The man who will take the helm of the Bank of England this summer got off to a good start with a confident and respectful performance in front of the Treasury Select Committee this week. He was the complete opposite of Bob Diamond (former Barclays boss), also a foreign head of a UK bank. Unlike Diamond, Carney was calm, assertive without being aggressive and didn’t do the Diamond faux pas of calling politicians by their first names.
Dr Carney has passed his first test as Governor-elect with flying colours. He has proven he has stamina (he was questioned for nearly 4 hours) and he knows his stuff. He provided 44 pages of thoughtful, detailed answers to the Committee before the questioning began on Thursday.
But is that enough? We already have an intellectual academic at the head of the Bank in the form of Mervyn King, he also knows his stuff inside out but that hasn’t helped the UK’s economy to grow or inflation to fall. We need a central bank governor who will turn the economy around; the question is whether Mark Carney is up to the job?
The key message from his testimony is that Carney wants the Bank to continue to target inflation. Bear with me here, all that means is that the Bank will still concentrate on “maintaining price stability”, the most over-used phrase in central banking.
This is exactly what the Bank of England does now. Where Carney appeared to differ with the current stance at the Bank of England is that he believes the Bank should be more flexible in its approach. For example, rather than the emphasis being on inflation remaining around the 2% target at all times, under Carney it may be possible to have slightly higher or lower inflation depending on the economic climate.
This could make Carney’s life easier, in that a flexible target would mean he may not need to write letters to the Chancellor if inflation rises above 3% this summer. However, one could argue that we have lived through higher inflation and weak growth: Since November 2009 prices have remained above the 2% target rate.
Higher prices and stagnating wages have not done much to boost confidence in the economy or growth since then. If Carney is going to formalise the current situation, it should be a concern for the public.
Carney’s appointment as head of the Bank of England has been met with enthusiasm and interest by the media. He is a very well respected central banker who has managed Canada’s economic recovery since the financial crisis, and presided over growth levels we could only dream of.
The Canadian economy has grown on average by 2.2% YoY since the second half of 2009; in contrast the UK has grown just 0.5% on average in the same time period. This doesn’t mean that Carney is a better central banker than King; he didn’t have to deal with the implosion of the Canadian banking system or an economy that places so much emphasis on financial unlike King.
Canada is also better placed to weather the eurozone sovereign debt crisis and is a commodity exporter, which has helped its economy to remain on track in the last few years. Success may be harder for Carney to achieve in the UK.
He may be more photogenic than King (sorry Mervyn), but from what I can see the reason why the politicians like him so much is that he seems to be more of an optimist and they want some of what Canada has got – solid growth rates. Sadly, Carney on his own can’t transform us into a resource-rich exporting powerhouse immune from the effects of European crises.
But Carney’s optimism could be a powerful tool. French writer Gustave Flaubert wrote: “There is no truth. There is only perception.” If that is true then Carney could be a success at the Old Lady. If he can smile through the bad news, something that King has been unable to do, maybe we’ll believe he can make things better and go out and spend.
Carney has his work out for him at the Bank of England, what he might not have realised when he agreed to take the job is that he will need to be part Svengali if he wants to kick-start the UK’s battered economy.