Carney’s serene Brexit moment

If you’ve been watching central banks at home and abroad l ately, you might have concluded that they fall into two camps, at least when it comes to interest rates. There are those who have done pretty much nothing (the U.S. Federal Reserve, our own Bank of Canada), and then there are those who’ve done something (like cutting rates below zero) but don’t have much to show for it — for example, the European Central Bank and the Bank of Japan.

But lest you have lost faith in the efficacy of modern-day monetary policy, a Canadian has arrived in the guise of St. George: Mark Carney, governor of the Bank of England and the pride of Fort Smith, NWT.

Not only has Carney done something ( cut rates), but what he’s done has also done something — slayed the dragon of a recession in the U.K.

At least, that’s the story according to the man himself.

The Bank of England slashed rates by 25 basis points last month, in response to a perceived growth swoon stemming from the surprise Brexit vote in June. Not everybody has been a fan of that move, least of all some pro- Brexit folks who point out, quite rightly, that the U. K. economy seems to be chugging along just fine, thanks. Consumer spending, housing, jobs — all have been fairly robust.

These critics also note that Carney was among the most prominent voices warning against the folly of the U. K. leaving the European Union. For them, that throws into question Carney’s predictive powers — he was wrong on the Brexit impact — and his motivations in cutting rates in August. Was it really just a premature move, designed to make his pre-Brexit warnings seem credible?

This week, Carney had to face his critics in an appearance before a U. K. parliamentary committee. So how does he feel about the decisions the Bank has made? “In light of all the events since the referendum … I’m absolutely serene.” He went on: “I absolutely feel comfortable with the decision I supported and the ( monetary policy) committee took in August to supply monetary policy stimulus.”

If you’re counting, that’s two absolutelys — Carney isn’t leaving much room for interpretation there.

Now, bank-watchers might well take this declarativeness as a breath of fresh air, given all the maybe-this-or-maybe- that we get from central bankers these days (see “Yellen, Janet”). Yet Carney might well have overstated his case.

For one thing, back when he was governor of the Bank of Canada, Carney often noted that interest rate decisions typically take at least six months to have an impact on the real economy. To claim that the August move staved off recession seems to run counter to that assumption.

Another wrinkle is that one wouldn’t expect Brexit to have much real- economy impact yet anyway. Prime Minister Theresa May hasn’t even triggered Article 50, which has to happen before what will no doubt be long negotiations with the EU begin. No one really knows how those will turn out, or how much sand will eventually be thrown into the gears of U.K. commerce as a result. To claim that a recession is around the corner, when that corner could be two years away, might seem a stretch.

But here’s the thing: as much as they say they are data dependent, central bank decisions do not occur in a vacuum. Yes, there’s the assumed stimulative effect of a rate cut on the economy (eventually), but there is also the harder- to- quantify impact that’s driven by perception. If the Bank of England had not moved in August, it might have signalled to markets, consumers and businesses that policy- makers were unwilling to take action against any Brexit- related downturn. That might not have turned out so well, and it would also have contradicted Carney’s assertions in the immediate wake of Brexit that the Bank would do whatever is necessary. In other words, it’s in part a credibility issue.

As well, the U. K. housing market looked particularly vulnerable post-June 23, and Carney’s cut in August has undoubtedly helped support home prices by lowering the cost of borrowing (even if the cut has been unevenly applied by U.K. banks so far).

In the end, Carney’s rate cut might end up being viewed much like Bank of Canada Governor Stephen Poloz’s January surprise in 2015. Oil prices had taken a tumble, but Poloz came under heavy fire for cutting rates by 25 bps when the full impact of the energy decline was still unclear. It turned out that Poloz was pretty much right, and his decision to take out “insurance” now looks wise.

Of course, we will have to see how the Brexit drama ( I use the word advisedly) plays out in the negotiating room before we can make that call for the Bank of England and its prophylactic moves this summer. In the meantime, Carney probably deserves the benefit of the doubt.

And if you don’t agree, well, just ask Mark Carney.