The Bank of Canada after Carney
If any further proof is required that global financial markets are completely integrated, the appointment of Canadian Mark Carney to the helm of the Bank of England should do the trick.
Carney’s announcement that he’s taking on the 318-year-old British institution before his seven-year term as Governor of the Bank of Canada is up has done everything from causing tongues to wag to rocking markets: a drop in the Canadian dollar is attributed to the “uncertainty” cause by his departure.
It may be more interesting to blame Carney’s pending departure than the usual suspects — the European debt crisis, the U.S. teetering on the edge of a fiscal cliff, weaker crude oil prices. But it’s hardly accurate. There is, after all, no shortage of capable candidates for the job — although the Heir Apparent appears to be Tiff Macklem.
Macklem is a career bureaucrat and currently Senior Deputy Governor of the Bank of Canada, neither of which qualify him for the status of a wild card.
(It’s worth noting that when Carney was named Governor, it was Paul Jenkins, a 40-year veteran of the bank, who was very widely expected to be in line for the top job. He left fairly soon after and was replaced by Macklem.)
In terms of continuity, furthermore, however brightly Carney’s star has shone, the reality is that the closely co-ordinated efforts of the Bank of Canada, the federal finance department, and the Superintendent of Financial Institutions has played a vital role in stabilizing Canada through a period of exceptional economic turbulence.
That means the central bank’s hawkish focus on inflation isn’t likely to shift from its target of two per cent. In other words, if it edges over that point, interest rates would rise whoever is in charge. It’s been a solid cornerstone of monetary policy since it was established in 1991 under Governor John Crow.
The inflation target was last renewed in November 2011 and will stand until the next review in 2016. When the bank adjusts interest rates to attain the target, it does so with the expectation that it will take six to eight quarters to work its way through the economy and have an effect on inflation.
So, we’re not talking about even the potential for a dramatic change of direction under a new governor.
That said, interest rates may be poised to rise sooner rather than later. The bank is currently assessing the impact of the last round of mortgage tightening that took effect last July. If it doesn’t show evidence of reining in household debt, a rate hike may soon be in the offing — although regulatory rather than macro-economic measures may prevail.
That’s also the outcome if, as the OECD recently forecast, moderate economic growth takes hold in Canada in 2013, spurring inflation in the second half of the year.
Other variables that will continue to influence the way monetary policy is handled include the U.S. fiscal cliff and the ongoing crisis in Europe, which still has the potential to disrupt global markets at regular intervals.
Of course, as much as it serves Canada to select a bank insider to replace Carney, it suits the Bank of England to turn to an outsider. The fact that the attached salary was bumped over $762,000 — plus generous pension benefits — and the term was cut to five years from eight, demonstrates just how eager the Brits were to recruit hm.
The ”Old Lady of Threadneedle Street” is about to undergo some transformational changes that will significantly broaden its power as a central bank — including regulation of individual banks. Those are measures often better implemented by someone who’s not burdened by institutional culture or relationships. That apparently worked against Paul Tucker, a career-long employee of the Bank of England who was expected to ascend to the job of Governor.
Of course, in Ottawa, where everything is refracted through the lens of politics and political ambition, there is a strong conviction that Carney will return and run for elected office when his five years in London come to an end.
For some it may be hard to fathom, but there’s a decent chance he may actually have other opportunities — and interests — by the time his term is up. Yes, something even more compelling than Canadian politics.
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