Mark Carney’s testimony to the treasury committee of the British House of Commons on Thursday was followed by a strengthening of the pound, which was up 0.24 per cent vis-à-vis the U.S. dollar. If this was no mere coincidence, it was not primarily an indicator of the success of the performance at Westminster of the present Governor of the Bank of Canada and future governor of the Bank of England.
Rather, Mr. Carney had previously given an impression that he would take the Bank of England in a more stimulative, loose-money direction, which would have tended to lower the value of the pound. His presentation to the treasury committee, however, reasserted his commitment to flexible inflation targeting of the kind he had adhered to in Canada. Consequently, the foreign-exchange markets raised their expectations for the British currency.
The emphasis of Mr. Carney’s thoughts has indeed shifted, but not really its substance. In December, he gave a speech to the Toronto society of financial analysts, on the normally less than headline-making subject of “forward guidance” in financial statements. By that time, his hiring as the governor of the Bank of England had been announced. Toward the end of the speech, he managed to connect nominal GDP targeting – a technique of monetary policy – to the topic at hand.
He apparently intended to send up a trial balloon to be spotted far away in Britain, and the British took it as such. Nominal GDP targeting is a policy that would seek economic growth by making up for lost time in a downturn – more expansive than the “accommodative” stimulation Mr. Carney has pursued in Canada. Britain, however, has had a harder time than Canada since 2008, with two recessions (a “double-dip”); it was plausible that he might favour somewhat more radical measures in his new job.
At the treasury committee this week, Mr. Carney confirmed that he had wanted to raise discussion about NGDP, but he made clear his preference for continuing with flexible inflation targeting. Indeed, back in December, he pointed out NGDP’s drawbacks, too. By now distancing himself explicitly from that policy, he showed his agility in the politics of central banking – and incidentally gave a small boost to the British pound.