Carney Run Bank Of England Unlikely To See Strong GBP
The UK made a radical departure in its choice of a new governor for the Bank of England – they went for someone from outside the British establishment. His appointment is seen in financial circles as a great coup for the UK as Mark Carney is very well regarded having successfully run the Bank of Canada.
GBP actually spiked higher on Carney's appointment reflecting his credibility. His choice in large part seems dictated by his role as head of the Financial Stability Board, a powerful body based in Switzerland, which sets global banking rules. The Bank of England is acquiring many new powers, such as bank supervision and over-seeing financial stability where his FSB experience will be invaluable.
However, it may be a little premature to buy GBP on Carney's appointment even if some commentators think he will be more hawkish on monetary policy than the current BoE governor Mervyn King. Canada navigated the financial crisis better than the UK largely because its economy was better run and its financial system better regulated.
Weak GBP likely to be favoured
At the press conference on Monday Carney talked of the need of rebalancing the UK's economy and completing reforms of Britain's financial system. That means shifting away from domestic consumption and financial services to focus more on manufacturing, exports and investment. This implies favouring a weak GBP, which the BoE appears to have supported.
Carney is described as innovative and pragmatic and it is unlikely that he will seek to reverse the BoE's GBP 375 billion quantitative easing programmes anytime soon. If anything he may turn out to be even more aggressive. When the global financial crisis struck he was quick to cut interest rates in Canada, though he never engaged in QE, simply because there was no need to.
QE clearly played a major role in stabilising the UK's financial system. Following the US Fed he could give explicit guidance over how long interest rates will stay at current levels. That's designed to boost investor confidence that monetary policy won't suddenly be reversed.
Not reaching the real economy
But one of the problems is that the QE money is not finding its way into the real economy. Carney may therefore consider more unconventional forms of monetary policy to ensure it can have an even deeper impact on the cost and availability of credit to households and SMEs. This would involve qualitative easing, which is buying commercial paper of lower credit quality than Gilts, something the BoE has shied away from.
Explicitly targeting and buying mortgage backed bonds, corporate commercial paper and packages of loans to SMEs is one way to push funds into those sectors at lower rates of interest. This means those sectors will have more disposable income. Being in charge of banking regulation might make that process easier as the rules can be tweaked to help credit flow to where it is needed.
Noticeable change in style
There will probably be a change in style when Carney takes over in July next year. He has strong communication skills and may bring about more transparency in the way the BoE operates, such as the how it makes economic forecasts.
But possibly Carney's main legacy in the UK will be to leave it with a more robust and better regulated financial system. But in the meantime, it is unlikely that Carney alone will drive a stronger GBP, that will require the backing of economic fundamentals and the UK still has a long way to go in that regard.