Carney's Replacement Needs to Be Committed

(Bloomberg Opinion) -- The U.K. government’s decision to publish a job listing for the next Bank of England governor has prompted speculation over who will replace Mark Carney and where he or she should come from. But the issue of when the next bank chief should be expected to step down from the role is just as important.

Philip Hammond, Chancellor of the Exchequer, has said Carney’s replacement should be internationally respected, opening the door to foreign applicants. It makes sense for the net to be cast as widely as possible. Talent should take priority over passport.

But the government should also insist on a different requirement: the successful candidate must be prepared to serve a full eight-year term, unlike the current governor, who changed his mind repeatedly over the length of his tenure at Threadneedle Street.

Carney came to the Bank of England in 2013 under the highest expectations. George Osborne, then chancellor, described his surprise pick as “the outstanding central banker of his generation.” The Governor of the Bank of Canada gave up his job to become the first non-Briton to lead the BOE since its creation in 1694. In 2018, Carney took up British citizenship, delivering on a pledge he had made upon his appointment.

Though Osborne was eventually vindicated in his choice, Carney had a shaky start. The main innovation he brought to the bank, forward guidance, created much confusion and some embarrassment. Officials had pledged to keep interest rates at their record-low level until unemployment fell below a certain threshold, but were caught out when the labor market improved much more quickly than expected. Carney also made a number of U-turns on the future direction of monetary policy, earning him the nickname “unreliable boyfriend.” 

These mistakes appear minor compared to how Carney rose to the occasion after Britain voted to leave the European Union. The referendum result sent the pound and the stock market sharply down, as investors feared for the economic future of the U.K. The governor assured that the bank would provide ample liquidity to lenders. The Monetary Policy Committee later voted to cut interest rates and extend its program of quantitative easing to ensure the economy – and investment in particular – would not grind to a halt.

In retrospect, the BOE may have exaggerated the extent of the immediate damage from the referendum result. The British economy’s performance exceeded the expectations of its economists, as well as foreign institutions such as the International Monetary Fund. The extraordinary stimulus also made Carney an easy target for Brexiteers, who accused him of stoking “Project Fear” and entering the political debate.

But Carney was right to go for overkill: In the absence of a credible response from the bank, more dramatic market reactions, including a full-scale run on the pound, could easily have occurred. Officials later went on to raise interest rates by reversing their earlier cut and adding one more hike. If anything, these later moves were a tad optimistic, since they were based on the assumption there would be no “chaotic Brexit” – by no means a certainty. 

Britain has not yet departed the EU. But it is already clear that, when Carney’s mandate ends next year, Brexit will continue to be the dominant theme for the British economy. If Britain opts for a “soft” departure that includes a negotiated transition, all the important choices regarding the post-transition period would still have to be made. In the event of a hard exit without a deal, the BOE would have to oversee an economy which has cut its ties completely with its major trading partner. There would be major implications for the financial sector, where EU law has created a convenient regulatory umbrella for banks that want to conduct business from the City of London with the rest of the bloc. What solutions would be found is anyone’s guess.

Hammond is therefore right to search for a personality who can command respect both at home and abroad. Andrew Bailey, the current head of the Financial Conduct Authority and frontrunner, would be a safe pair of hands given his long experience at the bank. Raghuram Rajan, the star economist at the University of Chicago and former governor of the Reserve Bank of India, would be a more intellectually exciting – if somewhat riskier – choice.

The government should insist, however, that the new governor serves a full eight-year term. In order to get his man, Osborne granted Carney a concession – that he could stay for only five years. Later, Hammond prolonged Carney’s term twice, first to June 2019 and then to January 2020, saying these extensions were necessary to grant Britain stability during the Brexit process. However, these exceptions should not be repeated: A long, fixed and non-renewable term supports independence, since the governor knows he will not have to please politicians to be confirmed or have his mandate extended. It’s best to settle details in advance, then to make up as you go along.

Britain has a period of uncertainty ahead, as the EU divorce proceedings may push it in an unforeseeable direction. While politicians will be at the helm of these changes, the bank will play an important supporting role. Its next chief should be a competent and recognizable figure, but also someone who can provide stability and is fully committed to the cause. The flip-flopping over Carney’s mandate should be an exception, not the rule.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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