Bank of England in wait-for-carney mode
Impending arrival of new governor stalling action
Bank of England officials likely discussed the threat of a triple-dip recession on Friday, but prepared to sit on their hands as a looming change of governor overshadows the remainder of Mervyn King’s term.
With five months before Bank of Canada Governor Mark Carney takes over, the Monetary Policy Committee is awaiting results of its credit-boosting program after halting bond purchases and signalling no further interest-rate cuts for now. That backdrop will colour “preMPC” briefings in London as policymakers discuss new forecasts before their Feb. 7 decision.
“There is that element of ‘wait and-about things, and that’s not particularly to the advantage of the economic situation,” said Neil Mackinnon, global macro strategist at VTB Capital in London and a former U.K. treasury official. “It becomes an excuse to wait until the new governor is in place. There is always the danger of policy paralysis.”
Economists predict the MPC will leave its quantitative-easing program and benchmark rate unchanged next week. MPC members’ inertia may reflect concerns that QE has lost its impact, while officials have turned their focus to the success of the Funding for Lending Scheme. Policy makers’ remarks are also increasingly addressing the next governorship and a potential revamp of their mandate in a debate sparked by Carney, who will become the first foreigner to run the Bank of England.
“The changeover has slowed things down a little,” said Jens Larsen, chief European economist at RBC Capital Markets in London and a former Bank of England official. “Everyone is angling around for this great new idea that’s going to solve the problems, and I don’t think it’s going to happen.”
In a coincidence of timing that emphasizes the clash of old and new, the Bank of England’s meeting and decision next week will take place just as Carney makes his first public appearance in the U.K. in connection with his new role.
He will testify to lawmakers who have said they will ask him whether the existing policy framework is the right one for the U.K. after barely any economic growth in the past four years.
The weakness of the economy may loom during both sessions after data last week showed gross domestic product fell 0.3 per cent in the fourth quarter, more than economists had forecast. While the U.S., German and Canadian economies are back above their pre-recession levels, Britain has recovered only half of the output lost during the 2008-09 recession.
Still, a report Friday showed U.K. manufacturing expanded for a second month in January and output surged the most since September 2011. James Knightley, an economist at ING Bank NV in London, said this “offers hope” the economy will avoid a recession.
Andrew Tyrie, who chairs the Treasury Committee, said on Tuesday he would question Carney on whether there may be a “better monetary policy for the U.K. than the current one,” under which the BOE aims to keep inflation at two per cent.
That line was prompted by Carney’s comment that nominal gross domestic product targeting could be an even “more powerful tool” to stimulate economies.