OTTAWA – Mark Carney is already causing ripples in Britain in his first week as governor of the Bank of England, even though his methods would be considered old hat in Canada.
Eschewing past practice, the British central bank went beyond simply announcing no changes to the 0.5 per cent key interest rate as it also published a statement explaining the reasoning and suggesting rates would remain depressed for some time.
The dovish statement had the effect of boosting equity prices in England and dropping the pound one cent to $1.51 US.
Under the previous governor, Mervyn King, the bank would typically issue no comment when policy was left unchanged.
But instead the central bank gave some indication where matters are heading by declaring that “the implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy.”
It also said it would provide an assessment next month to Treasury chief George Osborne on whether the bank should use forward guidance — a tool Carney introduced in Canada in the spring of 2009 to give markets and investors long-term assurance on interest rate expectations.
“It does appear that the committee are already moving towards more communication on their decisions and towards providing forward guidance on monetary policy,” said Howard Archer, IHS Global Insight’s chief U.K. and European economist.
Alistair Cotton, a senior analyst with Currencies Direct, said any forward guidance on interest rates would be “warmly greeted by homeowners (with variable mortgages) … who will be in a better position to budget and even forecast the right time to lock in.”
As Bank of Canada governor, Carney received many plaudits for his aggressive actions in confronting the global financial crisis, including introducing so-called forward guidance — a kind of conditional commitment on the direction of interest rates — that gives a measure of confidence in a generally uncertain world. The approach was later copied, and even expanded on, by Ben Bernanke at the U.S. Federal Reserve.
A Bank of Canada analysis concluded the conditional commitment was able to reduce longer-term rates.
Scotiabank economist Derek Holt said it was unlikely such guidance would be as effective in the United Kingdom at this time, however.
“It was an interesting experiment, but in the U.K. he’s not operating in the same context,” Holt said.
“The market is already convinced rates are going to be low for a long period of time, so … it’s likely to carry very little influence.”
Thursday statement was closely watched because it was Carney’s first since taking over Britain’s central bank on July 1.
The Carney’s should be used to the attention by now, however. The banker and his British born-wife, Diana, have been in the crosshairs of the British media since the shocking announcement last fall that he would become the first foreigner to head the Bank of England in its storied 319-year history.
In the last few days, British media have taken Diana to task over a months-old blog entry that suggested individually-wrapped tea bags were environmentally wasteful. She has since issued a statement saying she was not “anti-tea bag.”
Carney, himself, has been in the news with a statement that hints at suggestions he intends to ensure that new British notes will continue to carry images of women, not just men.