Bank of England Governor Mark Carney has been the only "adult in the room" since the British vote to quit the European Union, former BoE policy maker Danny Blanchflower says. It's an assessment many would agree with. Unfortunately, Mr. Carney looks like he may be planning a Brexit of his own.
British Prime Minister Theresa May, former foreign secretary William Hague and former justice secretary Michael Gove have all made comments in recent weeks that undermine the central bank's cherished independence. Mr. Carney has been roundly chastised for his gloominess both before and after the referendum on EU membership. Serious political magazines are even speculating that Treasury Select Committee member Jacob Rees-Mogg, one of his most outspoken critics, might be his replacement.
Mr. Carney says he'll decide by the end of the year whether he'll leave the BoE in 2018 or serve the full eight years of his term until 2021. But during testimony to a House of Lords committee this week, he dropped a hint that he's already decided to go. Asked about the BoE's attitude to a particular policy path, Mr. Carney had this to say: "I don't want to bind … [long pause] … the Bank of England two years' hence."
I'd bet my lunch money that he hit the pause button because he was about to use the time-honored phrase "I don't want to bind my successor." That would suggests he expects to have a successor within two years.
Mr. Carney was at pains to stress that should he leave it will be an "entirely personal decision."
But he sounds distinctly like he is preparing the ground for a departure while trying to minimize the potential aftershocks. It's not just personal considerations about where Mr. Carney wants his kids to go to school that will influence his choice. Nor will it be a simple desire to get away from the back-seat drivers and sniping from the sidelines. And then, there is the economy.
The day after the Brexit vote, Mr. Carney held an emergency televised press conference, pledging an extra £250-billion ($305-billion U.S.) of financial support for the financial system. David Cameron had already resigned as prime minister; there was a risk of Britain being leaderless for months, and the pound was already in a free-fall. Looking statesmanlike, Mr. Carney sought to reassure traders and investors that the central bank had done its homework and stood ready to intervene to ensure financial stability. For the rest of the day, the pound held steady.
Nevertheless, Mr. Rees-Mogg has suggested Mr. Carney isn't fit for office. "On every occasion, he wants to talk down the economy and find doom and gloom, which doesn't seem to me to be the job of the governor of the Bank of England. He never seems to want to recognize the result of the referendum and get on with it. It looks like he is a sore loser."
Yet, predictions from economists in the private sector reinforce his pessimism about Britain's economic outlook. The accusation that his despondency is somehow part of a "Project Fear" to reverse the referendum decision is unfounded.
What does seem clear is that the perceived assaults on his independence are contributing to the pound's persistent weakness and the accompanying rise in British government bond yields. Asked what would happen if central-bank independence was subverted, Mr. Carney said: "If it were to be called into question, one would expect to see a risk premium for U.K. assets." And asked if he's seeing anxiety in financial markets, he said "markets have taken note of the comments."
Britain's 10-year borrowing cost has doubled since mid-August to about 1.15 per cent. The pound dived below $1.21 on Tuesday, and is down 17 per cent against the U.S. dollar this year. Goldman Sachs reckons that leaves British currency still overvalued by as much as 10 per cent; if Mr. Carney announces he's leaving, I'm pretty confident sterling won't remain overvalued for very long.
The government seems to be belatedly recognizing the risk of its central bank chief walking away. My Bloomberg News colleague Svenja O'Donnell reported this week that the Prime Minister's Office sought to reassure Mr. Carney that Ms. May's criticism of the "bad side effects" of monetary policy in a speech this month was clumsy, and that she wants him to remain. I suspect such overtures are too little, too late.
When Mr. Carney took over at the Bank of England in 2013, Avery Shenfeld, the chief economist of Canadian Imperial Bank of Commerce, described him to me as the Ringo Starr of central banking: "He may not be the best drummer in the world, but he's joining the best band."
Back then, the economy was humming at a sufficient pace for Mr. Carney to warn in June, 2014, that interest rates might have to rise. Post-Brexit, he's presided instead over an emergency rate cut. Socially, politically and economically, Britain no longer looks like the harmonious nation he migrated to from Canada.
If he goes prematurely, the government will have only itself to blame.
Staying the course
The Bank of England will likely sit on its hands next week. That's according to the latest Bloomberg survey of economists, who see better-than-anticipated growth and faster inflation providing a recipe for policy inaction after the Monetary Policy Committee lowered interest rates in August for the first time in seven years. The central bank announces its decision on Nov. 3, when it will also publish new forecasts.
With the economy weathering the Brexit vote better than many had expected – and creeping inflation pinching Britons' wallets – the BOE will likely keep all elements of the stimulus package it unveiled in August unchanged, economists say. In response to Britain's decision to divorce from its biggest trading partner, the BOE cut benchmark borrowing costs to a record low 0.25 per cent and restarted its bond-buying program.
The central bank had expected growth of just 0.1 per cent in the third quarter in its August forecasts, which it later revised up to 0.3 per cent. Figures published Thursday showed expansion of 0.5 percent in the period, driven by the dominant services industry, meaning the BOE's growth estimates for this year will likely be revised up.