THE BLOG

The King Is Dead, Long Live the Carney

19/06/2013 12:14 BST | Updated 19/08/2013 10:12 BST
AP

Most of Mervyn King's duties as Bank of England Chief are now over, save for a dinner at the Mansion House this Wednesday where the Chancellor will give King a suitably compliment laden send-off, "thanks for doing a bloody fine job, old chap" and so on. The outgoing Governor will now spend his days taking dance lessons and supporting his beloved Aston Villa, while Osborne will return to 11 Downing Street safe in the knowledge that the man taking over is exactly what he wanted.

Mark Carney is the shining star of the world's central bank transfer market, so to speak. It may be arch to say that his move from the Bank of Canada to the Bank of England is similar to a footballer wanting to try his hand in the Premiership given the strength of the competition here. Nevertheless, the Chancellor's choice of candidate is very much how the Conservative party would like to see its economic strategy portrayed as; dynamic, educated and sophisticated.

The new Governor is also set to be able to bring in some Lieutenants in who share his ideology. Paul Tucker, one Deputy Governor and the man that Carney beat to the top job, tendered an early resignation last week whilst Charlie Bean, the remaining Deputy Governor, is due to take his leave sometime next year.

In the short-term, the key to Carney's success will be just how well he can convince members of the MPC that the loose monetary policy and 'forward guidance' (i.e. declarations of loose monetary policy for a certain time period) can work. King and two other members of the currency rate setting committee have been outvoted on no fewer than three consecutive occasions coming into this July meeting. Carney joining the panel will not shift the balance immediately.

I forecast at the beginning of the year that the biggest risk to the value of sterling over the course of 2013 was the appointment of Mark Carney. Osborne was keen to emphasise in this year's Budget that help for the UK economy would not come from government, but instead via 'monetary activism' from the Bank of England. Luckily enough for the pound, the improvement in data over the course of the past month or so has prompted the Monetary Policy Committee (MPC) to rein in its determination to further expand asset purchases and release more money into the economy.

The main argument for the MPC, moving forward, has to be whether, should we need to, they follow the Japanese method of doing things - i.e. massive money printing - or instead decide to act like the Fed and use 'forward guidance'. Some seem to think that this pledge will be tied to a growth expectation or an improvement in unemployment, much like the Federal Reserve's mandate. And there is clearly no full agreement on the best course for the UK as things stand.

Carney will take up his new role on July 1 and I certainly wish him every luck in his endeavours. Britain may well feel like it is on the road to recovery, but the new man at the Bank of England will find out fairly quickly that his new role presents far tougher challenges than the one he has left behind.