Mark Carney's Bank of England 'More Independent than Under Mervyn King'

At a debate on the challenges Mark Carney faces, when he takes the helm as governor of the Bank of England in July, IBTimes UK spoke to Amit Kara, executive director and European economist as Swiss investment bank UBS.

Kara, who had a four-year stint in economic research at the Bank of England, had the following to say about the UK's central bank and Carney's role within it.

Q: Mervyn King has often sought guidance from the Treasury in recent years. For example, he looked to the Treasury for advice on what assets to purchase under the Bank's QE programme that started in 2009.

Do you think Carney will be more independent than King, acting with greater autonomy from the Treasury?

A: I think policy action should reflect the sign of the times. I think in some ways we should look back at history and say why was the Bank of England set up?

Well, it was set up to finance war.

I think the crisis that we faced in the last few years was similar to something that we might have faced in a war. When countries go to war, a central bank becomes similar to the government.

Mervyn King did what a central banker should do.

Going forward, if the outlook improves, then a central bank will become independent.

Remember, this whole debate about central bank independence started in peace time.

It never started in a war.

Yes, [Carney] will become more independent.

Q: How much control over inflation do you think th Mark Carney and that Bank of England will really have?

A: Very little in the short term, but over a one or two-year horizon he has all the control.

Ultimately, inflation is the price of money. If I reduce the amount of money in the economy, inflation falls. If I just create fewer pounds - notes and coins - then the value of each of those notes and coins goes up. That is essentially lower inflation.

He just needs to raise interest rates to 5% and he'll knock inflation.

Q: With asset purchasing, the Bank of England has said it's not the end of the road yet. Carney has indicated that he's warm to the idea of more QE. Do you think that they should broaden the type of asset purchased under QE?

A: If it's possible, yes. The problem of course is that we don't have a liquid market in SME loans out there.

The Bank of England doesn't have a credit department. It cannot go out there and lend to SMEs or agnostically go out and buy an instrument that is not traded. The problem in the UK is we don't have deep capital markets in the way that the Americans have.

The bank has been trying for a long time to do this, but there is just no instrument out there. Its hands are tied.

Q: What do you favour as the monetary policy framework?

A: Why fix something that isn't broken? I don't think that the monetary policy framework is particularly broken in the UK. Maybe you could encourage a more diverse capital structure in the UK, with some alternative sources of capital, but I think that's more a financial stability issue than a monetary policy issue.

We pretty much understand [monetary policy], unlike the 1970s or 60s when we didn't really know that money controls inflation. There's been a technological advance in policymaker thinking.

That's what monetary policy is designed to do. I don't think we should tamper with it.

Q: So you're not keen on the idea of a nominal GDP target?

A: I don't think nominal GDP targeting has any merit over what we are doing now. First of all the data gets heavily revised. It makes it difficult for people to understand what the target is. Thirdly, you're talking about a level that you need to get to over a period of time - what is your starting point to create that level?

It makes a huge difference to whether you're going to stimulate the economy or not.

So I think there's all sorts of reasons why nominal GDP targeting as an explicit form is not necessary.

The other thing of course is ultimately all inflation-targeting central banks are nominal GDP targeters.

The Fed in a way has an identical framework to the UK, because all you do is set the interest rate like in the UK [and] you impact activity in the economy and inflation.

The mix between the two is not something the central bank can decide. It's just a fallout of the structure of the economy.

That's exactly what the Bank of England does.

Q: How do you think Mark Carney should tackle the communication when he unwinds QE?

A: I think on that there will have to be some kind of guidance and framework that'll have to be in place.

What I am against, for instance, is it would be very wrong of [Carney] in the unwinding of QE to say we are going to sell X billion pounds of gilts over the next two years.

You can't do that. No asset manager would tell you that he's going to sell his assets on a predetermined path at any price. There's no reason why the Bank of England should do that.

That's not to say that [Carney] cannot say what he is going to do over the next three months or so.

There's got to be an element of flexibility. I think he's got to make clear that they're not going to disrupt the market.

Of course, it's not just talk; he's got to act on it as well.

Short-term guidance of three months or so is fine, but you can't pretend you have a crystal ball and that you can say what's going to happen over a longer period of time.

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