Mr Carney at the Bank of England

Economic and market briefing: Mr Carney at the Bank of England – quick analysis with help from UBS

Markets were surprised yesterday afternoon when Chancellor Osborne appointed current Bank of Canada Governor Mark Carney to replace Mervyn King on 1st July next year.

The decision was particularly surprising given that Mr Carney had categorically rejected the job in a BBC interview.

Mr Carney is known to be a pragmatic central banker with an excellent grasp of financial stability issues and a willingness to work closely with the other stakeholders including the government and the banks – traits that must have been key for the Prime Minister and the Chancellor.

He also has experience as a Governor of an inflation targeting central bank that has a flexible inflation mandate very similar to that of the Bank of England. Canada has navigated the crisis well, albeit because of robust export growth and a resilient banking sector, but structurally Canada, like the UK, is a small open economy that is buffeted by global events.

Mr Carney will have to balance his role as a regulator of UK banks and at the same time protect the interest of the banking sector in international forums, especially Euroland, and this task will be scrutinised in some depth by commentators especially because he is not British. Mr Carney does, however, have strong family ties with the UK. His wife is British (and described on Radio 4 this morning as something of an eco-warrior), and he has also lived in the UK for a number of years, initially studying for a master’s degree and an economics PhD at Oxford and later as a banker. He also has strong international experience as Chairman of the G20’s Financial Stability Board.

But there are differences between Mr Carney’s experience to date and the challenges that lie ahead as Governor of the Bank of England. To start with, the UK government’s fiscal position is a lot weaker and its economic growth performance nowhere near as impressive as Canada’s in recent years. The BoE will be a bigger and more complex institution with its new regulatory powers and the job of the Governor will most likely change with it. The new Governor is unlikely to engage in granular detail and some anticipate that he is more likely to be a Chairman than a CEO. If economic growth continues to falter, the Bank will have to design and implement new and innovative forms of intervention, but on this front at least, the new Governor should have the support of Charlie Bean and Spencer Dale. It’s unclear at this stage what role Paul Tucker takes under Mark Carney, if any.

As for Mr Carney’s ‘decision history’, he supported rate hikes and higher bank capital ratios to restrain lending into the housing market, but the rate hikes implemented by the Bank of Canada were relatively small. On banks, he anticipates that banking systems in general need to be made robust, that individuals institutions need to be able to fail without causing chaos in the real economy and for that he has argued that not only the size, but also the quality of capital (very high proportion of loss bearing common equity in tier 1 capital) is important. Unlike Mervyn King who favours a complete separation of the banking sector activities, Mr Carney appears to be more flexible. He has after all, presided over a banking system in Canada which, in common with the UK, is also dominated by the small number of large banks.

As a broader consideration, the appointment of an outsider will also shake up an institution that has in effect been dominated by Mervyn King ever since 1991 when he was appointed the Bank’s Chief Economist. But any transition will likely be smooth, especially on the monetary policy side with Mr Bean agreeing to remain Deputy Governor until end-June 2014. Neither the government nor the BoE have commented on Mr Tucker who was the favourite to succeed Mr King.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla