Mark Carney facing competing demands as he starts his first day at the Old Lady

1st July 2013


Mark Carney will be greeted with a host of competing agendas, predictions and demands as he settles down at his desk at the Bank of England this morning.

Mike Amey, a managing director at the world’s largest bond fund manager Pimco says that the new Governor will probably want to oversee a devaluation in the level of sterling by between 10 and 15 per cent, a level he sees as feasible as the Telegraph reports.

“I think a lot of what Mark Carney is going to do – clearly he’s not going to state this upfront – is to try and keep sterling certainly from going up and, probably, he’s going to want to see it go lower”, he told the paper.

Another view is that Carney will not have all that much freedom given the state of the economy, the level of debt – both government and personal – and of course the fact that the Governor must also pay heed to the opinions of the Bank of England’s Monetary Policy Committee.

Interest rate decisions are by majority vote not just the say so of the Governor and individual opinions have been encouraged.

Last week, Mindful Money reported Schroders’ view that Carney would still have to convince the other members of the MPC if he wanted to embrace what it called monetary activism. The committee have, of course, voted down Sir Mervyn King on increasing quantitative easing on five occasions to date.

In his note, Schroders European economist Azad Zangana also listed eight other possible polic options.

1.    Increasing QE;

2.    Restarting corporate debt purchases;

3.    Buying assets backed by residential mortgages, either from the secondary market, or from the government in the future;

4.    Cut the main policy interest rate further from 0.5%;

5.    Cut the deposit rate for banks, taking it into negative territory;

6.    Introduce supplementary targets (e.g., the unemployment rate like the Fed);

7.    Cancel current holdings of government bonds, effectively making QE purchases a permanent give away;

8.    Through the Financial Policy Committee, lower capital requirements for banks, and therefore encourage more lending.

Turning to more bread and butter issues, Carney has also been urged, somehow, to get lending flowing to small business by the British Chambers of Commerce reported in the Guardian this morning.

The organisation wants him to back a £1bn investment bank and more quantitative easing (though as we say, that is not entirely in Carney’s personal gift).

But one change which is pretty certain is that he will give more long term guidance about interest rate decisions which should bring more certainty to decisions. This has been avoided up till now over fears it could tie the bank’s hands as circumstances change.

Finally the bank is now more powerful in terms of regulation of banks. The Prudential Regulatory Authority sits within its structure and some commentators think this is where Carney can make the biggest difference.

Allistair Heath, editor of City AM says regulation may be where he makes his mark, noting that Carney is not tainted by the financial crisis.

“His approach looks as if it will be tough but fair, and aware that the City needs both to be managed better and more prudently while being allowed to grow and create jobs and wealth. He needs to end to the endless hiking of capital requirements. He needs to emphasise the need to ban bailouts and finalise resolution mechanisms,” he says.

This is the Globe and Mail from Toronto with a long historical perspective. It writes: “Less may be at stake than in 1694, when the Bank was founded, in the reign of William of Orange, to finance the British-Dutch wars with France but, after all, stardom has its privileges”.

For investors there are a couple of issues to mull. First can the new Governor do anything significant to boost or even reboot the UK economy – a tough call and not just up to him.

Second, if he does take extraordinary measures what does it mean for inflation. If Pimco believes we will see a substantial devaluation, that suggests we will probably ‘import’ inflation with implications for savings rates and how much risk investors may want to take.

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