LONDON CALLING:
A fragile economy, industry regulation and feisty British tabloids
Out of the frying pan and into the fire,
Soon-to-be former Bank of Canada governor Mark Carney will have his hands full when he assumes his post as the head of the Bank of England on July 1, experts say.
“I think he’s going from the frying pan into the fire. I don’t even know if it was a frying pan here,” said Ian Lee, assistant professor of strategic management and international business at the Sprott School of Business at Carleton University.
“He’s going from the best or one of the best of the G7 nations to one of the worst. It’s going to be vastly more challenging.”
Officially, Canada has recovered from the Great Recession, though the economy faces a period of tepid growth. But that’s still a far better situation than in the U.K., where economists can’t decide whether the country has suffered one or two additional recessions since 2008.
“He walks into a situation where monetary policy is about as loose as it can be and he’s got to try to find new, perhaps unconventional ways to help kick-start the economy,” said Doug Porter, deputy chief economist at BMO Capital Markets.
“He’ll be under quite a bit of pressure and scrutiny to deliver the goods, rightly or wrongly. It’s asking a lot of a leader of a central bank to single-handedly make that much of a difference, but the expectations
“He’s going to be up to his neck in alligators and trying to figure out how to drain the swamp.”
IAN LEE
CARLETON UNIVERSITY
will be high to say the least.”
With the U.K. economy stagnating (growth is projected to come in below 1 per cent this year) there is increasing pressure on the Bank of England to extend its quantitative easing program. Interest rates are already at record lows.
“The challenge is that the central bank has already done most of what it could do to give energy to the U.K. economy. He’s arriving with great fanfare but he’s not bringing a much more powerful tool kit than what’s already been put into use,” said Avery Shenfeld, chief economist at CIBC World Markets. In addition to steering the sixth largest economy in the world, the Bank of England has become chief regulator for London’s sprawling financial sector. Everything from instituting tougher bank capital requirements to policing industry conduct falls to the central bank. The previous regulatory system was discredited and dismantled after the near-implosion of the banking industry in 2008 and the recent LIBOR rate-fixing scandal. London, alongside New York, and Tokyo, is a hub for the global financial industry. “That’s new for (Carney), but also for the Bank of England. He will probably be spending at least as much time concerned about the regulation of the financial services sector as he is about the economy,” said Porter. “Arguably that’s probably a bigger challenge over the short term. Monetary policy is relatively straightforward there . . . whereas the regulatory side will be finely nuanced.”
Another challenge: as head of the Bank of England, Carney has only one vote on a monetary policy committee. At the Bank of Canada, he had the power to set interest rates and choose to consult colleagues.
“In the U.K. Carney will have one vote and will need to be persuasive with his colleagues. That’s a new task for him. He has to lead a majority on a policy committee to vote with him, which his predecessor Mervyn King was not always able to do,” Shenfeld said.
Then there’s the British press. Carney was taken to task following his surprise nomination last November. He was also grilled by British MPs over his salary and wouldbe political aspirations.
“He’s had such a great run in Canada deservedly so, but I just think he’s going to be up to his neck in alligators and trying to figure out how to drain the swamp,” Lee said.
“If a year or two years from now, things aren’t progressing and becoming significantly better, it will be very easy for the tabloids to blame Mark Carney.”