Why Carney won’t work any magic for England
I have long been a huge critic of the Bank of England, writing many posts about during the now long forgotten bubble suggesting that interest rates rises were warranted all the while watching King and his band of merry man continue to pump the bubble and then ultimately seemingly having no idea on how to close it. Worse, the BOE have now, compounded the earlier errors, through popping the cork on Quantitative Easing and unleashing more cash even though it has had no discernable impact on the real economy…
So, George Osborne, a highly conservative chancellor, who in effect is not much different to Alistair Darling – the previous incumbent has gone for a big change. This has been celebrated around the City as a bold choice.
Carney has a reputation as a “Hawk” and this, given the above mistakes, has been viewed as a good thing. But is a hawkish BOE Govenor what we need now as we enter a 5th year of potentially muted economic activity since the 2008 financial crash?
Raising rates has its attractions,but the main UK lending banks will suffer as their bad loan books are still very large – £80 billion for RBS and over £100 billion for Lloyds. With all of the banks hugely scaling back their investment banking operations, the possibility of large profits in the sector has gone the way of the fairies. Higher rates also risk moves on mortgage book impairments as leverged UK borrowers have grown used to low rates and low repayments. A normalisation of rates here would cause carnage in the housing market.
Carney too has to take over a the macro prudential part of the FSA and which will be distracting in the first instance as the integration of staff and the systems of the rather pushy FSA into the sleepy and Ivory tower types of the Bank of England no doubt takes its toll on the two respective cultures.
The current BOE committee is quite dovish and this ironically might save Carney as he fails to get backing for potentially less “dovish” policies. Yes to stopping QE but not to raising rates are the likely retorts from the civil servants in the BoE. But the UK economy is, to my mind, still on life support and has been for sometime and with few signs of anything changing in the near future. Government spending is too high, austerity will have to continue for years to come and there is no support from the Eurozone – our most important market. It’s high risk to tighten policy too much from here.
With all this in mind, I don’t think Carney will prove a big success, much like Sven Goran Eriksson – a promising start and good wishes but which in the end, alas will not prove enough in the long-term….
Cityunslicker
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