CNBC Transcript: Bank of England Governor Mark Carney Speaks with CNBC's Steve Liesman Today

WHEN: Today, Monday, October 13th

WHERE: CNBC's Business Day programming

Following is the unofficial transcript of a CNBC interview with Bank of England Governor Mark Carney on CNBC today. Excerpts of the interview will begin on CNBC's "Squawk Box" (M-F-, 6AM-9AM ET) and run throughout CNBC's Business Day programming. Following are links to the interview on and

All references must be sourced to CNBC.

STEVE LIESMAN: Mark Carney thanks for joining us.

MARK CARNEY: Steve it's great to see you.

STEVE LIESMAN: Let's talk about one of the latest developments globally, weakness not just in Europe, but around the world. How does this change your outlook in the UK, both for the economy and for policy?

MARK CARNEY: Well I think we need to put it in some context. The revisions by the IMF, I'll use the IMF's numbers, are relatively modest and more of the IMF's message is around the medium term, it's around potential growth as opposed to immediate demand. That said, you know, there is weakness, more broadly in emerging markets and certainly in Europe, and Europe is the largest trading partner of the UK. To put it into our perspective, we have had a strong recovery over the course of the last 18 months, we are now into an expansion. It's being driven by domestic demand, it's reasonably broad based, it's this is much more than consumption. The business investment is growing more than 10% a year. We've had a housing market that's picked up. So there is, there are other components to it. We have to account clearly, a more modest global recovery, particularly if that is the case in Europe. And we, in addition, with that domestic focus, we really concentrate on what is going on in the labor market which will be as important as external developments for the path of monetary policy.

STEVE LIESMAN: When you say take that into account, you had been saying up to the end of September that the day of interest rate rises is closer. Is that still the case? Is that still what you're saying?

MARK CARNEY: Well that referred to – we make four forecasts a year as the MPC. And from forecast to forecast, the point of normalization implied by the forecast was moving closer. We're about to make another one in November so I can give you an update after that.

STEVE LIESMAN: You will be sure to call me I'm sure.


STEVE LIESMAN: Why does it seem six years, almost seven years after the financial crisis that the global economy can't seem to get traction?

MARK CARNEY: Well, one of the – there are several issues and again let me pull it back into a monetary policy perspective. Because one of the messages we've been putting out is that we expect the medium-term path of interest rates to be, once they start to rise in the UK, to be limited and gradual. And so one of the reasons behind that in the immediate to medium term, you have a number of headwinds acting against the economy, it's weak demand in major economies such as Europe. You have headwinds from ongoing fiscal consolidation. You have the legacy of very high debts in the household sector in a number of economies, including the UK. There has been progress, but households in the UK, still have in total a lot of debt and most of that debt is floating rates, so it is more sensitive to monetary policy. And the last aspect that's there is financial reform. We made some very positive changes in financial reform, but it is going to mean the cost of capital is higher, the cost of liquidity is higher over the medium term and as central banks we need to adjust to that. So you put that all together, that means a more limited and gradual path. When you get to the medium to longer term, which is part of the discussions this week, you have to say where is potential growth going. Given demographics, given the presence or absence of structural reforms and that will determine where that medium term, sorry that –

STEVE LIESMAN: Has there been a decline in global potential growth?

MARK CARNEY: Yes there has as one would expect following a financial crisis, I think some have been quicker to realize that than others and they've taken action and those economies that have taken less action, or have been less successful on the structural reform side have more catch up to do.

STEVE LIESMAN: Oil prices are sinking to lows we haven't seen in more than a year. All the inflation numbers are lower. Is one of your concerns right now that there is some sort of global deflationary impulse that's going around the globe right now?

MARK CARNEY: Well there is disinflation, persistent disinflation in a couple of major economies of the G4, so clearly that's coming through. The commodity outlook is, in some commodity spaces, is a product of sharp increases in supply, certainly in the oil market, you know the shale revelations in the U.S. is material. But yes, there is weaker global demand, relative to global potential. That is reducing, that is producing a very benign global inflationary environment and that is something certainly we do take into account.

STEVE LIESMAN: Mark, the text books would say that means that central banks around the world aren't stimulated enough.

MARK CARNEY: In some cases the issue is that the stimulus they're trying to provide, it still isn't getting through to the real economy, because of the transmission mechanism is impaired. Let's go back to Europe. The steps that are being taken by the ECB to run stress tests, do the asset quality review, ensure as proper final recapitalization of the banking system are very material. I mean they are overshadowed, actually, this weekend by other discussions. But the fact is, over the course of the last two years, the core European banking system has raised over 200 – or has had 200 billion euros of balance sheet actions – combination of capital raising and asset shedding and that will put them in a much better place to pass on the stimulus the ECB's doing. But if you look back, I think you're point is right, that recognizing the lags in monetary policy, given the impairment of some transmission mechanisms and given the less than perfect knowledge of unconventional policies and effectiveness of unconventional policies, the issue in total has been – there has been inadequate stimulus relative to what's been –

STEVE LIESMAN: Time is short, so I'll have to ask more direct questions than I normally would. The ECB's balance sheet has fallen by a trillion euros in the past year or so, a couple of years. Would you like to see them take more direct action to increase the size of that balance sheet, including purchasing sovereign bonds?

MARK CARNEY: Well look, I have full confidence in the governing council of the ECB and President Draghi that they will do the right thing. I think the framework that Draghi set out in Jackson Hole, which made it clear that this isn't just about monetary policy. It is going to require coordination with fiscal policy and most importantly structural reforms is the right one. The instruments that they are putting in place, one which is based off a very successful program in the UK, funding for lending, is actually an improvement on funding for lending in terms of the design. These are sensible things to do. They get directly to the transmission mechanism, I wouldn't presume to dictate exactly what they should do beyond that.

STEVE LIESMAN: I've got two more current news questions that I want to do first.

MARK CARNEY: Well I just want to – there will be lags. There will be lags in implementation, it will take a while for these programs to ramp up, and then of course as is with all monetary policies there are lags to effectiveness which is why that coordination is necessary.

STEVE LIESMAN: Markets have recently been extraordinarily volatile. In the U.S. there have been 200, 300 point swings every day. Is this something that raises concern to you about financial stability? And do you have any approximate reasons for the cause?

MARK CARNEY: Well I think there are several factors. First, prior to this, markets have been, you know volatility has been extraordinarily low for a very long period of time. The term structure of volatility has been upward sloping so we've been expecting some volatility. As the global economy becomes less synchronized, some advanced economies moving forward, others moving sideways, you can expect greater volatility. We're seeing some of that. The overlay of geopolitical risk, certainly we would have expected it to come in, we're seeing some of that as well. And then the prospects that we're discussing of a slowing is being digested by markets. Volatility in and of itself is not a risk to financial stability. I mean we have to accept that as this process moves forward, as some economies emerge from a period of exceptional, unconventional stimulus, there will be greater volatility. And that, in and of itself, should not influence the path of normalization of monetary policy. Real side factors that we were discussing external demand pressures, a benign global inflationary environment, developments in our own labor markets, those will. Those will certainly influence the path.

STEVE LIESMAN: And just one more thing and then we will do financial reform, if you wouldn't mind indulging me on this. The French downgrade this past week, is that a concern that we could be back into an area of risk around deficits and the fiscal side that we had not just so many years ago?

MARK CARNEY: Well, it's still a work in progress. The fiscal consolidation in Europe in some of the core economies, France included, Italy as well, this is the subject of intense discussions over the course of this month as you know. But these countries still have a lot of flexibility, they still are very highly rated. I'd put the European – the overall European situation, the challenges they have, back – this is a chronic phase of the European adjustment. This is not the acute phase. We're not back in to that period of a couple of years ago.

STEVE LIESMAN: Two senior bankers at HSBC recently said they we're resigning because of rules that were proposed by bank regulators in England regarding the idea that they could be held criminally liable if the bank failed. Is that going too far?

MARK CARNEY: Well a couple of things. First, overall we certainly believe in personal responsibility. Responsibility of directors, responsibility of the CEO, the chairman, the CFO, the head of the audit committee for their institutions, for material developments in their institutions. And that is absolutely clear and one of the lessons of the crisis is that those individuals in countless institutions didn't feel that responsibility and were not subsequently held to account. So I think if you believe in the market you believe in personal responsibility, these measures make sense. The second is that these are measures – these aren't measures by regulators, these are measures that were debated in parliament, it is a law that was passed by the UK parliament that establishes this responsibility. Thirdly the responsibility of the penalties, there's not a reverse burden of proof on the criminal side, there is civil responsibilities and there is a very high burden of proof for gross negligence around, as you would expect. As you would expect for directors of large systemic institutions if they don't fulfil their responsibilities. The last point is that it is a big deal to be a director of a major global, globally systemic bank. It requires time. It requires focus. It requires expertise and it requires a sense of responsibility. And so we make no apologies for implementing a rule that was passed by the UK parliament that goes to the heart of both personal comportment but also really, to the heart of the market discipline.

STEVE LIESMAN: One of the issues regarding market discipline. I just broadly on an issue of financial regulatory reform, you've been intimately involved in this issue with the FSB. Some people criticize the notion that it's gone too far. Capital levels, liquidity ratios. That it is a reason why global markets are underperforming. That the regulators have gone too far and are hampering lending and that's keeping economies weak.

MARK CARNEY: Well here's a surprise I am going to disagree with that. A couple of things, first in terms of the capital liquidity rules, we know, we understand, we as regulators and central bankers understand the implications of those rules. They will increase over the medium term the credit spread and liquidity spreads in markets. That's one of the reasons we expect risk free rates, which we control, risk free rates to be lower over the medium term to adjust so that end borrowers have the same, nominal – they face the same nominal rates and we are making those adjustments that is part of the reason why policy is where it is. The bankers or those who criticize tend to forget it. The second thing is, if you think about our priorities for the Brisbane summit in November, the G20 leaders' summit, first and foremost, it is to substantially complete the core of the reforms. The reforms that were launched in the aftermath of the crisis. So that means providing greater certainty to banks, to insurance companies, to investors, to market participants that this is the framework. This is what's getting done and then we focus on implementation. As part of that we expect that this will be a watershed for ending too big to fail, which is to go back to what we just discussed on senior directors is about bringing market discipline back to the largest financial institutions and including responsibility. I will, I want to finish with this though because it should be acknowledged in a couple of major agreements that I expect us to get in the next few weeks the private sector has been instrumental in helping to design them and having the commitment to implement them. And so those who think about the system over the medium term recognize that we need to take these steps in order to have a more resilient system. But a resilient system that is based on the market and is consistent globally.

STEVE LIESMAN: Mark Carney, thanks for joining us.

MARK CARNEY: Thanks for having me, Steve.

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