Bank of Canada Governor Mark Carney is getting an early taste of what it will be like plying his trade under the eyes of London’s notorious press corps.
There was no talk of “abandoning” the inflation target in the speech I read.
What Mr. Carney did say was that in exceptional circumstances a clear pledge by a central bank to achieve an economic outcome other than mild inflation could potentially generate faster economic growth.
A popular choice of regime among academics is dropping the inflation objective in favour of targeting a certain level of nominal gross domestic product. Mr. Carney cast serious doubt on the efficacy of a nominal-GDP target in normal times. But he said the approach could work in a crisis, if a central bank had dropped its benchmark rate to zero and was out of conventional options.
Since that describes the state of play in Britain, one can see why such utterances by the future king of monetary policy would be cause for excitement. However, that excitement should have been curbed by the very next paragraph in Mr. Carney’s speech.
“Of course, the benefits of such a regime change would have to be weighed carefully against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework,” Mr. Carney said.
I’m guessing that Mr. Carney was quite deliberate in adding that statement. And here’s why: While people like me will refer to him as the king of British monetary policy, he knows that on the Bank of England’s monetary policy committee he is simply first among equals. The committee consists of nine members, and each has a vote that is recorded and published in the minutes of each meeting.
It’s not unheard-of for the Bank of England governor to end up on the losing side of policy decisions. The Federal Reserve’s Federal Open Market Committee also holds votes, but the tradition is that the chairman wins. No such convention exists at the Bank of England. (At the Bank of Canada, the governor truly is king, as he or she is the only central banker with legislative authority to affect monetary policy.)
Mr. Carney didn’t get into any of this in his speech on central bank guidance. But he could have. As Bank of Canada Governor, Mr. Carney can contemplate a communications strategy knowing the public likely will accept it. Why? Because the public knows that he’s the boss. Same at the Fed. While U.S. policy-making can look chaotic, financial market participants tend to appreciate that they can get a good read on what the Fed thinks by listening to chairman Ben Bernanke and his two closest deputies, New York Fed president William Dudley and Federal Reserve Board vice-chairwoman Janet Yellen.
The culture at the Bank of England is less clear cut.
Not only are deputies independent, but some rotate off the committee every few years. That complicates any shift in policy guidance in Britain. For guidance to work, the public has to buy in. So if the policy committee is of more than one voice, the public reasonably would question the governor’s ability to follow through on his or her pledge.
“The ability to anchor inflation expectations, supervise financial institutions and to stabilize the British economy depends to a surprising extent on the persuasiveness of the governor,” Adam Posen, the American economist who left the British central bank’s policy committee earlier this year at the end of his three-year term, wrote in the Financial Times.
So I doubt Mr. Carney seriously is contemplating “abandoning” the Bank of England’s inflation target, at least as long as he’s still governor of the Bank of Canada. And there’s no saying whether he will push for it when he arrives in London in six months. If he couldn’t muster broad support on the policy committee, there would be little point.