BoE: Mark Carney's Transparent Ambivalence at the Treasury Select Committee

If Mervyn King and Mark Carney were boxers and not central bankers, one might describe their styles as follows.

King is aggressive, brazenly self-confidant and impatient to impose his knockout power on opponents.

When the ex-governor entered the ring at a committee hearing, he had no trouble in presenting his strong views, conditioned by his formidable intellect, to politicians.

His successor is also a person of considerable intelligence and self-belief, but has a different approach to adversaries.

Carney's strategy rests on subtle persuasion and precision punching rather than outright mauling.

He prefers to charm and smile at his company, rather then cajole and submit them to his will.

Another Side of Carney

In his first meeting with the Treasury Select Committee in February, Carney's people skills impressed the politicians. Perhaps they recognised a member of their own tribe.

But with the unveiling of his historic and radical forward guidance policy at the Bank of England over the summer, the politicians shifted from admiring the suaveness to interrogating the substance of his judgements.

Their probing questions of the assumptions behind his views on monetary matters brought out a degree of irritation and steely defiance people have not seen in Carney's manner.

There is a temper and toughness under the diplomatic surface after all.

Constructive Ambiguity

During the proceedings Carney deployed his own brand of rhetorical gamesmanship.

A notable phrase was that forward guidance had brought a "marked transparency" to the public's understanding about what the BoE is trying and why it wants to keep interests low until 2016.

Yet Andrew Tyrie, who is chairman of the committee and his fellow panellists, were not thrilled by what they heard and chipped away at Carney's thinking and that of his colleagues.

Paul Fisher, executive director of markets at the Bank of England, Professor David Miles, member of the Monetary Policy Committee (MPC) and Ian McCafferty, another MPC man, did their utmost to defend the policy of forward guidance and their boss.

Conflicting Goals?

Carney made it clear that he believed interest rates must remain low so that a nascent economic recovery is not choked by high interest rates.

He said that he was looking to keep monetary policy loose so that the BoE could avoid being forced to keep interest rates low for decades.

This is a phenomenon that struck Japan in the 1990s and led to two decades of deflation where low interest rates did not spur any economic growth.

A common criticism levelled at the Bank of Japan in retrospect was that interest rates were too high and were a major factor that made the Japanese economy stagnate.

But Carney failed to convince everyone on the committee that his twin goals of hitting the inflation target and creating sustainable economic growth could be reconciled.

Savers vs Spenders

Conservative MP Brooks Newmark pressed Carney about the impact of forward guidance on pensioners as low interest rates damage their savings.

However, Carney skilfully tied his defence of low interest rates to the long-term benefits of pensioners as he pointed out that only sustainable growth in the UK economy can ultimately raise long-term interest rates.

Forward guidance was a critical part of this he argued as it was the best way to provide a "more effective monetary stimulus".

Inconsistencies

David Ruffley and Jesse Norman, both Tory MPs, accused Carney with some success that forward guidance was inconsistent as it had tightened monetary policy by appreciating sterling and raising the yields on Treasury gilts.

The main thrust of their accusation was that the BoE had not steered peoples' expectations into believing that interest rates would be kept at 0.5% until 2016.

Carney countered that his strategy at the BoE was underpinned by what he called "conditions guidance" like the 7% unemployment rate as the only standard by which he would consider hiking interest rates.

He contrasted this with his reign at the Bank of Canada where the forward guidance was defined by what labelled as "calendar guidance" or "time contingency guidance", meaning monetary policymakers in Canada promised to keep interest rates at a specific level for an explicit period of time.

He justified "conditions based guidance" on where the UK is now in the economic cycle.

Still, Tyrie inspired a wry smile from Carney with the insinuation that he was being evasive as the governor would not say whether monetary policy had "tightened" or "loosened".

Instead Carney preferred to say that his forward guidance made "monetary stimulus" more powerful and clashed with members of the committee who did not think he was being completely forthcoming in his answers.

Funding For Lending

Liberal Democrat MP John Thurso asked about the effectiveness of the Funding for Lending Scheme and whether it was having any influence on the real economy.

David Miles and Carney both defended it on the basis that it was good that banks knew they had a lender of last resort that could give them cheap credit if ever they ran into funding difficulties.

Normalising Monetary Policy

Carney acknowledged the challenge of bringing the BoE role back to a pre-2008 world where economic growth, inflation and central bank interference were all operating in a more conventional way.

He was repeatedly criticised that his forward guidance was not nearly as simple or intellectually coherent as he claimed it was.

The Canadian expressed the belief that the British public understood his forward guidance and its implications for their everyday lives.

When asked about the wind down of quantitative easing he made it clear that any hike of interest rates would come before any selling of UK Treasuries as the BoE does not want to clean its balance sheet at a volatile time.

Did Carney Win?

Although the economic recovery has started for Britain, Carney repeated his belief that it was fragile and needed support by monetary activism.

He predicted that a fall in unemployment would likely happen before an increase in productivity.

His colleague David Miles observed that a danger for the early recovery was that unemployment fell but this would be off the back of low growth and no real increase in wages.

Undoubtedly Carney and his cohorts at the BoE have a tremendous amount to worry about, not just with the way they guide inflation expectations but also expectations of themselves.

Perhaps the success or failure of forward guidance will ultimately come down to how much people believe in Mark Carney's talent regardless of how much talent he actually has.

Expectations are difficult to form let alone steer but that is what central bankers try to do.

Carney will need all of his charm, brains and good luck to succeed.