Mark Field is the Member of Parliament for the Cities of London and Westminster and currently serves as a member of the Intelligence and Security Committee. Follow Mark on Twitter.
image of Montagu Norman, whose tenure as Governor of the Bank of England
extended virtually throughout the inter-war years, stands in stark contrast. Of course, that was a different era, but Mr Carney (as he now is) arrives with a
reputation – not to mention salary and transfer fee – akin to that of a star
centre-forward moving on from an unfashionable provincial club into the Premier
economies continue to stall, the real risk is that too much hope and
expectation has been placed in Carney’s arrival during the six months since his
appointment was announced. Predictably, much of the coverage over his Treasury
Select Committee appearance in February focused upon his bumper salary package
– expect this to continue, especially if there is no sustained upturn in our
I suspect that in
the key areas of interest rate policy and over quantitative easing the Carney
regime will reflect a faithful continuation of the monetary policy we have had
over the past few years, rather than any change of pace, as has been widely
anticipated. Indeed, George
Osborne was probably most attracted by the prospect of an incoming Governor
prepared to maintain the ultra-low interest rates we have had over the past
four-and-a-half years, along with a willingness to print more money as the main
tool of monetary stimulus.
I have argued
before that the notional independence of the Bank of England already stands
open to question. For over 40 consecutive months now, its inflation target
has been surpassed – this has come to pass as a consequence of political
complicity between the Treasury (both pre and post May 2010) and the Bank.
Whilst the economic case favouring this cause of action can be robustly made,
it clearly flies in the face of an ‘independent’ Bank of England. This continues
to damage its credibility.
However, as we
approach the pre-election season, I can only imagine this complicity continuing.
With the date of destiny with the voters soon upon us and growth at best
spluttering, brave would be the governor who resists political pressure for a
fillip timed for spring of 2015. With the Chancellor making clear that there
will be no shift in fiscal policy, all rests on the Bank’s monetary arsenal –
or what is left of it – to deliver the goods.
Yet while a
combination of loose monetary and tight fiscal policy has usually seemed enough
to jumpstart the British economy in past recessions, a turbo-charged version of that strategy in the near five years
since the financial crisis has merely
kept us in a state of suspended animation. GDP still remains 2.5 per cent below what it
was immediately prior to the crash. Cheap mortgage credit seems to be the only
uplift from the Funding for Lending initiative and will now be reinforced by
Help to Buy, which surely risks reinflating the property bubble. In spite of a
plunge in the value of sterling, our trade deficit is stubbornly high.
money acts only to delay the sort of reform needed to address Britain’s flagging
competitiveness. Both the private and public sectors remain hugely over-leveraged,
with that debt the main driver of continued caution from businesses and
households when it comes to spending and taking on fresh liabilities. Ideally, Mr
Carney would start sketching out an exit strategy that might tackle the
structural roots of our economic sickness. However, since (perhaps
understandably) there is neither the commercial appetite nor political nerve to
allow the bankruptcies and repossessions that would help wipe the economy’s
slate clean, passive restructuring (otherwise known as inflation) will be the
order of the day. Whilst two decades ago, Carney’s native Canada and Sweden
were able to turn around banking crises within three years, that was in an era
of rapid global growth. Such expansion is highly unlikely to assist this time.
Which is why I
suspect kick-starting growth is unlikely to be the central challenge of Mr
Carney’s tenure. Instead, it will be the prospect of diminished living
standards as wages continue to stall and ‘gentle’ inflation continues to be
used as a means of effective debt reduction. No wonder the Chancellor is
encouraging the Bank to take on a broader remit beyond inflation-targeting,
with new powers to target unemployment and aid growth. Mr Carney has also
indicated that he wants to provide businesses and consumers with much better
long term signals or ‘forward guidance’ about the economy, including how long
low interest rates are likely to last (I suspect we can expect silence on the
latter front this side of May 2015).
So as we look
ahead at what a Carney governorship may bring, it would be safe to bet that we
have not yet reached the end of the road with monetary activism, always assuming that the
recent turmoil in the bond markets is not a signal that the central bankers’ room
for this sort of manoeuvre has come to an end. Furthermore, events at both RBS
and the Co-op bank in recent weeks have shown that interference by the Bank of
England and the Treasury, even in the affairs of notionally independent
institutions, is endemic – a situation that will only intensify as the General
looser-still position on interest rates and quantitative easing in a bid to ease
further the value of the pound if growth continues to stall. Expect clearer
communication and a more informal style masquerading as transparency from
Threadneedle Street. Await, even, toying with unconventional ways of stimulating
the economy. The Bank will certainly continue to neglect to keep the lid on
inflation. But if there is one thing that we should neither ask nor expect from
the new man at Threadneedle Street, it is miracles.