Search for Mervyn King in YouTube and you are presented with a choice between a speech by the former governor of the Bank of England and highlights of a darts match between his namesake and an opponent named Dean Winstanley. Search for Mark Carney and you are offered a string of interviews and speeches broadcast on a range of television channels.
Granted, some of these date back to the new governor’s tenure at the Bank of Canada. Granted, too, not all of the clips are complimentary. They include ill-tempered tirades against a monetary policy that some believe will condemn UK pensioners dependent on bank savings to penury for many years.
Whether or not the British electorate approves of Carney’s approach to monetary policy is scarcely the point. More important is that the new governor has brought a refreshing openness to an institution that has historically been stereotyped — rightly or wrongly — as stuffy, distant and insensitive to public opinion. It is impossible to imagine his predecessor, for example, being described as “chillaxing” in a “lilac polo shirt, crumpled shorts and suede loafers”, as the Daily Mail did when it spotted Carney and his wife at a musical festival in August.
“Carney’s openness towards the media has surely been very helpful in getting his message about the relationship between interest rates and unemployment across to companies and households,” says Melanie Baker, UK economist at Morgan Stanley.
Critically, Carney appears to have chosen his words to reinforce the message that monetary policy should be used to nurture growth. “The Bank of England’s task now is to secure the fledgling recovery, to allow it to develop into a period of sustained and robust growth,” he said in August. “We aim to get there in part by reducing the uncertainty that has held back growth.”
At the same time, he reminded his audience that the Bank’s mandate of maintaining a 2% inflation target, remained unchanged and had been reconfirmed by Chancellor Osborne in March.
The message seems to be percolating through. In the August edition of the Bank of England/GfK Inflation Expectations survey, carried out just after the release of the Bank’s inflation report, only 29% of households said they expected rates to rise in the next 12 months, which is down from 34% in May and is the lowest since November 2008, at the height of the crisis.
Regulatory shake-up
While Carney’s forward guidance may have been unfortunately timed, it has been impeccably managed and clearly delivered. “It may have made more sense if it had been implemented after the first round of quantitative easing in 2010,” says Jens Larsen, chief European economist at RBC Capital Markets in London. “The strong macro data and rising long term bond yields may make monetary policy difficult at the moment, but let’s reserve judgement until there is more clarity on how successful it has been in influencing interest rates.”
If it is too early to digest the impact of Carney’s arrival on the UK economy, it is also probably too soon to assess the effects of the shake-up in the regulatory environment that came into force in April. “The Bank of England is experiencing its most important institutional and functional changes in a generation,” it said in its 2013 Q1 Quarterly Bulletin. “Failings in pre-crisis arrangements have prompted the government to introduce wholesale changes to the UK regulatory landscape.”
This reform has given the Bank new regulatory powers, with responsibility for supervision from a prudential and conduct perspective passing from the now defunct Financial Services Authority (FSA) to the new Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). The PRA was quick to bare its fangs, identifying a capital shortfall of £12.8bn at Barclays when it imposed a 3% minimum leverage ratio on Britain’s eight largest banks and building societies. The FCA, then slapped a £138m fine on JP Morgan in September.
The PRA’s zealousness on leverage, the Bank insists, is in no way inconsistent with supporting economic recovery. As Carney said in August, “some argue that the repair of banks’ balance sheets holds back economic recovery because it causes banks to cut back their lending. The reality is the opposite: where capital has been rebuilt and balance sheets repaired, banking systems and economies have prospered.”