What the Mark Carney era may offer is a little bit more predictability on monetary policy. Under Mervyn King the main guidance came from the Bank’s quarterly Inflation Report press conferences, MPC minutes, and speeches by committee members. Under the Bank’s new remit, set by the Chancellor in the March budget, it’s likely that Carney, like Bernanke, will seek to link interest rates and monetary policy directly to growth and jobs targets
There will be subtle changes but no one, as economists at HSBC have noted, is expecting ‘shock and awe’. The big question for Carney is which indicators to use as targets. The runners are unemployment (as in the US), real GDP, or the measure preferred by many economists: nominal GDP. If that were to be the agreed measure, a current compendium of headline inflation and growth figures might suggest that we were in boom conditions. That would imply taking the famed ‘punch bowl’ away.
In Canadian conditions, Mark Carney was among the first central bankers to cut interest rates to the bone as the subprime crisis hit. As Matthew Lynn wrote here recently, the long period of low interest rates may have produced a Canadian housing and construction bubble, giving rise to fears of a ‘hard landing’ as monetary conditions have been tightened.
When George Osborne recruited Carney, it was assumed that the reason for doing so was to freshen up the Bank but also put some fire under monetary policy. But with the economy starting to recovery and a nascent housing boom on the back of ‘Funding for Lending’ and ‘Help to Buy’ schemes, Carney may feel his tasks are to guide the market towards an end to QE and a normalisation of the official bank rate, which has been held at 0.5 per cent for four years.
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