Mark Carney's in-tray: Persuasive powers will be required – and an awkward letter needs writing
George Osborne has given his new central bank chief a fair reforming wind. That's why the Chancellor tweaked the Bank of England's inflation targeting remit in March to allow Mark Carney more latitude to stimulate the economy should he desire it.
At Budget time, Mr Osborne also instructed the Bank's Monetary Policy Committee to conduct an assessment of the merits of "intermediate thresholds" for monetary policy (like the Federal Reserve's pledge to keep US monetary policy loose until unemployment falls below 6.5 per cent). The outgoing Governor, Sir Mervyn King, has always resisted offering this kind of "forward guidance" to the financial markets on monetary policy, but Mr Carney has indicated that he is favourable.
The assessment is, thus, a way of preparing the ground for a new approach from the Bank under the Canadian. Many City analysts think Mr Carney would like to announce some form of UK forward guidance, possibly stating that the Bank will not raise interest rates until the economy is growing at a certain speed. If so, one of Mr Carney's early important jobs will be to influence that MPC assessment to ensure that it comes to the conclusion he wants, persuading the rest of the committee of the merits of a fresh approach. The new Governor will unveil the MPC's assessment at the same time as the Bank delivers its new growth and inflation forecasts in August.
But, before that, Mr Carney must chair the July meeting of the MPC to decide if the Bank should inject more stimulus into the economy by adding to its stocks of £375bn gilts. In recent months, the MPC has been split six-three against more purchases. If Mr Carney thinks more easing is warranted, he will have to persuade the six opponents of more quantitative easing why they are wrong.
Further in the future, Mr Carney will also chair the Financial Policy Committee super-regulator, where one of his first jobs will be to take a view on whether the commercial banks' announced plans to raise more capital are sufficient. There are some administrative duties too. Last week's announcement that Paul Tucker will leave the Bank in the autumn means Mr Carney will also have to turn his attention to who he would like to be his deputy governor for financial stability. He will also have to turn his thoughts to who he wants to replace his deputy governor for monetary policy, Charlie Bean, who retires in June next year.
But long before any of that looms a more awkward responsibility. The Bank's latest forecasts show CPI inflation rising above 3 per cent in the third quarter of the year. So one of Mr Carney's earliest duties could be to write an open letter to Mr Osborne, the man who chose him, to explain why inflation is again more than 1 percentage point above the Bank's official 2 per cent target.
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