Opinion

James Saft

UK’s long wait – for Carney and recovery: James Saft

May 7, 2013

May 7 (Reuters) – Britain may well come to regret the
exceptionally long gap between Governor of the Bank of
England-to-be Mark Carney’s appointment in November and his
first day on the job in July.

Widely seen as a central banking superstar (a role not
without its dangers), Carney is credited with helping to steer
Canada’s economy through the financial crisis and its aftermath
with its banking system and reputation intact.

But one cost of bagging Carney as the successor to Mervyn
King was a very long run-in of more than seven months, during
which Britain has lurched towards and away from recession all
the while giving the impression of an economy more punch drunk
than strengthening.

The rate-setting Monetary Policy Committee of the BOE is
widely expected to do very little when it votes this Thursday,
missing an opportunity to cut rates from the record low 0.50
percent where they have sat for four years. It is also very
unlikely the BOE will increase its quantitative easing
bond-buying plans or further follow up or expand on its efforts
to channel credit to households and businesses.

Looked at narrowly, another month or two of inaction, while
a contrast to the comparative activism of the Bank of Japan and
even the European Central Bank, is not that bad. The very recent
run of economic data in Britain has been mildly encouraging,
dampening fears that the country was listing towards its third
recession since 2008. Surveys of businesses showed some strength
in the dominant services sector and very slight contraction in
manufacturing and construction. As well, GDP expanded in the
first quarter, confounding minority expectations of a new slide
into recession.

Take two steps back and the somewhat quiet period before
Carney’s ascendancy, if that is what his era turns out to be, is
slightly more troubling. The background for the British economy
is well known: this is a slump worse than the Great Depression,
both deeper and without the same vibrancy of the 1930s recovery.
And with years of falling living standards, many households are
squeezed. A survey by a consumer advocacy group found that 20
percent of participants borrowed money or used savings to meet
the cost of food in April.

Britain’s coalition-leading Conservative party remains
committed to a program of deficit reduction, despite criticism
from the International Monetary Fund, placing more pressure on
monetary policy.

“Our hopes now rest on either a significant and speedy
recovery of our biggest trading partner, the euro zone economy
(and that looks to be going in the wrong direction), or monetary
policy,” UK-based fund manager Jim Leaviss wrote in a note to
clients.

“In other words do the government’s hopes all rest on Carney
doing something new and different, or massively increasing the
scale of what the Bank of England has done before? If so we
might all be disappointed.”

LITTLE STEERAGE ROOM

To be sure, the BOE has taken steps to goose growth, notably
making changes in April to a program designed to lend money to
banks for lending on to households and businesses.

Not only has inflation been above the BOE’s 2 percent target
for more than three years – it now stands at 2.8 percent -
prices in the inflation-protected bond market imply investors
are demanding 3.1 percent over 10 years to compensate them for
anticipated inflation.

That may give Carney little room to implement so-called
forward guidance, a policy he has been associated with in Canada
which involves trying to move market prices by telling investors
how long low interest rates will be kept in place. The risks are
that forward guidance either finds little traction or,
conversely, erodes faith in the BOE’s commitment to fighting
inflation.

Opening up a hot front in the currency wars is also not an
attractive option, for Britain or for the BOE. There is
considerable firepower on the other side, as shown by the
willingness of the other major central banks to pursue easy
money policies. As well, Britain, with its consumer-oriented
economy, would suffer more from the high import prices brought
on by a weak pound than it would benefit as an exporter.

Carney, therefore, is going to have a hard row to hoe.
Expectations are high, morale is low and global conditions, with
weakness in Europe and China, are not necessarily developing to
Britain’s advantage.

When the new central banker does land, pressure will be high
to “do something,” especially by subscribers to the Great Man
theory of central banking.

Carney may end up looking back fondly on his pre-BOE days.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

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