New Bank of England boss may request magic powers

Do you believe in magic? That might be the right first question for whoever succeeds Mark Carney as governor of the Bank of England. The newly mandated government of Boris Johnson is expected to name a successor to the Canadian in the next few days. The list of possible candidates is extensive enough, but with no obvious frontrunner. Previous governments failed to appreciate Carney’s articulation of the widely shared worries that a rough departure from the European Union would be bad for the economy and present a challenge to monetary policy. The next governor may not find life any easier.

If all goes well, he or she will not only face the developed world’s current issues of stubbornly low inflation rates, easy credit and climate change. If Brexit also goes wrong, the new bank chief will also need some preternatural gifts.

The government is already on the edge of breaking its own rather artificial promise to eliminate the fiscal deficit on current spending in three years, according to a report issued on Monday by the independent Office for Budget Responsibility. That would not be worrying in normal times. The global experience of the last decade suggests that governments can spend freely when they’re taking advantage of unused productive capacity.

But reduced trade with Europe might additionally reduce economic potential in ways that no amount of government spending can counter. Even in a recession, massive ineffective spending could revivify the long-dormant ghost of inflation.

Then there’s the pound. Up to now, the UK’S current account deficit, most recently at 4.6 per cent of GDP, has been financed easily, in large part by capital flows into Britain’s giant financial centre.

Brexit could change the direction of flow, if banks decide to move assets from the UK into the single market.

It’s easy enough to imagine a real witches’ brew. Capital flows drag down the pound, while a recession is combined with inflation. The new governor will want to raise policy rates to avoid a currency crisis, but then comes the last spectre — political interference. And no central banker has ever found a spell to ward off a cornered and angry politician.

THE GOVERNMENT IS ALREADY ON THE EDGE OF BREAKING ITS OWN RATHER ARTIFICIAL PROMISE TO ELIMINATE THE FISCAL DEFICIT ON CURRENT SPENDING IN THREE YEARS