Bank of England Governor Mark Carney brought an end to his reign by holding interest rates at 0.75% after business surveys picked up post-election. To his critics, he proved unreliable to the end, but in our view this seems like the correct decision, particularly with the upcoming spending review.
Historians perusing the Bank of England’s (BoE’s) base rate during Carney’s tenure as governor may conclude it was a dull affair. His Monetary Policy Committee tweaked interest rates three times over the course of 69 meetings. Traditional measures of central bank activity, however, as Carney acknowledged in his final speech this month, have fallen by the wayside as conventional policy tools find it harder to boost inflation than to contain it.
It was unconventional to appoint a Canadian to the post, and it was in the unconventional that Carney made his mark. His strong forward guidance in 2013, linking the bank rate to unemployment, helped to boost investment and lean against austerity, while his calm and clear response to the referendum result settled nerves and, arguably, saved jobs at the expense of higher living costs. His work on financial regulation has also shored up the financial system with UK banks seemingly well-prepared to fight future crises.
As his reign draws to a close, UK inflation has been persistently below target – arguably the Bank misjudged the extent to which falling demand would offset slower inward migration, leading to excess capacity in the UK. Carney’s previous warnings that the BoE could hike in the event of a hard Brexit look misplaced. Low inflation is a global phenomenon, however, despite strong labour markets, and many jurisdictions would envy core inflation that’s averaged 1.9% over the last two years.
With the BoE judging the lower bound for interest rates to be “close to, but a little above, zero” his successor, Andrew Bailey, may need to share Carney’s enthusiasm for unconventional policy if inflation keeps falling.