Sizing up Carney
–Kathleen Brooks is research director at forex.com. The opinions expressed are her own.–
Back in the last quarter of 2012 when Mark Carney was announced as the Governor-elect of the Bank of England, imaginations ran wild about the new arsenal he could bring to the BoE’s toolkit for getting the UK economy moving again. GDP targeting and unlimited QE were not beyond the realms of possibility. Carney in the past had dismissed suggestions that central bankers were out of options when it came to stimulating over-leveraged developed economies. However, as we get closer to his start date the debate has shifted regarding monetary policy.
The Bank of Japan is throwing the kitchen sink at their economy, at the same time as debate is raging at the Fed that QE3 should come to an end. Added to this, the BoE seems to be having its own internal debate about the effectiveness of the UK’s quantitative easing policy.
Where Carney stands regarding these debates is what we want to know as his start date at the Old Lady comes into view. All eyes and ears will be on his response to questions about the positive and negative effects of QE. He is likely to be asked about the Bank of Japan’s enormous monetary policy programme announced earlier this month. While he is likely to be diplomatic, it will be interesting to see if he believes the BoJ’s economic objective – to use monetary stimulus to reach a 2% inflation target in 2 years – is realistic, and if QE is the best way to do this.
Will Carney adopt the BOJ-style of QE and throw the kitchen sink at the UK economy? Or will he adopt the more cautious approach of the ECB? What does he think about the Fed’s QE programme and the prospect of the end of the largest stimulus programme the world has ever known?
Everyone wants to know if he thinks the Fed’s massive expansion of its balance sheet has been successful, especially as cracks have started to form in the US economy recovery. While Carney is likely to be diplomatic (after all, central bankers do not typically comment on the activities of their peers), any candid comments will be most welcome by the fixed income and FX community who are trying to “price in” the Carney effect at the BoE.
The current governor of the Bank of Canada has taken on the challenge of his career by agreeing to head of the Bank of England. Canada has low inflation and its economy has stayed in positive territory ever since it emerged from recession at the end of 2009.
It’s a very different kettle of fish in the UK. The economy is sluggish, even if we do avoid a triple-dip recession the UK is likely to skirt along the bottom for sometime yet. The threat of stagflation is also very real as Carney gets ready to make his move.
The BOE has, so far, not been able to brighten this lacklustre economic landscape, can Carney deliver the economic goods when Mervyn King has not?
Carney’s view of the limitations of monetary policy will also be monitored. The ECB has been clear that it feels monetary policy can’t fix everything and President Draghi has made clear that member nations’ governments need to do their bit to boost sustainable growth.
Does Carney feel the same? Where does he think the limitations of monetary policy lie? Is the UK economy beyond help? While we doubt he will admit that central banks’ are impotent, no one will buy what he says if he thinks he can click his fingers and make everything ok.
There has been a lot of speculation about Mark Carney and his style of central banking, but as we get closer to his start date at the Old Lady, we really know very little about his plans for the BoE. The BoE needs a new face and a new leader, his answers to some of these questions will help us to find out if he is the right man for the job.