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Andrew Pyle


Good Luck Mark Carney, You'll Need It

Posted: 11/26/2012 4:47 pm

It wasn't that long ago that Canada saw one of its more publicly visible chartered bank CEOs leave the nest to take the reins of a major UK financial institution. That individual was Matthew Barrett, then the CEO of BMO, who went to lead Barclays PLC.

Many years later, after Barrett's tenure was over, Barclays hit more than a couple of setbacks and the bank's stature today is diminished relative to its grander days in the 80s and 90s. Today we heard of yet another Canadian banker export to the UK as the country's Chancellor announced that the head role at the Bank of England would go to none other than the current Bank of Canada Governor, Mark Carney.

Like its European cousins, the UK has faced and continues to face major economic headwinds, with limited latitude on either the fiscal or monetary policy fronts. Sir Melvyn King -- the present Bank of England Governor -- has not exactly performed terribly in the aftermath of the 2008-1, but he
hasn't been a monetary policy poster boy either.

In particular, the BoE's implementation of non-traditional policy tools (like bond buy backs) has not been enough to counter the drag on domestic demand growth in the UK. While the third quarter pop in GDP of 1 per cent was a welcome surprise, it followed three consecutive quarters of contraction and early indications for retail spending so far in Q4 suggest the likelihood of a return to modestly negative GDP growth.

Meanwhile inflation remains stubbornly high, with headline retail inflation running at 3.2 per cent and core CPI (excluding food and energy) inflation at 2.6 per cent. Both are not as high as we've seen this cycle (headline retail inflation got up to 5.6 per cent in September of last year, for example), but it limits what the BoE can do with monetary policy if it doesn't want to lose the market's confidence in its ability to control inflation.

Let's put it another way: Over the past 20 years, retail inflation in the UK has averaged 2.8 per cent, with real GDP growth averaging 2.6 per cent on a year-over-year basis. On top of all this we have a Deputy Governor at the BoE (Paul Tucker) who is currently caught up in the Libor rate setting scandal revealed this year.

As for Carney, the track record has been impressive on the inflation front. Over the same 20-year period, Canada's headline inflation rate has averaged about 1.9 per cent, but average annual real GDP growth has been 2.7 per cent. With inflation now barely above 1 per cent, there is plenty of room for the Bank of Canada to cut its overnight rate target from the present 1 per cent mark should economic conditions sour.

Let's be clear. The Bank of Canada hasn't been perfect on policy and has often been criticized on flip-flopping with respect to its projections and guidance. That hasn't deterred global investors from shifting capital into Canadian securities on the prospect of low-inflation growth over the medium-term. The bet is that Carney can wave the same magic wand for the UK, though it's going to take more than a doctorate from Oxford to overcome the relatively larger challenges facing that country versus Canada, with its proximity to a troubled Eurozone.

Given the leadership role Carney has taken at the G20 (head of the Financial Stability Board) and strong working knowledge of global capital markets, most assume he is up to the challenge even though he was not favoured for the BoE's lead job (Tucker was odds on favourite). The bigger issue, however, is that Carney and the BoE are about to take on an increased financial sector oversight role as a new Prudential Regulatory Authority set up within the walls of the BoE prepares to replace the current Financial Services Authority. All we can say is good luck Mark.

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  • K Harazny

    Canada losing Bank of Canada governor Mark Carney to the Bank of England is a huge loss for our country.

  • Melton Blue

    George Osborne appoints Mark Carney to become the Governor of The Bank of England. Canada has done well under his stewardship.

  • William Cameron

    Mark Carney sounds like a good choice as next #BoE Governor and he has in addition the great advantage of not being Adair Turner.

  • Andrew Turmer

    Good luck to Mark Carney as the new BoE Governor. We can all forget about him never wanting the job.

  • Alex Ward

    If Queen on CN $, Carney gets visa. MT @gideonrachman: Mark Carney a great choice for Bank of England. Will the Home Office give him a visa?

  • Joel Taylor

    Well Mark carney speaks fluent French like a good Canadian should. Might help with relations with our European partners perhaps?.......

  • Tobias Ellwood

    Wise choice for new Bank of Eng Governor: Mark Carney. Unfamiliar, indeed rare mood in Chamber with whole House welcoming the appointment!

  • Derek Brower

    They noticed Canada's household debt levels when they appointed Mark Carney, right?

  • John Shmuel

    Mark Carney: "We have a good record here, a record of success in our financial system."

  • Leevan Aden

    Mark Carney did get his masters and doctorate in economics at Oxford after all.

  • Julianne Bowman

    Canadian Mark Carney to head up Bank of England! Well, staple me to a maple tree. #darkhorse

  • Robert Benzie

    Difficult day for Finance Minister Jim Flaherty, who is close to both @TOMayorFord and Mark Carney. #cdnpoli #onpoli #topoli

  • Andy Bruce

    Small list forming of Goldman alumni at Europe's big 2 central banks. Carney & Broadbent at BoE, obviously Draghi at ECB.

  • emily jackson

    Carney leaving? Ford thrown out of office? Just some casual news for us to wake up to in the west. AIIIEEE. #TOpoli #cdnpoli

  • David R Silva

    "He is acknowledged as the outstanding central banker of his generation," Osborne said of Carney. http://t.co/MmHJCLpP

  • Claire Schachter

    .@bankofcanada's Mark Carney dodges the Liberal leadership bullet and lands on the other side of the pond with style.

  • Ian Muller

    Carney leaving is a tough loss for Canada, but a significant validation of the Canadian central banking system #cdnpoli

  • Mantejd

    New BoE gov Mark Carney speaks in clear plain language! Understood exactly what he was saying on the @BBCnewschannel at his presser.

  • Luke Skipper

    "Canada was better than any other western economy during the crisis" Chancellor of the Exchequer #BoE #Carney #Ialwayshadfaith

  • Shirlee Engel

    NDP wishes Carney good luck for the future. Will watch closely who will be chosen. "Big shoes to fill" #cdnpoli