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Derechos | Equipo Nizkor
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Derechos | Equipo Nizkor
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18Apr13
Bank of England job will put Carney to the test
Mark Carney is gearing up for what some have called a mission impossible: turn around Britain's ailing economy, fix its banks and lead an overhaul of the Bank of England.
Currently head of the Bank of Canada, Britain's finance minister called Carney "the outstanding central banker of his generation."
But he may struggle if he pushes for quick change at the BoE, despite its dramatically expanded powers.
A first challenge for the BoE's only foreign governor in 319 years will be to temper expectations when he starts in July.
"Wanted, a new governor of the Bank of England. Only superhumans need apply," was how Ed Balls, an opposition Labor party lawmaker who was at the heart of the decision to give the bank control of interest rates in 1997, put it last year.
Britain may have slipped back into recession. Policymakers are split over what to do next and the government insists it will not spend more to get growth going again.
Carney has said his role would not be "a super governor position" and he would work with fellow policymakers to tackle "the immense challenges" ahead for the $2.5 trillion economy.
The 48 year-old has already had a taste of what he can expect from Britain's media when newspapers splashed details of his pay and benefits worth more than 850,000 pounds a year.
That kind of deal may seem normal to a former Goldman Sachs banker like Carney. But it contrasts with the mood across much of Britain, which is three years into an austerity program, and adds to the glare of the spotlight on him.
Unusually for a central banker, Carney may also have to contend with speculation that he has ambitions to enter politics one day, something he had to deny categorically in November.
Yet Carney's appointment has been widely welcomed and former policymakers say his can-do style will give the BoE new impetus.
He has signaled his preference for giving clear guidance on where monetary policy is going - something long opposed by the man he will replace, Mervyn King.
Carney can also help reshape the bank's upper echelons over the coming year when two of his deputies are expected to leave.
Britain's finance minister George Osborne, whose austerity plan is running behind schedule and looks unlikely to return the economy to full health before the 2015 elections, is certainly hoping he will rise to the challenge.
But it remains to be seen whether the new governor can win support from the BoE's independent policymakers for change.
Four of the nine Monetary Policy Committee(MPC) members are "external" members who are expected to balance internal thinking within the bank known as the "Old Lady of Threadneedle Street."
John Gieve, a former deputy governor, thinks Carney can muster support for a new approach.
"He is coming in as a leader. He's a confident guy. He's an experienced central banker who knows the patch and a few of the senior people at the Bank of England already," he said. "Many at the bank will welcome a change, but for an institution which has been run by insiders for 20 years it will be a big shock."
Change of the Guard
The BoE has been dominated by King for two decades, first as its chief economist and then governor. He pioneered the inflation-targeting system now widely used by many countries.
For much of that time, Britain enjoyed growth. But the good times were fuelled by growing debt that plunged the country into its deepest economic crisis since the Great Depression.
Osborne, once close to King, has shown signs of frustration that the BoE has not lived up to his hopes of "monetary activism" that would help offset his spending cuts.
The bank has kept interest rates at a record low of 0.5 percent for four years and spent 375 billion pounds on government debt, or a quarter of gross domestic product, far more than the U.S. Federal Reserve by that measure.
Still the economy remains stagnant and Osborne has made clear his desire for more action from the central bank.
Just in time for Carney's arrival, Osborne reworded the bank's mandate, keeping the 2-percent inflation target but also opening the door for possible new attempts to revive growth.
But Carney will find it harder to push through changes than he did in Canada. King has failed to get support from policymakers for more bond-buying in recent months, a stand-off hard to imagine at other big central banks.
Making a commitment to keeping British interest rates rock bottom for a set period - a relatively modest option by the standards of post-crisis policy-making - would be a challenge.
The Bank of Canada did just that under Carney in 2009 at the height of the financial crisis, burnishing his reputation as a creative thinker. But the decision was taken by Carney and his deputies, with no need to get external policymakers on board.
Carney is believed to have used a visit to London in late March to sound out some of the external members of the MPC.
"In the UK, policy can change with the shift of one or two votes on the MPC," said Andrew Sentance, a BoE policymaker between 2006 and 2011.
"When the MPC is divided on policy - as it is at present and has often been over the course of its history - forward guidance could be quickly undermined by a shift in the views of a minority of MPC members."
Early Test
Osborne has told the bank's top policymakers to report back to him in August, a month after Carney's arrival, on the merits of steps taken by the U.S. central bank to convince markets that its massive help for the economy won't be reined in quickly.
The Federal Reserve said in December it would keep interest rates near zero as long as unemployment remains above 6.5 percent and inflation expectations do not hit 2.5 percent.
Osborne has asked what indicators might work in Britain.
Rob Wood, a former BoE economist, said some MPC members might be open to specific guidance, having signaled they will ignore above-target inflation while wage pressures remain weak.
The response to Osborne gives Carney an early chance to get the bank behind a broad agreement that guidance can help underpin an economic recovery before he tries to thrash out specific thresholds, possibly based on wage growth, he said.
"It's very unlikely to be a big bang but it could be a staging post for that change," said Wood, who now works for Berenberg Bank.
Even if Carney can secure a commitment to keep stimulus in place, there are doubts about how effective that would be.
"People are not expecting an interest rate increase for two to three years so the question arises: what more are you trying to persuade people of?" said Simon Hayes, a Barclays economist.
Carney might also be tempted to change the bank's Funding for Lending Scheme which has increased mortgage lending but has not had a big boost on loans flowing to small businesses.
Carney suggested in February he might favor ramping up the FLS. It gives banks and building societies access to cheap funds if they keep or raise lending to households and businesses.
Another way to help growth would be to relax capital buffers British banks must set aside above global minimum requirements, even if that would be a gamble against a surge in defaults.
In any case, many bankers say low levels of lending are really due to worries among businesses that there might not be enough demand from consumers to justify higher borrowing.
Carney has also suggested he would consider expanding the central bank's government bond-buying program to other assets.
The Fed has been buying mortgage-backed bonds for years to try to help the housing market, a pillar of the U.S. economy.
Sam Tombs, an economist with Capital Economics, said while the BoE might consider steps such as buying equities as radical options to kickstart growth, it was more likely it would stick to buying gilts, possibly increasing the pace to hold a total of 500 billion pounds by the second half of next year.
While most attention is focused on how Carney might try to revive the British economy, his biggest test maybe when the time comes to wean it off emergency support.
"This is the real challenge: how to manage rising interest rates and the impact on households who could really suffer," said Mark Garnier, a Conservative member of a parliamentary committee which scrutinizes the BoE.
Bankers Beware
There are high hopes that Carney's experience and interest in banking - a contrast with King - will dovetail with the BoE's new powers for overseeing the City of London which is still reeling from the financial crisis.
Carney will continue to serve as head of the Financial Stability Board which sets rules for banks worldwide. His experience at the FSB shows he has a no-nonsense approach to complaints from bankers about reforms. In 2011, he clashed with the head of JP MorganChase, Jamie Dimon, over new capital rules.
"This is a significant change," said Gieve, the former BoE deputy governor. "Carney is more knowledgeable and interested in finance than King who hasn't disguised his low opinion of bankers."
Critics of King say his disinterest in the banking system meant the BoE did too little to tackle the build-up of risks that caused the financial crisis. A London banker said top executives had scarcely met with King beyond formal gatherings.
BoE officials have countered such criticism by saying the bank was not directly in charge of monitoring banks in the run-up to the crisis.
By contrast, Carney sharpened the focus of the Bank of Canada on the links between the banking sector and the economy and earlier this year he said a lack of trust in banks "deepened the cost of the crisis and is restraining the pace of recovery."
The BoE's new powers to ensure banks, insurers and building societies hold enough capital, curb bonuses and monitor risks, such as property bubbles, gives Carney a chance to leave his mark on a sector that is key to Britain's recovery hopes.
But given the scale of the central bank's increased power, there is a risk of overreaching.
"There is a massive management challenge," said former MPC member Sentance, saying Carney must delegate to his deputies.
"If the governor sits there trying to manage all these things himself, which is closer to the current governance style, you're going to struggle."
[Source: By William Schomberg, Reuters, London, 18Apr13]
 | This document has been published on 18Apr13 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. |