Car­ney fa­vors rate plan copied by Ber­nanke over BOE doubt

The Pak Banker - - Front Page -

LON­DON

As Car­ney pre­pares to take con­trol of the Bank of Eng­land, former cen­tral bank econ­o­mists say his five years atop the Bank of Canada sug­gest he will be more in­ven­tive and open than the cur­rent gov­er­nor in out­lin­ing plans to spur the U.K. re­cov­ery.

Although King pur­sues quan­ti­ta­tive eas­ing, the Bank of Eng­land re­jects a Cana­dian cri­sis-fight­ing strat­egy — later adopted by Fed­eral Re­serve Chair­man Ben S. Ber­nanke — of spec­i­fy­ing how long in­ter­est rates will re­main low. That stance may be re­vis­ited if Car­ney ar­rives in Lon­don in seven months to find the U.K. still stuck in a re­ces­sion­ary rut.

“Mervyn was very proac­tive in be­gin­ning gilt pur­chases, but he is still less prag­matic than Car­ney, who may be open to a wider range of op­tions,” said Simon Wells, chief U.K. econ­o­mist at HSBC Hold­ings Plc (HSBA) in Lon­don and a Bank of Eng­land of­fi­cial un­til last year.

Car­ney, 47, em­braced greater trans­parency as an emer­gency tool in 2009 when he promised to keep Canada’s bench­mark rate, then at 0.25 per­cent, low for 15 months as long as the in­fla­tion out­look didn’t change. Ber­nanke fol­lowed in Au­gust 2011 when the Fed said it would hold its key rate near zero at least through mid-2013, a range it sub­se­quently ex­tended by two years.

Such vows are aimed at adding stim­u­lus to an econ­omy where short-term rates are al­ready around rock- bot­tom by per­suad­ing in­vestors to con­tain longer-term bor­row­ing costs be­cause they know of­fi­cial rates won’t rise.

“It keeps the whole in­ter­est-rate struc­ture down and helps the macroe­con­omy by boost­ing as­set prices such as stocks and hous­ing,” said Mark Zandi, chief econ­o­mist at Moody’s An­a­lyt­ics in West Ch­ester, Penn­syl­va­nia.

A 2010 Bank of Canada dis­cus­sion pa­per said its “con­di­tional com­mit­ment likely has pro­duced a per­sis­tent ef­fect in low­er­ing Cana­dian in­ter­est rates rel­a­tive to what their his­tor­i­cal re­la­tion­ship with in­fla­tion and un­em­ploy­ment rates would im­ply.”

King, 64, has nev­er­the­less re­jected pro­pos­als from former col­leagues such as An­drew Sen­tance to chart a pub­lic course for pol­icy, say­ing as re­cently as two weeks ago that it would re­duce the cen­tral bank’s flex­i­bil­ity.

“We don’t pre­tend to tell peo­ple what our pol­icy will be in fu­ture,” he told re­porters in Lon­don on Nov. 14. “There doesn’t seem much point in hav­ing monthly meet­ings if you al­ready know what de­ci­sion you’re go­ing to take. I think it’s a mis­take to try and pre­tend that we can an­tic­i­pate what those de­ci­sions would be.”

An­other ar­gu­ment, made by then-Deputy Gov­er­nor Rachel Lo­max in 2007, is that the bank’s Mon­e­tary Pol­icy Com­mit­tee is “not a con­sen­sual body” so it would be hard to find agree­ment on the path of pol­icy. By con­trast, Car­ney’s cur­rent panel at the Bank of Canada sets rates by con­sen­sus.

Car­ney has fol­lowed trans­parency in other ways where King has not. He has de­liv­ered about dou­ble the num­ber of speeches King has in the past four years. Canada’s pol­icy re­ports also con­tain spe­cific base­case pro­jec­tions for in­fla­tion and growth, while the U.K.’s fore­casts are less clear and King em­pha­sizes the prob­a­bil­i­ties sur­round­ing them, as he did yes­ter­day in say­ing “the essence of pol­icy mak­ing is look­ing at the bal­ance of risks.”

“Per­haps that also gives an indi- cation of where the BOE could be headed,” said Robert Wood, a former Bank of Eng­land of­fi­cial un­til his move ear­lier this year to Beren­berg Bank.

King’s in­sti­tu­tion also came un­der fire this month when an in­de­pen­dent re­view said its fore­cast­ing ca­pa­bil­i­ties have de­te­ri­o­rated and that its pro­jec­tions for growth and in­fla­tion were too op­ti­mistic.

While the Bank of Canada al­ways re­leases state­ments af­ter each pol­icy de­ci­sion, the Bank of Eng­land tends to only do so when chang­ing tack. Cana­dian pol­icy mak­ers also in­clude a “pol­icy in­cli­na­tion state­ment” in their an­nounce­ments, of­ten re­peated in speeches, that’s aimed at giv­ing in­vestors a sense of where bor­row­ing costs may be headed.

“Over time, some mod­est with­drawal of mon­e­tary pol­icy stim­u­lus will likely be re­quired,” the Bank of Canada said in its last state­ment. “The tim­ing and de­gree of any such with­drawal will be weighed care­fully against global and domestic de­vel­op­ments, in­clud­ing the evo­lu­tion of im­bal­ances in the house­hold sec­tor.”

Still, Car­ney has found that this ap­proach can have pit­falls. In­vestors priced out any chance of in­ter­est-rate in­creases af­ter his Oct. 15 speech failed to re­peat the bank’s pol­icy state­ment, only to re­verse course when it reap­peared at the next week’s rate an­nounce­ment.

Saved from hav­ing to pur­sue as­set pur­chases by an econ­omy that bounced out of the 2009 re­ces­sion and wit­nessed no bank bailouts, Car­ney may be more skep­ti­cal than King “about the ef­fi­cacy of fur­ther gilt pur­chases,” said Jens Larsen, chief Euro­pean econ­o­mist at RBC Cap­i­tal Mar­kets in Lon­don who worked at the Bank of Eng­land un­til 2010.

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