As Mark Carney takes the reins at the Bank of England, expectations could hardly be higher. The Canadian’s successful stint at the helm of his native central bank, and his chunky compensation package (almost three times that of his predecessor), have seen him credited with near super-human powers. Throw in his youth and film-star good looks and the arrival of Fort Smith’s most famous son has taken on the air of an economic “second coming”.
The UK is locked in its weakest recovery in statistical history. Revised figures suggest the economy remains 3.9pc smaller than its 2008 pre-crisis peak, even worse than the previously estimated 2.6pc shortfall. Everyone wants to believe that recovery is within reach and maybe, just maybe, the smiling Canadian with degrees from Harvard and Oxford is the missing ingredient.
Yet expectations of what Carney can do have spiraled to such an absurd extent that, Obama-like, he is destined to disappoint. He is just one member of the nine-strong monetary policy committee – a committee on which, as Mervyn King has found, the governor doesn’t always get his way. The MPC is also using tools that have already been pushed to extremes – interest rates nailed to the floor for four years, unprecedented money-printing – and failed to secure recovery.
This coming Thursday, just four days after Carney’s arrival, the MPC makes its July announcement. With little momentum on the committee to extend quantitative easing beyond £375bn, the likelihood is that the UK’s monetary bazooka will stay in the cupboard for now.
Although viewed as backing “more stimulus”, Carney may himself vote against extra QE next week, lest he ends on the losing side during his first MPC outing. So the “asset purchase target” will probably stay where it is, in a near unanimous vote, with the bank rate kept at 0.5pc.
Recent data anyway makes it awkward for the MPC immediately to sanction more QE. Despite historic GDP revisions, the forward-looking indicators are lately looking up. PMI survey measures for manufacturing, general output and services were all above 50 in May, pointing to growth – the first time that’s happened in 13 months. Retail sales also rose a better-than-expected 2.1pc in May. So, with the economy showing tentative signs of life, it’s hard to justify more “funny money” straight away.
Then there’s inflation – supposedly at the heart of the MPC’s remit. Prices pressures are rising, with the CPI up 2.7pc during the year to May, compared to 2.4pc the month before. Again, stubbornly high inflation doesn’t fit with the narrative of unleashing yet more monetary “shock and awe”.
But all this is a fiction, of course. The Bank will soon do more QE, whatever the macroeconomic data say, even if it’s delayed for a month or so to preserve the myth that policy-making is a function of such old-fashioned considerations as our oft-changing inflation indices and frequently-revised growth numbers. The timing of QE now has little to do with these metrics, being driven instead almost entirely by fear of the markets.
Quite early into his five-year term (shortened from the usual eight-year commitment), Carney has indicated he will reassure indebted firms and households that bank rates won’t rise for some time. In doing so, he would be following America’s Federal Reserve and his own Bank of Canada.
In reality, though, such “forward guidance”, however carefully calibrated and communicated, could be blown out of the water if it looks like the QE money machine is being turned off and global markets take umbrage. The prospect of no more central bank goodies could spark another Lehman-style collapse. Bond traders would then impose much higher borrowing costs not just on UK companies and mortgage-holders, but the government too – and, with base rates already at rock-bottom, there would be little any central banker could do. That’s the extremely tough backdrop against which Carney arrives at Threadneedle Street.
While the UK’s macro economic data has lately improved, the mood on the markets has grown much stormier – and that’s what will truly determine the MPC’s decisions over the coming months. In the US, sovereign bond yields spiked during June, their sharpest rise in a decade, after Fed Chairman Ben Bernanke gave just the tiniest hint that America could soon “taper” QE. The yield on 10-year US Treasuries hit 2.52pc on Friday, up from 1.62pc at the start of May.
This happened despite Bernanke subsequently stressing that the Fed is in “no hurry” to tighten policy – and shows just how jumpy bond markets now are, after years of distortion by the world’s “leading” central banks. Gold just dipped below $1,200 per troy for the first time in almost three years and has lost 25pc over the last quarter. That reflects the institutional belief that American QE will soon end. But if stopping the QE party causes the bond markets seriously to rebel, then more monetary happy pills will be administered – and fast. Global equity markets are meanwhile watching and waiting, wondering if recent bond market tremors will turn into a fully-blow rout.
On Wednesday, fresh PMI numbers will be published, giving an indication of how the UK economy fared in June. While such macro numbers may be billed as significant in the MPC’s latest thinking, they are a mere side-show compared to the influence now wielded by the faceless, financial denizens – and that age old struggle on the markets between greed and fear. That’s why Carney’s job will be so difficult. He’s under more public scrutiny than perhaps any Bank of England Governor in modern times. So much is expected of him, yet under the current febrile circumstances, he has practically no power.
I’d like to wish him all the very best in his new post, though, and also re-iterate a coupled of points about Mervyn King. Firstly, it is entirely untrue that King “didn’t see the crisis coming”. He most certainly did. This column has often referred to the speech he gave in June 2007. “Excessive leverage is the common theme of many previous financial crises – are we really so much cleverer than the financiers of the past?” King publicly observed “It may say champagne – AAA – on the label,” the Governor continued. “But by the time investors get to what’s left in the bottle, it could taste rather flat”.
These were extraordinary words – and King issued other warnings too. He was ignored, of course, by both the Labour and Tory front-benches – the boom just felt too good. What more could a Bank of England Governor have said, without being accused of spreading panic?
Remember, too, that King was twice stymied by government placemen on the MPC when he tried to limit credit – once in August 2005, when he voted against a rate cut, and again in June 2007, when he was out-voted in pushing for a rise.
Numerous City interests want to destroy King’s reputation. He is, after all, the one senior UK financial regulator who truly wants to split investment and retail banking. King makes that case because a welter of historic evidence backs him, to say nothing of common sense, but also because he is almost unique among those in the top echelons of British public life in displaying the intellectual resilience and guts to stand up to the money-men and their political lackeys. I sincerely hope that he continues to do so from his new perch in the House of Lords.