Central bank governance: Is Carney spoiling for a fight?
Growth-focused monetary policy from the new BoE governor would stir a heated debate.
In early December, Canadian monetary chief Mark Carney, governor-designate of the Bank of England (BoE), put another nail in the coffin of inflation-targeting puritanism. In a radical speech, Carney called on G7 central banks to consider more aggressive measures to buttress growth and counter liquidity-trap fears, such as explicit forward interest rate guidance, numerical targets for unemployment, or scrapping inflation targets entirely, until nominal growth reaches a given level.
This speech saw Carney swimming with the intellectual tide in the US, given the Federal Reserve’s recent unemployment targets to anchor its stimulative policies.
With nominal UK GDP still 16% below its pre-recession trend, it’s no surprise that the market has largely been pleased by Carney’s appointment.
But following the speech, BoE markets director Paul Fisher appeared to pour cold water on Carney’s more unorthodox proposals, citing the challenge of estimating unemployment targets as an anchor for monetary policy and questioning the necessity of forward-rate guidance given current lower-bound market rates. UK chancellor of the exchequer George Osborne – responsible for approving any shift in the monetary policy framework – set a high bar for a regime shift but did not rule it out.
Markets are divided over the extent to which Carney will push for yet more monetary activism within the BoE and the UK Treasury. But there is plenty of evidence to suggest he will cash in on his reputational capital. The former Goldman Sachs banker’s actions at the Bank of Canada and Financial Stability Board level lay bare his leadership instincts and battle-ready disposition. Carney’s use of forward-rate guidance during the global crisis established his reputation as a trail-blazing governor. And in countless speeches he has waxed lyrical about the opportunity for central banks to broaden their mandates to counter the cycle and the power of communication as a chief tool in the monetary arsenal.
In other words, expect a lively debate at the BoE under Carney about the relative merits of adopting an explicitly flexible inflation-targeting framework; a more ambitious nominal GDP-targeting agenda (NGDP); other empirical thresholds to anchor monetary policy; the pursuit of quantitative easing on an ever-aggressive scale; or a combination of such measures.
To put it another way, the bond market’s preferred monetary policy mix for rebalancing – a decently sloping yield curve to generate credit growth and a relatively loose monetary stance subject to strict inflation targets – won’t be in vogue under BoE Carney, if UK output remains stagnant.
By breaking taboos about a central bank’s mandate, Carney has already set himself up for a showdown with inflation-targeting traditionalists and those that fear output-oriented monetary targets risk BoE politicization. What’s more, if, and when, the US NGDP tide goes out, Carney might find himself swimming naked.
Nevertheless, an offer by a central bank to anchor its monetary policy through the explicit lens of economic growth would prove alluring to any fiscal policymaker, not least to Osborne, who is confronted with the risk of a triple-dip recession and a likely credit downgrade, amid fiscal slippage.