The announcement follows weeks of speculation over whether Mr Carney would extend his term, with the Treasury denying reports that he had been asked to stay on just weeks ago.
The chancellor said: “I’m delighted that the governor has agreed to stay in his role for a further seven months to support a smooth exit from the European Union and provide vital stability for our economy.”
In a letter to Mr Carney, Mr Hammond said an extension of the governor’s term “would ensure there is continuity at the bank during this exceptional period and would also allow for a new governor to be appointed during the autumn next year after the terms of the UK’s withdrawal and the framework for the future partnership have been finalised”.
In his reply to Mr Hammond, the bank’s chief said: “I recognise that during this critical period, it is important that everyone does everything they can to support a smooth and successful Brexit.
“Accordingly, I am willing to do whatever I can in order to promote both a successful Brexit and an effective transition at the Bank of England.”
Mr Carney had been set to stand down in June 2019, after a six-year stint at the helm, but will now stay until the end of January 2020, a seven-month extension.
Last week he was asked by MPs on the Treasury Committee whether he would stay on, to which he replied: “Even though I have already agreed to extend my time to support a smooth Brexit, I am willing to do whatever else I can in order to promote both a smooth Brexit and effective transition at the Bank of England.”
On Tuesday, Nicky Morgan, chair of the Treasury Committee, said: “This announcement provides much-needed stability and clarity during this important period. The government should now use the extra seven months to continue its succession planning. It should identify a candidate in good time for the Treasury Committee to scrutinise the appointment.”
Anna Stupnytska, global economist at Fidelity International, said Mr Carney would have a more “firmly doveish” influence on UK monetary policy than “almost any potential successor”.
“While Carney expects a gradual pace of rate hikes from here, perhaps little more than one per year, as he sees out the rest of his tenure, in reality he will be driven by how smooth or disruptive Brexit turns out to be,” she added.
“Indeed, it is perhaps with regards to Brexit where Carney continuity is more important, and why Theresa May was so keen to keep him on board. In addition to setting interest rates, the Bank of England also supervises and regulates British banks through ‘macro-prudential’ policy.
“As such, investors can take some comfort that Carney is as well-placed as anyone to navigate any choppy waters that Brexit will bring to threaten Britain’s overall financial system.”
The chancellor also said that Sir Jon Cunliffe, deputy governor with responsibility for financial stability, has been reappointed.
“I’m confident his extensive experience will continue to be a valuable asset to the Bank of England,” Mr Hammond said.
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