24 Jul 2013

Mark Carney’s exercises in persuasion

The new Governor was in his element at the early unveiling of the concept for the Jane Austen £10 note. I quoted back the Austenism to be used on the note at Governor Carney: “I declare after all there’s no enjoyment like reading!”, asking if it applied to the MPC minutes; “for a very sad group of people that is true,” he told me. The good burghers of the Jane Austen Society were putty in his hands.  

All of which will count for nothing if the economy does not achieve “escape velocity” during his tenure at Threadneedle Street. Ahead of tomorrow’s GDP number we are at a critical juncture in Britain’s medium economic fate. Park fiscal policy for a moment, George Osborne has executed some serious changes to Britain’s economic settlement. He believes that it’s all about monetary policy. It’s also all about banking policy. Governor Carney has already used a form of forward guidance to dampen down expectations of interest rate rises in 2015, and push market expectations back to 2016. His colleague Mario Draghi is developing something similar in the Eurozone. In a fortnight, Osborne and Carney will swap letters on a new framework for monetary policy that I believe will include threshold-based guidance, probably jobs.

This will enable the chancellor to communicate that interest rates will only go up if we have created hundreds of thousands of new jobs, and even then probably not before the election. That is my hunch. Governor Carney will also have to tread carefully. He will want to inject enough medium term confidence to persuade investment-shy businesses and households to start to put their cash piles to work. But he will, I am sure, determinedly stress his inflation-fighting credentials, as one of only two G7 governors to have raised interest rates post-crisis. Yes, lower for longer, but also perfectly ready and willing to raise rates when necessary.

The big question, though: will it really make any difference? are we not already in the liqudity trap? This is where bank policy comes in. And with RBS now under review for a bad bank: okay bank split, today we got the fascinating intervention of Vince Cable over the alleged Bank of England “capital Taliban” who imposed higher prudential requirements on the likes of Barclays and Prudential in the last weeks of Sir Mervyn King’s tenure. There is now some evident political pressure for the Bank of England to roll back on some of this approach.

I asked Governor Carney if he felt pride or prejudiced about Britain’s financial system?

“We’re looking for a little more sense and sensibility, thank you”.

* Plastic banknotes? The Governor corrected my description of the notes he introduced to Canada as “polymer”. I asked if there was any chance of the Jane Austen note being polymer.

He told me: “We introduced polymer notes in Canada… There’s no decision on that, in keeping with transparency and consultation, if we were to consider moving to polymer notes, which have some advantages, if we were to consider that, we would have a public consultation and announce that in due course. Today its about Jane Austen and the £10 note.