By: Andrea Cohen
In November of last year, the Bank of England (BOE) announced that in July of 2013, the current Governor of the Bank of Canada (Canada’s central bank) – Mark Carney will assume the position of Governor of the BOE and replace Mervyn King.
Why did the British government make this decision? Why recruit a non-Briton for the job of leading monetary policy for the UK and why this one? We believe that the answer lies in Carney’s track record and the way the Canadian economy has handled the recent crisis.
There are two main things that the UK government hopes to accomplish with this appointment. The first is a monetary policy that fosters growth and not just price stability. The other is a change to banking regulations.
Envying Canada’s success in avoiding the perils of the financial crisis, the UK is only recently (and in a moderate fashion) starting to see the light at the end of the tunnel. Carney is credited with sharp sense of markets and flexibility in thinking that allowed him to both maintain low inflation and stimulate activity.
Carney, educated in Harvard and Oxford and formerly a Managing Director at Goldman Sachs understood that Canada has reached a point at which inflation expectations were so firmly contained, that it could actually capitalize on that. By lowering its policy rate and announcing that it will remain that low for a long time (at least a year), Carney helped the Canadian economy mitigate much of the stagnation we saw in the US and that we still see in Europe and in the UK. Although things were shaky, Carney’s commitment, together with confidence in low inflation, helped revive the housing market (through the mortgage market) and kept the economy afloat.
This flexibility seems to be missing from the BOE current leadership and policy makers hope that Carney’s innovative measures and lack of fear of change will benefit the UK economy as well.
In addition to being Governor of the Bank of Canada, Carney is also Chairman of the Financial Stability Board (FSB). Skipping a full discussion on the role and mandate of the FSB, we will point out that the fact that Carney heads this body that deals with regulations of financial institutions, together with his track record of keeping Canadian banks out of trouble means that UK policy makers want the same for their banking system.
Carney is a known supporter of controls and transparency of financial institutions. His actions to limit credit risk, promote fairer valuations and separating investment and commercial banking activities made Canadian banks stronger. None of them collapsed or needed massive state bailout like British and American banks and they are now even stronger having the means to do business and seize opportunities that most other banks of these sizes can’t. Recent legislation in the UK gives the BOE more powers and oversight over banks, so Carney will have the authority to implement regulations he sees fit.
There is still plenty of time before Carney takes office at the BOE. Our hope is that the time until then will not be characterized by paralysis, while the BOW awaits the change of leadership and refraining from significant actions because of that.