Here’s what we learnt about the incoming Bank of England Governor, Mark Carney, in his testimony before MPs at the Treasury Select Committee today, in more or less descending order of importance.
1. This is a man who wants a shake up – and most notably to have the Bank of England’s remit to be reconsidered on a regular basis.
This is perhaps the first and most important takeaway: the Bank has had its inflation target and a more-or-less unchanged remit for more than two decades. The 2% target may well be the best scheme under which it monitors and hence controls the economy, but there hasn’t been a formal move to reconsider it. Mr Carney wants that to change.
2. He doesn’t really want to adopt an NGDP target.
Mr Carney had talked so approvingly of this alternative to inflation-targeting – targeting the total amount of cash generated by the economy, that a lot of people thought he wanted to ditch the inflation target altogether. However, Mr Carney said that while there are plenty of things to recommend nominal GDP as a guide for how much, on a long-term basis, the Bank needs to stimulate the economy, he added: “from what I know given the research I have seen, as I sit here today then flexible inflation targeting, deployed in a different way would remain a superior alternative to a shift in framework.”
3. “Flexible inflation targeting“ could well involve a Fed-style employment target
Mr Carney spoke approvingly of the Federal Reserve’s new so-called threshold guidance – under which it has committed to carrying out more quantitative easing until (in its case) unemployment gets down beneath 6.5%. He also made clear his support for giving long-term guidance on interest rates (for instance, committing to keeping interest rates at a particular level for an extended period of time). Both would represent a major shift in monetary policy in the UK.
4. He wants to distinguish himself from Sir Mervyn King, in terms of leadership style
He talked repeatedly in his lengthy written submission [pdf] to the committee about his consensual leadership style. Although he was careful not to make the comparison himself, some will likely contrast this to the existing Governor’s management style, which some have characterised as dictatorial. Mr Carney told the committee he did not intend to be “an emperor” or a “super-governor” – he characterised himself as a “managing partner”.
5. He is potentially in favour of more quantitative easing
Now, Mr Carney himself didn’t say anything as brazen as the above. He is, after all, a central banker who’s well aware of the risks of publicly committing oneself to a particular policy. However, he got about as close as one can get to doing so, saying that when he “comes to the table”, if the UK economy remains as weak as it is today, “this will merit for a period of time considerable monetary policy stimulus.”
6. He is young and charming
This isn’t an entirely shallow point. The Bank of England has been in dire need of some re-energizing. Its relationship with Parliament has suffered. Many economists are critical of its conduct during the crisis (well, specifically Sir Mervyn’s conduct). The sight of a young (well, by central bankers’ standards), dynamic character like Mr Carney is a breath of fresh air. For me the most significant moment of the hearing today came after it had finished and a number of the MPs rushed over to Mr Carney to congratulate him. And the Committee formally approved his appointment a few hours later. They aren’t an easily-influenced bunch and, in short, he charmed the socks off them. The real question is how long the honeymoon will last.
7. He doesn’t want a “helicopter drop”
There has been a lot of talk recently about whether central banks could go one step further than their current quantitative easing, and help finance a tax cut by printing money. Milton Friedman likened this to dropping cash out of a helicopter, and it’s something the FSA chairman Lord Turner raised in a speech just last night. Well, Mr Carney’s having none of it. He said: “I do not envisage circumstance where I would support that.”
8. He is already having an effect on the Bank of England
Perhaps it’s Sir Mervyn getting demob happy, perhaps the Bank sees the way the wind’s blowing. Either way, the Bank has already, subtly, started to change. And there was rather significant evidence of this today – even as Mr Carney gave his evidence. In its monthly meeting, the Monetary Policy Committee voted to leave interest rates and asset purchases on hold. Normally, unchanged monetary policy wouldn’t merit a formal statement from the committee, but this time around the MPC issued a pretty lengthy explanation for its decision. As I understand it, this was a conscious effort on the part of the Bank to improve how it communicates its decisions. Hitherto we’ve had to wait a fortnight to get the full minutes of each month’s meeting. This is a sign that there may be more instant explanation after each and every decision.
It’s also worth dwelling, for a moment, on one particular sentence from the statement: “Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term.” This is a clear indication to financial markets ahead of the closely-watched Inflation Report next week: don’t expect the Bank to want to start raising interest rates any time soon. You have been warned.