Photo: World Economic Forum
The response to the Bank of England’s selection of Bank of Canada chief Mark Carney to be its next chief is being met with near universal praise.Given how explosive subjects of monetary policy are (at least in popular discussion) the lack of controversy is Surprising.
A lot of attention has been paid to the fact that Carney represents a force for strong bank regulation (Canada didn’t have a banking meltdown), something the UK feels it needs given the various busts and scandals that have affected its banks.
Just last month, Sid Verma of Euromoney did an extremely in-depth Mark Carney profile, examining his role as “Finance’s New Statesman.”
In all the discussion about Carney as a bank regulator, there really hasn’t been much talk of him as a practitioner of the interest rate setting side of central banking. It turns out he’s really solid there too.
First off, nobody really has described him as “dove” or a “hawk” which is probably a good thing, as he’s not boxed in to some arbitrary label.
That being said, during the crisis he made some excellent moves.
The epoch-making feature of his tenure as governor remains the decision to cut the overnight rate by 50bp in March 2008, just one month after his appointment. While the European Central Bank delivered a rate increase in July of that year, Carney’s market instincts rightly judged that the leveraged-loan crisis would trigger global contagion.
And when policy rates in Canada hit the effective lower-bound, the central bank combated the crisis with the nonstandard monetary tool: the “conditional commitment'” in April 2009 to hold the policy rate for at least one year, in a boost to domestic credit conditions and market confidence more generally. Output and employment began to recover from mid-2009, in part thanks to monetary stimulus.
In his comment on the announcement, Goldman Sachs’s Kevin Daly also brought up the “conditional commitment” aspect of his 2009 announcement.
It is difficult to speculate on the policy implications of an appointment such as this, not least because Mr. Carney will have only one vote (of nine) on the MPC. But the BoC Governor has a reputation for being a policy pragmatist and innovator (under his tenure, the BoC was the first G7 central bank to introduce the conditional rate commitment in 2009). Relative to the conservative approach towards credit easing that the BoE has adopted under Governor King’s stewardship, it is also possible that Governor Carney may be prepared to engage in more ‘unconventional’ forms of QE. Mr. Carney is also perceived in some quarters as being a dove, although this perception may simply be ‘state dependent’ (i.e. his relatively dovish stance reflected the weak state of the global economy during his tenure at the BoC).
Carney was ahead of the curve on this move.
The world of central banking/monetary policy has moved in the direction of recognising that when policy hits the “Zero Lower Bound” (short term rates are at zero), a powerful tool is language, future promises, and conditions.
That’s why there’s so much interest in the Fed’s indication that it won’t hike rates until 2015 and the Evan’s Rule, which would commit the Fed to low rates until either inflation or unemployment hit key thresholds.
So here’s what the Bank of Canada announced on April, 2009:
With monetary policy now operating at the effective lower bound for the overnight policy rate, it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities. Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. The Bank will continue to provide such guidance in its scheduled interest rate announcements as long as the overnight rate is at the effective lower bound.
This early use of language and rules was cited by monetary economist Michael Woodford in a highly influential paper at Jackson Hole, wherein he noted that this (the novel) language seemed to have a noticeable effect on market-based expectations of future policy.
In just the last few years, there’s been a lot more work done on promises, targeting, commitments, conditionality in so forth. But Carney was an early innovator.
ADDED: One other point. As noted above, in addition to his April 2009 move, Carney cut rates in March 2008, just one month after his appointment as head of the Bank of Canada. This move deserves praise for a unique reason, which is that there’s an observed phenomenon of central bankers acting hawkish right when they take office to establish credibility (Here’s a paper on that phenomenon). The fact that Carney didn’t succumb to that cliche, but instead recognised the situation of the moment is a high testament to his judgment.
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