The Old Lady of Threadneedle Street Has a New Man…and He’s Canadian
On Monday, the Old Lady of Threadneedle Street proved that she’s still got some tricks up her sleeve. The Bank of England (located on Threadneedle Street in London since 1734 – hence the name) shocked almost everyone by announcing that Mark J. Carney had been selected as Mervyn King’s successor as governor of England’s central bank. I say “shocked” because Carney wasn’t exactly the odds-on favorite for the job…and he’s not a British citizen. You see, Carney’s Canadian…in fact, he’s currently the head of the Central Bank of Canada. The man almost everyone thought would be the next governor of the BoE was Paul Tucker, who is currently the deputy governor at the BoE. He’s been at the BoE since 1980, so it’s not too much to say that practically everyone concerned considered him a shoe-in for the job.
This marks the first time in history that a non-UK citizen has been appointed as governor of the BoE, though there have been several U.S. economists who served on the Monetary Policy Committee in recent years. Yet of all the countries the United Kingdom could poach a central bank head from, at least Canada still has Queen Elizabeth II on the C$20 note.
Such a surprising selection hints that the Bank of England is looking for a change in culture and a virtual shake-up in light of criticisms of its internal workings and hierarchy. Clearly, the UK Chancellor desperately wanted Carney – in these times of fiscal austerity, Carney will be receiving a 50% pay rise on his predecessor.
To be clear, Carney is definitely qualified for the job, and despite the shock, the announcement makes sense. With an undergraduate degree from Harvard, and a masters and a doctorate (both in economics) from Oxford, Carney has also worked for Goldman Sachs and Canada’s Department of Finance. He has impressive experience in regulatory matters as Chair of the Financial Stability Board – a big plus since under this new regime, the BoE will have responsibility for banking supervision as well as monetary and financial policy. He also has a reputation for being innovative. It was under his leadership that the Bank of Canada adopted the “flexible inflation targeting” system – constructed in an identical fashion to the Bank of England’s.
The general response from the media and from the finance industry has been positive. Again, Carney’s record is impressive: he has led the central bank of probably the only undisputed AAA sovereign. Canada has performed better than many other developed economies. It has already recovered all the jobs lost in the downturn and the output gap is closing. That’s not to say that the Canadian economy’s health is perfect. Carney will be leaving the country with a record household debt burden not dissimilar to what the United States was seeing a few years ago.
There was no major reaction from UK bond market. As the Bank of Canada does not publish minutes or a voting record of its meetings, it is unknown whether Carney is a “hawk” or a “dove” on fiscal policy. However, there are suggestions that Carney leans to the more hawkish side: unlike the Federal Reserve, Bank of Japan, or the BoE, the Bank of Canada has refrained from introducing quantitative easing or any other “unconventional” monetary policy tools. Instead, Carney raised Canadian policy rates by 75 basis points in 2010 and has since held the policy rate at 1%. Furthermore, the Bank of Canada is the only G7 central bank to be considering raising policy rates.
Carney, who I’ve read will seek British nationality, says that he relishes the challenges of the UK policy-making environment – and it certainly is a challenge. The United Kingdom continues to flirt with recession, it’s facing the greatest fiscal tightening since World War Two, and all this is wrapped up with some stubbornly high inflation. What’s more, the Monetary Policy Committee seems to have lost its way, appearing skeptical about the effectiveness of quantitative easing in increasing demand, but is struggling to come up with alternative options. So Carney’s creative skills will certainly come in useful in his new role.
Though now that the Old Lady has picked herself a new Canadian, there’s still the question of what will become of Paul Tucker; his term as deputy governor expires in February 2014. I hear there’s an opening at the Central Bank of Canada. Tucker could send a CV to Ottawa – throw his hat in the ring, just in case Canada want to start a central banker-exchange program.