By William Schomberg
LONDON, April 18 Mark Carney is gearing up for
what some have called a mission impossible: turn around
Britain's ailing economy, fix its banks and lead an overhaul of
the Bank of England.
Currently head of the Bank of Canada, Britain's finance
minister called Carney "the outstanding central banker of his
But he may struggle if he pushes for quick change at the
BoE, despite its dramatically expanded powers.
A first challenge for the BoE's only foreign governor in 319
years will be to temper expectations when he starts in July.
"Wanted, a new governor of the Bank of England. Only
superhumans need apply," was how Ed Balls, an opposition Labour
party lawmaker who was at the heart of the decision to give the
bank control of interest rates in 1997, put it last year.
Britain may have slipped back into recession. Policymakers
are split over what to do next and the government insists it
will not spend more to get growth going again.
Carney has said his role would not be "a super governor
position" and he would work with fellow policymakers to tackle
"the immense challenges" ahead for the $2.5 trillion economy.
The 48 year-old has already had a taste of what he can
expect from Britain's media when newspapers splashed details of
his pay and benefits worth more than 850,000 pounds a year.
That kind of deal may seem normal to a former Goldman Sachs
banker like Carney. But it contrasts with the mood across much
of Britain, which is three years into an austerity programme,
and adds to the glare of the spotlight on him.
Unusually for a central banker, Carney may also have to
contend with speculation that he has ambitions to enter politics
one day, something he had to deny categorically in November.
Yet Carney's appointment has been widely welcomed and former
policymakers say his can-do style will give the BoE new impetus.
He has signalled his preference for giving clear guidance on
where monetary policy is going - something long opposed by the
man he will replace, Mervyn King.
Carney can also help reshape the bank's upper echelons over
the coming year when two of his deputies are expected to leave.
Britain's finance minister George Osborne, whose austerity
plan is running behind schedule and looks unlikely to return the
economy to full health before the 2015 elections, is certainly
hoping he will rise to the challenge.
But it remains to be seen whether the new governor can win
support from the BoE's independent policymakers for change.
Four of the nine Monetary Policy Committee(MPC) members are
"external" members who are expected to balance internal thinking
within the bank known as the "Old Lady of Threadneedle Street."
John Gieve, a former deputy governor, thinks Carney can
muster support for a new approach.
"He is coming in as a leader. He's a confident guy. He's an
experienced central banker who knows the patch and a few of the
senior people at the Bank of England already," he said. "Many at
the bank will welcome a change, but for an institution which has
been run by insiders for 20 years it will be a big shock."
CHANGE OF THE GUARD
The BoE has been dominated by King for two decades, first as
its chief economist and then governor. He pioneered the
inflation-targeting system now widely used by many countries.
For much of that time, Britain enjoyed growth. But the good
times were fuelled by growing debt that plunged the country into
its deepest economic crisis since the Great Depression.
Osborne, once close to King, has shown signs of frustration
that the BoE has not lived up to his hopes of "monetary
activism" that would help offset his spending cuts.
The bank has kept interest rates at a record low of 0.5
percent for four years and spent 375 billion pounds on
government debt, or a quarter of gross domestic product, far
more than the U.S. Federal Reserve by that measure.
Still the economy remains stagnant and Osborne has made
clear his desire for more action from the central bank.
Just in time for Carney's arrival, Osborne reworded the
bank's mandate, keeping the 2-percent inflation target but also
opening the door for possible new attempts to revive growth.
But Carney will find it harder to push through changes than
he did in Canada. King has failed to get support from
policymakers for more bond-buying in recent months, a stand-off
hard to imagine at other big central banks.
Making a commitment to keeping British interest rates rock
bottom for a set period - a relatively modest option by the
standards of post-crisis policy-making - would be a challenge.
The Bank of Canada did just that under Carney in 2009 at the
height of the financial crisis, burnishing his reputation as a
creative thinker. But the decision was taken by Carney and his
deputies, with no need to get external policymakers on board.
Carney is believed to have used a visit to London in late
March to sound out some of the external members of the MPC.
"In the UK, policy can change with the shift of one or two
votes on the MPC," said Andrew Sentance, a BoE policymaker
between 2006 and 2011.
"When the MPC is divided on policy - as it is at present and
has often been over the course of its history - forward guidance
could be quickly undermined by a shift in the views of a
minority of MPC members."
Osborne has told the bank's top policymakers to report back
to him in August, a month after Carney's arrival, on the merits
of steps taken by the U.S. central bank to convince markets that
its massive help for the economy won't be reined in quickly.
The Federal Reserve said in December it would keep interest
rates near zero as long as unemployment remains above 6.5
percent and inflation expectations do not hit 2.5 percent.
Osborne has asked what indicators might work in Britain.
Rob Wood, a former BoE economist, said some MPC members
might be open to specific guidance, having signalled they will
ignore above-target inflation while wage pressures remain weak.
The response to Osborne gives Carney an early chance to get
the bank behind a broad agreement that guidance can help
underpin an economic recovery before he tries to thrash out
specific thresholds, possibly based on wage growth, he said.
"It's very unlikely to be a big bang but it could be a
staging post for that change," said Wood, who now works for
Even if Carney can secure a commitment to keep stimulus in
place, there are doubts about how effective that would be.
"People are not expecting an interest rate increase for two
to three years so the question arises: what more are you trying
to persuade people of?" said Simon Hayes, a Barclays economist.
Carney might also be tempted to change the bank's Funding
for Lending Scheme which has increased mortgage lending but has
not had a big boost on loans flowing to small businesses.
Carney suggested in February he might favour ramping up the
FLS. It gives banks and building societies access to cheap funds
if they keep or raise lending to households and businesses.
Another way to help growth would be to relax capital buffers
British banks must set aside above global minimum requirements,
even if that would be a gamble against a surge in defaults.
In any case, many bankers say low levels of lending are
really due to worries among businesses that there might not be
enough demand from consumers to justify higher borrowing.
Carney has also suggested he would consider expanding the
central bank's government bond-buying programme to other assets.
The Fed has been buying mortgage-backed bonds for years to
try to help the housing market, a pillar of the U.S. economy.
Sam Tombs, an economist with Capital Economics, said while
the BoE might consider steps such as buying equities as radical
options to kickstart growth, it was more likely it would stick
to buying gilts, possibly increasing the pace to hold a total of
500 billion pounds by the second half of next year.
While most attention is focused on how Carney might try to
revive the British economy, his biggest test maybe when the time
comes to wean it off emergency support.
"This is the real challenge: how to manage rising interest
rates and the impact on households who could really suffer,"
said Mark Garnier, a Conservative member of a parliamentary
committee which scrutinizes the BoE.
There are high hopes that Carney's experience and interest
in banking - a contrast with King - will dovetail with the BoE's
new powers for overseeing the City of London which is still
reeling from the financial crisis.
Carney will continue to serve as head of the Financial
Stability Board which sets rules for banks worldwide. His
experience at the FSB shows he has a no-nonsense approach to
complaints from bankers about reforms. In 2011, he clashed with
the head of JP MorganChase, Jamie Dimon, over new capital rules.
"This is a significant change," said Gieve, the former BoE
deputy governor. "Carney is more knowledgeable and interested in
finance than King who hasn't disguised his low opinion of
Critics of King say his disinterest in the banking system
meant the BoE did too little to tackle the build-up of risks
that caused the financial crisis. A London banker said top
executives had scarcely met with King beyond formal gatherings.
BoE officials have countered such criticism by saying the
bank was not directly in charge of monitoring banks in the
run-up to the crisis.
By contrast, Carney sharpened the focus of the Bank of
Canada on the links between the banking sector and the economy
and earlier this year he said a lack of trust in banks "deepened
the cost of the crisis and is restraining the pace of recovery."
The BoE's new powers to ensure banks, insurers and building
societies hold enough capital, curb bonuses and monitor risks,
such as property bubbles, gives Carney a chance to leave his
mark on a sector that is key to Britain's recovery hopes.
But given the scale of the central bank's increased power,
there is a risk of overreaching.
"There is a massive management challenge," said former MPC
member Sentance, saying Carney must delegate to his deputies.
"If the governor sits there trying to manage all these
things himself, which is closer to the current governance style,
you're going to struggle."