Mark Carney: a tenure of inertia
The starting gun has been fired to seek out Mark Carney's successor as Governor of the Bank of England (BoE), but he will nevertheless remain in his post until January 2020. It represents a seven-month extension on his planned tenure, with Chancellor Philip Hammond describing the decision as instrumental to 'support a smooth exit' from the European Union.
Yet as the likelihood of a no-deal Brexit recedes, the focus is shifting ever more towards Carney's original remit: monetary policy. In his time as Governor, Carney has overseen a quite-extraordinary period. In 45 Monetary Policy Committee (MPC) meetings reviewing base rates, the nine-strong contingent have held them on 42 occasions. The first shift was a quarter-point cut to new record lows of 0.25 per cent back in August 2016, while this has been offset by two quarter-point increases since.
A loss of trust
In decades past, such a track record for someone in this role would have been unthinkable. However, these are not ordinary times, and it certainly isn't Carney's fault that he inherited a national and global economy reeling from subdued growth, tighter fiscal policy and weak inflation. Indeed, it is controlling the latter which is his primary raison d'etre, and, for the most part, he has been within range of the BoE's 2 per cent target since entering Threadneedle Street back in 2013.
Nevertheless, it's a record which, in itself, would hardly have investors on the edge of their seats each time the MPC congregates, and goes some way to explaining why Carney's attempts at convincing markets that borrowing costs will need to rise in the near term have yet to be priced in. Or, as he put it a fortnight ago, a need for ‘more, and more frequent, interest rate increases than the market currently expects.’ As it happens, traders are expecting interest rates to remain as they are at 0.75 per cent for the rest of the year, with just a solitary quarter-point rise before 2022.
And it isn't just a history of numbers which has numbed market expectation of a rate increase. For traders, it's a message they've heard countless times before from Carney, with his failure to follow through on most occasions earning him the unwanted tag of 'unreliable boyfriend'.
The impact of policy is as much down to expectation as it is the actual decisions that are made. The result of such market scepticism is that if Carney were to now actually increase rates, the unexpected nature of it risks greater ramifications. In that respect, it almost represents a loss of control, with the central bank having to rethink its strategy as a result of what traders are communicating, rather than the other way around.
The new normal
Perhaps one legacy of the Carney era which may be rued is the fact that record-low rates have become the new normal under his watch. Many young adults and first-time buyers will not have consciously known a world where base rates exceeded even 1 per cent – in stark contrast to those who endured double-digit interest rates back in the 1980s. It ultimately leaves us in a situation where saving is discouraged, given the derisory rates of return, while borrowing is encouraged, owing to the plentiful supply of cheap money. All of which is understandable immediately after a major recession, but surely there comes a point where this (im)balance needs to be re-calibrated?
The UK economy has grown in every single quarter during Carney’s reign. Both wage growth and inflation have had their dips, but, for the most part, have enjoyed a positive trajectory. Since 2016, inflation has largely exceeded the Bank’s 2 per cent target too. While there has been a strong ‘cost-push’ element to this with the devaluation of sterling, this in itself would make a strong case for policy tightening, given the likely strength to the currency that would ensue.
For all the foreboding in recent years, our economy has continued to show a robustness which is the envy of many other international policymakers. Yes, growth has hardly been exceptional, while the global economy doesn’t exactly provide a booming backdrop. But in this post-crisis era, if a perfect set of circumstances is the yardstick, then the MPC might be waiting a long time before they ever sanction policy tightening again. Besides, how much harm would a series of well-communicated, gradual quarter-point increases have done over the past five or six years?
Of course, rate rises have consequences of their own, most notably for borrowers with variable-rate debt. But let us not pretend that the present inertia is risk-free. We find ourselves a decade into the current economic cycle, and it is therefore a statistical likelihood that a recession is in store over the next five years. But what headroom will Carney’s successor have in such a situation? What extra stimulus could be provided, without entering the damaging realm of negative interest rates?
There may be a cocktail of storm clouds circulating at the moment, not least the continued threats of trade protectionism, ballooning Chinese debt, the Italian banking crisis, Brexit and more – but these aren’t going away anytime soon. If the markets are indeed correct, and we find ourselves with BoE rates of just 1 per cent by 2022 – a whole 13 years into the economic cycle – then policymakers are on course to put themselves in a considerable bind.
And in the meantime, it is hard-working savers who will pay the price. Little wonder then that savings rates across the country continue to tumble. And who knows what awaits indebted households, who will likely have to endure more rapid rate increases sometime in the future as a direct result of the Bank’s current failure to act. He may have done plenty of good work, and be considered a safe pair of hands in some quarters. But, at household level, this is how Carney will be remembered by many.
It isn’t too late for him to set the wheels in motion for a better legacy, and steer monetary policy onto a healthier course. But, for the Canadian, time is now running out – as are his powers of persuasion over financial markets.
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