13 Nov 2013

Full transcript: Mark Carney talks to Jon Snow

Exclusive: Bank of England Governor Mark Carney talks to Channel 4 News about the recovery, what it means for real wages and whether he will raise interest rates.

Jon Snow: Governor you seem to have been taken by surprise by the sheer strength and speed of the recovery?

Mark Carney: First I would say we welcome the strength of the recovery, we have inflation coming down, the economy is creating 60,000 jobs a month, growth is as strong as its been in six years, since 2008, since before the crisis, so all of that’s to be welcomed.

When I first arrived here, my colleagues and I at the bank thought the recovery was going to be stronger than others thought it was and we also thought inflation was going to be weaker, softer, moving more towards that 2 per cent target than others thought. What’s happened is it’s turned out to be at this moment a little stronger than we had expected and inflation in quite a welcome sense is softer so both of those are good things.

And yet in three months you’ve actually had to change your game plan a bit because you talked originally about the 7 per cent unemployment level as being a benchmark after which you’d then think about raising interest rates – and now there’s a lot of add on…

No, we haven’t changed…the important thing Jon is we haven’t changed our game plan at all. What we said to your listeners, to people across the country, businesspeople, is that the Bank of England is not even going to begin to think about raising interest rates until we see unemployment come down to a 7 per cent level.

Now today, unemployment rate is 7.6 per cent. So we want to see real people in real jobs and that unemployment rate moving to that level.

But you’ve moved your projection forward, do you think it could happen – a 2 in 5 chance it could happen next year, 3 in 5 chance the year after which is sooner than either of the projections than you put before…

And that’s a product of the fact that the economy, the recovery has taken hold, the economy has picked up. But the important thing is what will we do at that point, what will we do as the Bank of England with interest rates at that point. And we ‘re not automatically going to change interest rates at that point.

We’re going to take stock of where the economy is, how much spare capacity there is in the economy, how many people are out there looking for a job, or how many people are in a job who want to work more, how much spare capacity is there in our businesses to produce more with the machinery that they have, and taking that assessment then we’ll decide what to do with interest rates because the important thing is we’re going to learn a lot from this point until that point. As the economy grows we’ll find out how truly productive this economy is.

But what kind of recovery is this, is it frothy, is it financial services, is it kind of stuff that’s dicey or is it real, solid, manufacturing, the stuff that builds an economy long term?

MC: Well there are two things. We need that type of recovery and we’re helping to try to secure it by providing this guidance on interest rates. Because what’s happened in this recovery – about six months ago, the British people started to decide that the world was not about to end because of problems outside our shores, problems in Europe, problems in the American financial system, what have you, the world’s not gonna come to an end.

And they started to reduce their savings from extremely high levels, precautionary savings levels, to more normal levels of saving. So we’re getting a one time boost from that adjustment. At the same time that that was happening, the housing market started to recover from quite frankly depressed levels relative to recent history. So we have those two factors. The question is how do we sustain that? Well we sustain that in a couple of ways. One we fix the financial system and my predecessor Governor, Lord King started that process and we’re going to finish the job. Secondly we provide the stimulus the economy needs for the length of time that the economy needs until the conditions are in place where we have that sustainable recovery that’s based on real jobs in real industries.

But then if the recovery is real, and is really under way as you say, then why do you need emergency levels of interest rates? And this is an emergency level…

Without question these are, interest rates are at a historic low. Think about the headwinds that are blowing into this recovery, that are holding back the strength of this recovery. Our major trading partner the European Union is still stagnating, it’s no longer shrinking rapidly but it’s still stagnating and probably will for some time.

We expect one per cent tight growth for the European Union, the UK’s growing at about three per cent right now. That’s one aspect. Secondly those banks – there’s been a lot of progress on the banks but they still need to build more capital, they still need to repair, they still need to fix some things. They’re not yet…I speak to a lot of small and medium sized enterprises and they’re still not fully satisfied with their access to capital. And thirdly…

But we can surely ease austerity…

Well that’s a judgement the government has to make. We take that as given and we set policy accordingly. But the other thing I was going to say Jon is that the British people are looking at their own balance sheets and that’s why they were saving more money out of every pay cheque than they did prior to the crisis and that process of repair, and that unwillingness, correct unwillingness, to return to a sort of debt-fuelled consumption, is something that also will moderate the pace of this recovery.

For all those reasons it is appropriate for the Bank of England to provide that stimulus and to provide people and entrepreneurs across this country with a degree of confidence about the conditions that would be necessary for us to start to take that off the table. We summarise that in the seven per cent unemployment rate but really we’re talking about when we get to that point, looking at the conditions in the economy – how much slack is there in the economy and how much momentum does the economy have – and then we’ll take stock and decide what to do.

We’re talking on quite a rare day, because we haven’t seen a Governor bounce into action like this talking in the way that you’ve been talking for quite some time. Therefore one wonders what this really means to the man and woman on the street. They are not feeling this. I don’t think they will find it easy to identify with what you’re saying – they’re going to say – we’re not experiencing this growth, our wages if anything are going down.

Well it’s a very important point. I think some – not everybody across the country is feeling this, without question. There’s still a million more people out of work than were in work prior to the crisis (JS but even those in work…) You’re right…but what is happening, and I don’t think we should downplay it, what is happening is 60,000 jobs per month, new jobs, are being created, most of those in the private sector, most of those full time. And that’s real work, real people. So let’s acknowledge that.

The second thing, you’re absolutely right, real wages are not picking up, they haven’t been for a number of years (JS when will they), and what’s required for them to pick up is the way I would phrase it – (JS they’ll want to know when) and what’s required is that business starts to have as much confidence in the recovery that’s necessary for them to start investing and that’s going to help boost real wages.

So when the second half of our forecast, middle of 2014 through to the end of 2016, embedded in that forecast that we just released today, is that you start to see real wage gains. In order to get that though, we need businesses to have the confidence that this recovery is going to be durable, which is why we’re doing what we’re doing with the banks, and what we’re doing with monetary policy.

This is your first tv interview since you were appointed and of course one question abides – are you your own man? And after all George Osborne scoured the world for you and even changed the employment parameters to make it attractive for you to come. Are you?

Of course – absolutely I mean…(JS but aren’t you?) I’m an independent central banker. Well there’s two things, one is the great advantage of the structure that’s been put in place for the Bank of England is the governor is absolutely independent and in fact, the other members of the monetary policy committee which set interest rates and the financial policy committee which sets financial policy, we’re all independent. I have one term, I have one term. I’ve been appointed (JS nothing to lose?) well I have my reputation to lose and I will make sure, I will do everything I can to make a series of right decisions.

But I mean you know raise interest rates before a general election, if that had to be done, would you really do it?

Well absolutely. I had the experience of being in a similar position during the crisis and in Canada we had the opposite issue which was should we cut interest rates in an emergency fashion in the teeth of the freefall after Lehman. That wasn’t as acknowledged around the world but that’s what was actually happening. We decided that was the right thing to do because it was the right thing to do for the Canadian economy. It was in the middle of an election campaign and we did it. In these jobs, and I have the experience of being in these jobs, you just have to do the right thing with an eye on the medium term. That’s the horizon for central bank policy…

But you’ve got another much more tricky judgement to make in some ways and that’s help to buy…it’s hard to imagine the governor of the Bank of England is really enthusiastic for such a scheme. Because surely you’re looking at a subsidy of 95 per cent for people’s mortgages and that’s what got us into trouble the last time. Why do you want to be involved in that now?

Well what we have to do when we look at the housing market is we have to identify whether or not there’s going to be risks that arise in the housing market, are people going to end up borrowing too much, is it going to be a risk to the banks and therefore a risk to the entire economy. And we have to look across a range of issues, whether it’s the structure of help to buy or any other government programme, whether it’s how much capital a bank holds against a mortgage, whether it’s how they conduct the test, whether individuals can afford to pay those mortgages back, all of those aspects we can have influence on.

Some of them we can control directly as the Bank of England, others we have a responsibility to stand up and say – if it can improve the financial stability of the economy, we have a responsibility to stand up and say – make this change, in our judgement, make this change.

Even though that is a golden acorn of the government’s policy and you could be having to do it less than six months before a general election?

We will do what’s right. We have very clear mandates at the Bank of England, we have a responsibility to deliver that 2 per cent inflation target so people can ultimately see real wage growth, we have a responsibility to make sure the financial system is resilient and we will take the steps necessary. In some cases – if I may, Jon – some cases we have direct responsibility, we can instantly change things, in others we have to make recommendations but we do those in public.

You mentioned the eurozone just now, Washington last week was pointing the finger at Germany, saying the very fact that Germany had these huge surpluses from its massive export market, and Brussels is doing the same thing today, do you see Germany as the problem?

I see Germany as part of the solution to a sustainable recovery in Europe.

Well to be part of the solution you can be part of the problem?

Well there are German exports and there are German exports. German exports outside the eurozone actually have a supply chain, in most cases, you think of German auto exports actually more than three quarters of the components of German auto exports come from other areas of the European Union including in some cases here. But there is a question about the strength of domestic demand and I don’t mean fiscal policy in Germany I mean more broadly domestic demand and there’s a series of structural measures that the German authorities are aware of that they could take which would help raise growth in Europe which would be good for Europe and would be good for us.

You used one of your early speeches to bolster the view that the City must grow, you want to see the City grow, you’re an enthusiast for the City and you’ve told the City that you’re an enthusiast for the City. You’re talking this up at a moment when still scandal stalks the City. Not least in the foreign exchange outrage which has been going on in which at least three British banks seem to be involved. Is this the right time to say grow the City – isn’t it time to say tame the City?

There are two things. I’ll come to taming the City in a moment… well you embed multiple – I’m choosing two of the many things I could pick from that question. But the first thing – we#re not, the Bank of England, I’m not, we’re not cheerleaders for the City. Our job is to make the City safe effectively, make the financial system safe. And then it will find its own size.

And the point I was making in the speech is that London is the global financial centre, and finance’s proportion of the global economy is going to grow. Not because it is going to grow in the advanced economies but because it is going to grow in the emerging economies. And London’s traditional role is to be in the centre of those flows. Now, if London follows that route, as it has in the past, for centuries, then it’s going to grow relative to the economy. If, if, if .

Our job is to make it safe. There’s two aspects of that. First, make it fair. Fairness means that if you make a mistake in the City, you pay the consequences. If you make a business mistake and you’re a big bank, you fail, just like you would if you were a small corner shop anywhere across this country, a farmer, whatever.

And is this part of the taming?

And this is part of the taming. I’m on my second, I’m sorry, I should have signalled. And so there’s a series of reforms we’re doing so to end “too big too fail”. And the second part of the taming and of the fairness is the integrity of these markets. There has to be, these have to have the most integrity of any of these markets. We have to change the structure of these markets and we’re working on that, and we have to root out corruption in these markets where it’s found. And we are very concerned about the allegations in the FX market, we are supporting the authorities, the FCA and others in their investigations, and we will do so and we collectively – it’s not our primary responsibility but we’ll do everything we can to root this out. And I’ll say the last thing on this, if I’m allowed three, which is ultimately these issues of integrity, they’re issues of culture within these organisations and they are the responsibility of the senior management and the boards of these organisations to set the right tone from the top all the way down through the organisation so that it can be delivered.

Does it set the right tone to be saying to the Chinese – come in, do business here, set up banks, and actually the regulation you’ll be subjected to will be actually lighter than that which we’ve applied to banks which have already gone off the rails?

That would not be the right thing to say but we certainly haven’t said it. (JS Well the implications are very strong) No absolutely not. What we have done is we have changed our policy for foreign branches in the UK and we have put an emphasis on this fairness point. What is crucial is the ability to resolve the institution if it makes a mistake and so we need an understanding with those foreign authorities. We might come to that understanding with the Chinese authorities, and it’s logical that the Chinese would be here, but the second thing that we’ve done is we have restricted that activity to what’s called wholesale activity.

So it’s not a retail activity, you and I aren’t going to have accounts at these banks, it’s going to be City-like activity if it indeed occurs. But these are the same rules for everybody. The Chinese aspect, is a product of the fact that the Chinese, it’s the second largest economy in the world, it’s one of those emerging market, financial sectors that’s growing quite rapidly, London is the global financial centre and it’s natural that some of this activity would gravitate to London but it’s got to be done in the right way.

By your own words you are a foreigner and you already look quite comfortable in the job. And I just wonder if having spent 10 years in this country earlier on in life, specially time at Oxford, gives you a kind of insight into the structures of this country in terms of the establishment, the public school system, the class system, which John Major, our former prime minister, has described as one of the things possibly even holding the country back. Do you understand the world you’re in? Do you resent it, find it difficult, or find it very easy?

I think as a foreigner you have a different perspective and maybe, I would hope, an objective perspective. I think I do understand – I know what I don’t know in this country and that’s quite a bit but it’s necessary…I have the friends and family extended relations I have in this country extend across the social spectrum…(JS and I gather across the Irish sea? You’re an Irish citizen?) And across the Irish sea…I am an Irish citizen, I’m a Canadian citizen and an Irish citizen.

You’re also a British subject – British citizenship can’t be far away?

I will – to take up my right to British citizenship there’s a residency requirement (JS so you are interested in doing it?) I made that commitment to the prime minister. The residency requirement actually extends to about the end of my term as it turns out despite the fact that I have been married to my British wife for 18 years.

Governor, thank you very much for talking to us.

A pleasure Jon, thank you.