Gerard Lyons: Why Mark Carney Has My Vote to Retain the Role of Governor of the Bank of England

Gerard Lyons

Senior Fellow

Should Mark Carney stay as Governor of the Bank of England? In my opinion, yes. The decision is his. He should not be hounded out. There are five issues that need to be considered.

First, the last thing the economy needs now is a change at the top of the Bank of England. In recent weeks there has been too much unnecessary pessimism about Brexit and what it means. The focus now, for all of us, should be on what is in the best long-term interests of the UK economy and all its people.

Change at the top of the Bank could be unnecessarily destabilising and provide further fuel to those who want Brexit to fail.  Second, and in his favour, is that Mark Carney has handled the period since the Referendum vote well. In particular, the Bank under Carney was fully prepared.

Only a month before the vote, the Bank realised the City was attaching a tiny probability to a “Leave” vote. To guard against the likely market disruption that would have triggered, much work was done behind the scenes to help position the City for any eventuality.

It worked. Yes, the pound did fall, but that was likely to happen anyway, at some stage, whatever the vote. More particularly, markets were stable and resilient after the referendum result. Also, the Bank provided a further policy stimulus. I thought it was right to cut rates, but not to buy corporate bonds. The economy avoided the immediate financial Armageddon widely predicted by the economics profession.

Third, another positive, is that he is overseeing a necessary transformation at the Bank. It was widely felt when he was appointed that the Governor should be from outside the Bank. That was right then and there is a strong case for saying it would be right when he is replaced too.

The Bank needs to evolve, and Mark Carney seems to be handling this well with a “One Bank” policy, focused on financial as well as monetary stability. He is impressive, authoritative and candid, and also he is very global. I used to regularly interact with him at international meetings before he became Governor and his global perspective is something that is vitally important now for the UK economy.

That leads on to the two contentious issues that are unlikely to go away: the role that the Governor played before the referendum and also the direction of travel of monetary policy.

Fourth, it has been argued that during the referendum campaign the Governor sailed too close to the wind into political areas. This is a valid criticism. But he is not the first to do so. His predecessor, Mervyn King, who was clearly politically neutral, was criticised for making comments on Labour’s fiscal plans. Often the Governor is almost placed in a no-win situation but perhaps in the referendum campaign he could have been more neutral.

The trouble with this criticism is that this is not going to go away. Monetary policy is becoming more intertwined with other areas of policy. What we want is a future scenario where no-one ever has to even ask the question about whether the Bank has veered too far, one way or the other.

That leads directly into the fifth area; the direction of monetary policy itself and the future scrutiny of the central bank. In this regard, Mark Carney has done a lot to make monetary policy more approachable to the general public. The last thing we want is an academic who can’t communicate or someone who doesn’t know how the City works. The House of Commons Treasury Select Committee does a good job in scrutinising the Bank, but I think we need even more of a debate about the future direction of travel of monetary policy.

Some commentators have reacted with fury to the Prime Minister Theresa May questioning monetary policy during her conference speech. What nonsense. She was spot on. The consequences of low interest rates have a profound effect: it incentivises people to borrow to buy property, and does not reward savers.

There needs to be a debate about an eventual future rebalancing of policy with higher interest rates and no more quantitative easing, to go alongside a weaker pound. We also need to discuss how much of the heavy lifting needs to be done by fiscal policy, as opposed to the Bank of England. At the moment the economy might not be able to handle higher rates, but at some stage it will.

When the Labour Government made the Bank of England independent in 1997 it was well received by the markets. Since the 2008 financial crisis, monetary policy has not been as independent as many previously thought. For instance, Quantitative Easing, or “printing money” depends upon an underwriting from The Treasury and hence taxpayer support.

Also, last year, Mr Carney outlined five new research areas for the Bank of England’s policy. The first was the interaction between monetary, macro prudential and micro prudential policy. This may sound technical, and it is, but it takes the Bank right into issues at the heart of politics. In other countries, macro prudential policy and preventing a housing bubble involves the Government directly.

The issue is not to make the Bank less independent: instead it is to recognise how important monetary policy is to people’s lives. Perhaps, we need even greater scrutiny of the Bank of England and a more robust debate about monetary policy. If Mark Carney stays he has to be fully committed to ensuring Brexit is a success, as does his successor.

This article first appeared in the The Daily Telegraph 

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