cheap until the economy returns to rude health.

It would be one of the most substantial changes to the UK’s monetary policy framework since the rate-setting Monetary Policy Committee became independent in 1997.

It is also Carney’s big idea to lift the UK economy out of the doldrums and into what he has termed “escape velocity”. Others interpret this as a self-sustaining recovery.

However, while Carney is a fan of guidance, the rest of the MPC might take some convincing. Four of its current members, including deputy governor Charlie Bean and chief economist Spencer Dale, have spoken out against forward guidance in the past. 

Claire Jones

Future BoE governor Mark Carney. Getty Images

Bank of England governor-designate Mark Carney talked a lot today about his fondness for so-called “forward guidance” — where a central bank indicates what is likely to happen to monetary policy way beyond its next policy vote.

The theory is that forward guidance boosts growth by providing more certainty to lenders that they will be able to access cheap cash from the central bank for a long time to come. Convinced of this, banks will reduce borrowing costs and lend more. And, with rates remaining lower for longer, savers will believe there is little point in holding cash and will go splurge. 

Claire Jones

If Bank of England governor-designate Mark Carney was looking to spark debate, then his call for the UK to scrap its inflation target (should meaningful growth continue to elude the UK) has done the job.

The FT’s economics editor Chris Giles and economics correspondent Sarah O’Connor write in today’s paper that Mr Carney’s call has divided economists in this year’s FT poll.

Those in favour of sticking with the status quo — 45 per cent — outnumber those calling for a shift to a new regime — 35 per cent. (And not all of those in favour of a switch back Mr Carney’s calls for central banks to target nominal GDP instead.) But in previous years, support from more than a handful of economists for the scrapping of the inflation target would have been unthinkable.

Interestingly, support for change is stronger than average among those who have had to work with inflation targeting: of the ten former MPC members that took part in the poll, five want to do away with the current regime, with the rest in favour of keeping it. 

Mark Carney. Getty Images

Mark Carney, the next governor of the Bank of England, has suggested he will act much more aggressively to revive the UK economy when he takes charge next summer, including dumping the BoE’s much-vaunted inflation target if growth fails to pick up.

In a clear break with the views of the BoE’s current senior management, Mr Carney, now governor of the Bank of Canada, said on Tuesday that central banks should consider more radical measures – such as commitments to keep rates on hold for an extended period of time and numerical targets for unemployment – when rates are near zero. 

Claire Jones

Mark Carney appointed as Sir Mervyn King's successor. Image by Getty

1. Mr Carney could introduce a commitment to keep rates on hold for an extended period of time.

Fed chairman Ben Bernanke was not the first to come up with the idea of making a commitment to keeping rates at ultra-low levels for a number of years, so long as inflation remained low. Mr Bernanke’s big idea was copied from Mr Carney’s Bank of Canada, which introduced a conditional commitment in April 2009 – two years before the Fed – with the aim of lowering longer-term interest rates.

2. Expect radical changes to the way in which the Bank operates.

Bringing in a foreigner to head your central bank is very rare – it signals that the government of the day believes there’s something deeply wrong. That Mr Carney has got the job signals the government is intent on root-and-branch reform of the Bank. 

Chris Giles

Mervyn King, Governor of the Bank of England

Mervyn King, Governor of the Bank of England

There is still more than 14 months to go before Sir Mervyn King leaves the Bank of England, but he is already in danger of appearing a lame duck as the race to succeed begins in earnest.

Today the FT reported that Mark Carney, the governor of the Bank of Canada, has been approached in relation to the job by a member of the Bank’s court, its governing body, having spoken to three people involved in the process. Mr Carney declined to comment. The Bank of Canada said the report was not accurate.

The FT also reported that the Treasury wants Charlie Bean, deputy governor for monetary policy, to remain in post after his term expires in June 2013 to provide some continuity as the top echelons of the Bank are rearranged. No one has denied this part of the story and Mr Bean has told colleagues he is willing to accept any offer to stay on for an interim period. So where do these events put the runners, the riders and those subtly touting themselves for the job.