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Mark Carney.....new Governor of the BOE, can he do miracles ?

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Mark Carney.....new Governor of the BOE, can he do miracles ?

Post  Panda on Tue 25 Jun - 7:44

Mark Carney: golden chance for return to prosperity beckons
Mark Carney has a golden opportunity to rescue Britain. The incoming Bank of England Governor has the Chancellor squarely behind him, a public desperate for new ideas to bolster the recovery, and a suite of powers to make rival central bankers jealous.

Mark Carney appeared before MPs in February Photo: Reuters

By Philip Aldrick, Economics Editor
7:13PM BST 24 Jun 2013


With no ties to the UK, he doesn’t need to curry political favour or burnish his public image – freeing his decisions from the complications of politics or ambition. The success of his five-year term will be judged by one measure alone: did he lead the UK back to prosperity?
“All his incentives are to get it right,” said Rachel Lomax, the BoE’s former deputy governor. “He doesn’t want to be reappointed. He has no personal ambitions in the UK. He has the opportunity to be brutally honest.”
Carney, the Bank of Canada Governor, will become the third most powerful man in Britain – behind the Prime Minister and Chancellor – when he takes up his new post in Threadneedle Street next Monday.
There, he will be in charge of setting interest rates and overseeing the banks. If he thinks demand in the economy is weak, he can punish savers by keeping rates low. If he thinks credit is too easy, he can make it harder for households or businesses to get a loan. His decisions, alongside fellow BoE policymakers, will have enormous implications for everyday lives.
Yet, Carney is unelected and answerable only to his political masters. Which is why, if he is to make the most of his opportunity, a key challenge will be how he handles Westminster.
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In that respect, he couldn’t have been given a better start, according to Lomax. “George Osborne chased him across the world to give him the job. His major act was to appoint Carney. So he’s got Osborne over a barrel,” she said.
The Chancellor is expected to give Carney anything he wants, to begin with at least. And he appears to have started already. “Almost all chief executives when they take over have a chance to throw out the dirty washing so they can define the baseline on which they are to be judged a success in the end,” Lomax said.
Osborne’s recent handling of Britain’s banks, on which Carney will have been consulted, looks like just such a “kitchen sinking” exercise. Plans to enforce a strict leverage ratio earlier than the global standard, to launch a review into breaking up Royal Bank of Scotland (RBS), and to make UK lenders recapitalise clear the decks for Carney’s arrival.
He may decide to leave RBS as it is and soften the leverage ratio demands, but he now has a platform from which to make a choice.
Similarly, the overhaul of the BoE’s 2pc inflation target – by emphasising “flexibility” in the mandate and introducing “threshold” guidance that will allow it a supplementary target on growth or jobs – gives Carney a clean slate from which to operate policy.
So far, Carney has been in close contact with the Chancellor. If he is to be a success, insiders say, it is vital he maintains that access. Following the bureaucratic chain of command at the Treasury is the path to indecision, they argue.
Relations between the Treasury and the BoE are riven with political rivalry. Never more so than now, since the Treasury’s economics function was denuded when the Chancellor moved forecasting to the Office for Budget Responsibility. In the meantime, the BoE has built a commanding economics department under outgoing Governor Sir Mervyn King.
One senior BoE official compared relations between the two arms of state to “the hundred years war”, with both vying for supremacy. For the moment, the BoE is in the ascendancy. But Carney should not rest on his laurels, the official said. “The best way to get round it [the rivalry] is to go directly to the Chancellor,” the official observed.
Having hailed the 48-year-old Canadian on his appointment last year as the “outstanding central banker of his generation”, Osborne will instruct the Treasury to support him. Politically, senior officials say, Carney will be pushing on an open door.
To make the most of his advantage, he should emulate the Coalition’s early success, and move fast. “This is his best moment,” Lomax said.
While Carney is likely to be given free rein on monetary policy, for threshold guidance or a variation on quantitative easing (QE), he will find politics more of an obstacle with the banks.
Last week’s report from the Parliamentary Commission on Banking Standards said an end to political interference in the state-owned banks was “extremely unlikely ... in the present climate”. The goodwill Carney brings, though, may be able to minimise that for a while.
Carney may maintain a strong relationship with Osborne, but there are other areas where he will have to tread carefully. The BoE’s internal politics is likely to be one of them.
A new Deputy Governor for financial stability will be named soon, following Paul Tucker’s departure, and another for monetary policy recruited when Charlie Bean steps down next year. The Chancellor makes the appointments but Carney will be consulted.
Carney oversaw a similar change of the Canadian central bank’s top brass about two years after taking over there in 2008. But David Longworth, a former deputy governor at the BoC, said it would be wrong to think that he wanted to shake things up. “We had all been there more than 35 years. It was a question of what do you want to do with the rest of your life,” Longworth said. “He didn’t want me to leave.”
Tim Hodgson, a colleague of Carney’s from Goldman Sachs and the BoC, says he will be sensitive to the institution’s 319 year history, claiming he is “too smart to be tone deaf”.
Carney did overhaul some of the BoC’s more archaic habits, updating technology and fully automating databases. David Madani, Capital Economics’ Canadian economist, remembers a story doing the rounds. “He asked for a BlackBerry shortly after getting there and was told, 'We don’t do that here’. To which he said, “Wanna bet?’ ” He faces similar challenges at the BoE, which he is expected to make more transparent and open.
Much has been made of the different way in which interest rate decisions are made in Canada, and the struggles he will face in the UK. In Britain, the individual votes are published and four of the rate-setters are independent. In Canada, the Governor presents a single consensus decision.
Although Carney has not had to face dissenting voices in public before, Longworth claimed he is ready for the British system. “Mark bought into the consensus decision making early on,” he said. “This was not Mark making decisions by himself about where rates should go. It was six people debating the issues. It was a real consensus.”
Perhaps the biggest political risks he faces stem from his personal allegiances. Carney has expressed sympathy for the Occupy movement, arguing it was “entirely constructive” by highlighting economic challenges and an understandable product of the “increase in inequality”. He has also attacked big business for sitting on a huge cash surplus, turning potential growth into “dead money”.
More significant, though, have been his close ties with Canada’s Liberal party, which last year reputedly asked him to consider the leadership. According to a top manager at one leading private equity firm in Canada, some polling it did for internal purposes showed Carney would have catapulted the Liberals from third to first, with a 13 point lead.
Ralph Goodale, the Liberals’ deputy leader and finance minister between 2003 and 2006, when he worked with Carney, said: “That arithmetic wouldn’t have surprised me. Because of his public credibility, and his role internationally.” Asked if he believed Carney would return to Canada for a life in politics, he added: “I think at some point he would be very effective in politics.”
If he does harbour political ambitions, Carney will be aware of the dangers, especially after Sir Mervyn ran into trouble for being “excessively political” in his support for austerity.
Mindful of the mess his predecessor got into, Carney has promised to be studiously neutral. “If fiscal policies are credibly stable, central banks should not have any need to comment on the overall stance of fiscal policy, and they should avoid doing so,” he told MPs last year.
Westminster is about to greet its newest player.
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