Carney set to steer BoE through Brexit

Posted on September 23, 2016

Bank of England Governor Mark Carney holds a new plastic £5 note as he visits Whitecross Street market in London. PRESS ASSOCIATION Photo. Picture date: Tuesday September 13, 2016. The polymer fiver is said by the Bank of England to be cleaner, safer and stronger than paper notes, lasting around five years longer. See PA story MONEY Banknote. Photo credit should read: Jonathan Brady/PA Wire©PA

Clear vision: Mark Carney holds a new plastic £5 note as he visits a London street market in September

Officials in Whitehall and at the Bank of England are increasingly confident that Mark Carney will stay on as central bank governor until 2021 to help Britain deal with the economic and financial challenges of leaving the EU.

The governor has said he will announce this year whether he will leave the BoE in 2018 or serve a full eight-year term until 2021. The talk among officials close to the governor is that the Philip Hammond, the chancellor, will be spared the task of searching for a replacement next year.

    Mr Carney’s calm response to the referendum result has won plaudits from Remain supporters and some ardent Brexiters, leaving the governor in a strong position to influence Britain’s strategy in negotiating its withdrawal from the EU.

    Immediately after the referendum, it was thought that the Brexit vote would encourage him to leave early in 2018 after five years in the job — as he had indicated was his preference when appointed in 2013.

    Mr Carney was sunk into gloom after the June 23 vote, having warned publicly on the economic risks of leaving the EU and viewing his role for the next two years as trying to patch up the fortunes of a diminished country. He has described the 24 hours after the referendum as his “toughest day” in the job.

    However, BoE insiders say the governor’s mood has brightened considerably, while he has won approbation in the City and at Westminster for his calm handling of the immediate fallout from the vote.

    Even MPs who had been publicly critical of the governor’s warnings on the risks from Brexit have applauded his handling of the nervous days in late June and early July. Steve Baker, a member of the Commons treasury committee, praised Mr Carney for showing “great statesmanship” in acting so swiftly to calm the markets after the vote, including cutting interest rates to 0.25 per cent.

    Mr Carney original intention to serve five years reflected his belief that was the time he would need to help complete the repair job after the financial crash and to leave Britain on a stable footing. He also said it would be a natural time to depart in the interests of his daughters’ schooling.

    With his family settled in London, the governor first opened the door to completing a full term in an interview with the Financial Times last year.

    The Brexit vote has given him a new policy challenge: although the initial fallout from the referendum was less severe than many had predicted, the BoE and Treasury believe jitters could return when exit talks actually begin.

    Podcast

    Markets v economists — who was right about Brexit?

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    Before the June referendum, economists warned a vote to leave the EU would tip the UK economy into recession. But Britons kept spending and the markets recovered. Chris Giles and Roger Blitz ask who was right — the gloomy economists or the upbeat markets?

    “In the absence of anyone else showing much economic leadership, this gives him a chance to shine,” said one Whitehall official. “He quite likes the media opportunities his current job gives him on the world stage.”

    Although the governor is keeping his cards close to his chest, the expectation among officials at Threadneedle Street is that he will now see through his tenure until 2021. He does not need the approval of the chancellor or parliament to stay on because his appointment was for eight years. It was only a government press notice that revealed he “indicated he intends to serve for five years”.

    The BoE said: “Nothing has changed. The governor has said he will make his decision public by the end of the year.”

    Other calculations have come into play. The election last year of Justin Trudeau as Canada’s prime minister has closed off, for the time being at least, any thoughts Mr Carney might have had of returning home to pursue a career in politics at the top of that country’s Liberal party. “There is nowhere else for him to go at the moment,” said the Whitehall official.

    Meanwhile, the decision by Minouche Shafik, deputy governor for markets and banking, to leave the BoE in February to become director of the London School of Economics is seen as another hint that Mr Carney is planning to stay until 2021. “Minouche would have been a frontrunner to succeed Carney in 2018, so it is quite interesting that she has decided to leave now,” said one Treasury official.

    Carney’s interventions

     

    Forward guidance 1 (2013 version) Mark Carney’s big idea on becoming governor was to say he would not consider raising interest rates until unemployment had fallen below 7 per cent. That guidance was worthless as the threshold turned out to have no bearing on monetary policy.

    Forward guidance 2 (2015 version) In the summer of 2015, the governor said the question of raising interest rates would come “into sharp relief” by the end of the year. It did not.

    The kindness of strangers Mr Carney warned in early 2016, as the EU referendum campaign was gathering steam, that Britain relied on the “kindness of strangers” to finance its current account deficit, highlighting one of the enduring risks of Brexit.

    Recession warning In May, the BoE governor said leaving the EU might cause a mild recession. His words caused anger among Brexiters but were more measured than the simple use of the “R” word. The BoE is still concerned but a sharp slowdown in growth.

    All the necessary steps Following the vote to leave the EU, Mr Carney announced a package of measures to reassure markets on the morning of the result, pledging to take “any additional measures” necessary for stability. That has been credited with calming financial markets quickly.

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