Chart of the Week: Mark Carney Takes the BoE Hot-Seat

This week sees Mark Carney take up his role as Governor of the Bank of England. He arrives in a country still stuck in the throes of a banking crisis. He has left Canada on one side of a household debt boom – with the pinch still to come – and arrives in the UK on the other.

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Dr Carney is taking the reins of the most powerful Central Bank in British history. The Bank now has unprecedented powers with regard to both monetary and financial policy. With this in mind, the role of the Governor will be crucial in shaping the UK’s near-term, and perhaps its long-term economic performance. That is not because monetary policy can fix everything but because it has an essential role to play in achieving escape velocity. However, fresh thinking is required.

Mark Carney has previously highlighted the deleveraging of the banking system, households and companies as a key risk to recovery. The UK still remains burdened with an excessive amount of household debt. The new Governor has been vocal of the need to allow monetary policy to aid deleveraging. Actions speak louder than words and we note that Canada did raise rates in 2010, even though inflation was below target, in order to stem the increase in household debt. The Bank of Canada has also sought to use guidance in order to encourage prudence in household borrowing by indicating that some tightening may be necessary.

A not unrelated problem for the UK economy is the broken banking system, and the damage that the crisis has wrought on productivity. In his own words “putting the banking system on a more resilient footing should help, to some extent, to restore the potential output of the UK towards its pre-crisis path.” Fixing the banking sector is, in our view, the key for the UK’s future economic performance and Mr Carney is in charge of a Bank with the tools available to take the required remedial action.

Time will tell whether Mark Carney is truly the “outstanding central banker of his generation”. Canada’s economic performance has outstripped that of other G7 nations by some distance over his tenure, but it looks as if the pinch is yet to come. He may be lucky to be leaving Canada at the right time, but with UK output still 3.9% off its peak, a little luck wouldn’t go amiss.

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