Carney says politicians ‘deflect blame’ by attacking central banks

Posted on November 15, 2016

The Bank of England governor Mark Carney has taken aim at critics of central bankers, saying politicians who focused excessively on the adverse side-effects of monetary policy were engaged in a “massive blame deflection exercise”.

Mr Carney told a committee of MPs that low global interest rates and rising inequality in developed countries were driven by “much more fundamental factors”.

The governor’s remarks come after US president-elect Donald Trump criticised the actions of the Federal Reserve and Theresa May had appeared to question the efficacy of loose monetary policy in her speech to the Conservative party conference, saying the bank’s policies had hurt savers while helping those with assets.

“It’s very important to distinguish between the stance of monetary policy and the reasons why global interest rates are low, the reasons why inequality has increased across major economics” Mr Carney told MPs. “Those are caused by much more fundamental factors. And an excessive focus on monetary policy in many respects is a massive blame deflection exercise.”

Although Mrs May’s comments at the Conservative party conference were initially interpreted as an attack on the bank’s independence, those suggestions were quickly denied by Number 10. Mr Carney declined on Tuesday to draw any parallels between Mrs May’s comments and those of Mr Trump. There is a “different debate” going on in the UK to that happening in the US, he said.

Mr Carney also told MPs that the depreciation of sterling since the referendum in June had been necessary to help address the UK’s large current account deficit.

“The UK economy has … had a large external imbalance and that large external imbalance as represented by a large current account deficit needed to be righted,” he said. “The exchange rate is part of that adjustment mechanism.”

Mr Carney said the UK’s current account deficit, of 6 per cent of national income, was “very large” and “unlikely” to be sustainable.

The BoE forecast this month that the current account deficit would almost halve over the next three years. Mr Carney told MPs on Tuesday: “One of the questions is whether the future relationship with Europe and the rest of the world means that that sustainable level of the current account has gone down.”

Sterling’s fall will reduce the current account deficit by improving the UK’s trade balance.

But it will also have an effect on the UK’s primary income account — increasing the sterling value of foreign investment income received by UK companies and households. The main driver of the increase in the current account deficit during recent years has been the deterioration of the primary income balance, rather than changes in the trade balance.

Mr Carney’s predecessor, Lord King, said last month that the decline of the pound had been a “welcome change”. But Mr Carney declined to welcome the development, saying instead that “the purchasing power of the country has gone down by 20 per cent … The preferred adjustment would have been a surge in domestic productivity”.

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