x Abu Dhabi, UAEMonday 24 July 2017

Bank of England governor Mark Carney will look to Japan for lessons on half measures

Mark Carney begins his job as the governor of the Bank of England tomorrow with no lack of admirers and no shortage of advice from the financial world.

Mark Carney, the new Bank of England governor. Patrick Doyle / Bloomberg
Mark Carney, the new Bank of England governor. Patrick Doyle / Bloomberg

Mark Carney begins his job as the governor of the Bank of England (BoE) tomorrow with no lack of admirers and no shortage of advice from the financial world.

Some of that advice, contained in a torrent of words from commentators about his prospects as he prepared to leave the equivalent post in Canada, came with muscle.

One obvious test of the new regime will be the development of a new relationship between the BoE and the European Central Bank (ECB).

Euro-currency states are often irritated when Britain, determinedly hanging on to sterling, sticks its nose into single-currency affairs, especially during the deep crisis afflicting the euro zone in recent years.

Nicolas Sarkozy, in the dying months of his French presidency, pointedly told the British prime minister, David Cameron, he had "missed a good opportunity to shut up" over euro-zone policymaking.

But there is growing recognition that a good understanding between these two great banking institutions is important as Europe as a whole seeks a rosier future.

Mr Carney has already given strong indications on how he feels Europe should proceed.

In his final speech as the governor of Canada's central bank, he warned that without major reform, Europe faced a decade of stagnation.

He commended the Japanese model of encouraging growth as one Europe ought to follow. "Europe can draw lessons from Japan on the dangers of half measures," he said.

Japan launched a huge programme earlier this year in which trillions of yen are being pumped into the purchase of bonds and securities in an effort to stimulate its economy by doubling money supply.

Mr Carney talked of a "bold policy experiment", the success or failure of which would have a marked effect on the world economy in coming years.

Sharon Bowles, a British member of the European parliament who chairs its economic and monetary affairs committee, will use her first contacts with Mr Carney to urge his cooperation with the ECB in devising a common rule book.

The UK has been cool on this idea because of fears it might be "a bit too dictatorial about some of the things and not allow enough flexibility".

Ms Bowles told CentralBanking.com the good relationship between the BoE and the ECB that she considered "crucial" had not always existed.

"I think they need to be partners a lot more," she said.

Mr Carney inherits a landscape in which BoE interest rates, 0.5 per cent for more than four years, stand at a historic low and the 319-year-old institution - older than any other central bank except Sweden's Sveriges Riksbank - now accounts for a third of the UK's national debt.

More than one analyst has pointed out Mr Carney, in common with the man he succeeds, Sir Mervyn King, has only one vote out of nine on the BoE monetary policy committee (MPC), which decides interest rates. The vote may not always go his way any more than it did Sir Mervyn's.

The outgoing governor was overruled again in his final interest-fixing meeting in June when his call for a £25 billion (Dh139.6bn) increase in Britain's quantitative easing programme, the device used by central banks to stimulate economies, was defeated by six votes to three.

"Members of the MPC old and new are lining up to say Mark Carney can't work miracles," Adrian Ash of BullionVault wrote in Britain's Daily Mail newspaper. "I doubt that's news to him. "

The comments were specifically a reference to the outlook for savers - poor, according to Mr Ash - but can be applied more generally to the tasks facing Mr Carney on the domestic and European stages.

When the BoE again held its base rate at 0.5 per cent this month, a BullionVault chart showed this to be the 58th month in which the rate had lagged inflation, Sir Mervyn's 10 years in charge having coincided with retail prices rising 38 per cent.

"Mr Carney will go from a resource-rich economy, with government debt forecast to start falling next year as a proportion of GDP, to having to fund a rising debt burden, with the banks still on life support, and the economy as a whole spending over 4 per cent more than it earns for the next 3 years running on the current account," said Mr Ash, spelling out the task ahead.

However, some observers expect the newcomer's influence to rise if he displays, as predicted, a bolder outlook on economic recovery.

"We suspect that he will be able to carry a majority of MPC members with him should he favour more help for the economy - which we believe he will unless there is sustained clear overall improvement in the data over the coming weeks," said Howard Archer, of IHS Global Insight.

It remains to be seen what reforms Mr Carney can force on British financial institutions.

"When Mr Carney leaves the BoE in five years, if he can plausibly claim Britain is at the beginning of the end of banking reform, he will have justified his appointment," wrote the Financial Times.