Carney Sets High Bar to Bank of England Changes

Incoming Bank of England Governor Mark Carney
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Incoming Bank of England Governor Mark Carney

Mark Carney, the next governor of the Bank of England, said on Thursday any rethink of how British monetary policy is run should be made carefully but changes should be looked at over time.

Carney told lawmakers in London that a commitment to keeping stimulus over a period of time could be needed but played down speculation that he would rapidly press for bigger changes at the bank when he takes over in July.

"In my view, flexible inflation targeting -- as practiced in both Canada and the UK -- has proven itself to be the most effective monetary policy framework implemented thus far," the Canadian central bank chief said as he delivered his first views on how to revive a near stagnant British economy.

"As a result, the bar for alteration is very high," he said in written answers to questions from a parliamentary committee.

Sterling rose after Carney's testimony as investors took it as showing little signs of looser monetary policy ahead.

The pound rose 0.4 percent to $1.5720 as investors who had bet on hints of more aggressive easing measures.

"Some of Carney's comments suggest that he favours some changes in the BoE's policy framework. Nevertheless, we rule out that changes will be abrupt as he sounds very keen on maintaining confidence in the institution's credibility," said Annalisa Piazza, an economist at Newedge Strategy.

Carney, who will be the first foreigner to run the bank in its 318-year history, took part in a three-hour question-and-answer session with lawmakers after submitting his testimony.

In it, he said that while moving cautiously, reviewing monetary policies would be important.

"Although the bar for change ... should be very high, it seems to me important that the framework for monetary policy -rightly set by governments and not by central banks - is reviewed and debated periodically," Carney said.

Carney said he would welcome a short debate on this, as the Bank of England's remit has not been seriously reviewed since it gained operational independence in 1997.

Not only does finance minister George Osborne set the policy framework but Carney will also be only one voice on the central bank's policy committee so there is no guarantee he could force through change even if he wanted to.

"Whatever Mark Carney says about monetary policy today, he will be one member of nine on the MPC, so cannot dictate policy," former Monetary Policy Committee member Andrew Sentance said.

Strong Credentials

After taking over at the Bank of Canada in 2008, Carney earned a reputation for protecting his home country from the global financial crisis and he now faces the bigger challenge of getting Britain out of a rut of almost zero growth.

Carney promised to keep Canadian rates near zero for about a year in April 2009 as the global crisis intensified, before the idea was taken up by the U.S. Federal Reserve.

That kind of approach has raised eyebrows at the Bank of England. Several top officials have said it is not needed for Britain, in part because of concerns it could stoke the country's persistently above-target inflation.

Asked about that kind of communications policy by the British lawmakers, Carney said central banks "may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up".

However, markets could begin to doubt that kind of commitment if inflation rose above target, he said.

"To 'tie its hands,' a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus," Carney said in his written answers. "This could reinforce the central bank's commitment to stimulative policy in the future and thus enhance the impact of its policies in the present."

The U.S. Federal Reserve recently set inflation and unemployment thresholds for changing its near-zero interest rates. Carney sounded open to the idea but said any move to such a system in Britain would depend on how quickly the bank would be expected to correct any overshoot in inflation expectations.

Carney gave no clear signal that he would push for more bond-buying by the Bank of England, stressing the risks of quantitative easing but also saying the weak state of Britain's economy would merit monetary stimulus for a period of time.

He was cool on the idea of setting a higher inflation target than the Bank of England's two percent.

"In my view, moving opportunistically to a higher inflation target would risk de-anchoring inflation expectations and destroying the hard-won gains that have come from the entrenchment of price stability," Carney said.