The future Governor of the Bank of England has signalled he will go for growth when he takes over in July with a series of radical policy proposals to rescue the country from its “exceptional” economic problems.
In his first public appearance in the UK, Mark Carney, the current Governor of the Bank of Canada, said Britain might benefit from a commitment to keep interest rates low for a fixed period as well as a more “flexible” inflation targeting regime that tolerated inflation remaining higher for longer.
The Canadian also exposed an early rift with the Chancellor over bank reform, saying he supported proposals made by the Government-appointed Vickers commission that were rejected by George Osborne . Mr Carney said he “agreed with the logic” of the commission, which proposed a 4pc leverage ratio. Mr Osborne lowered that to 3pc in the Financial Services Bill.
In a four hour hearing with MPs on the Treasury Select Committee (TSC), Mr Carney faced questions on everything from his rumoured political ambitions to his “unconventional” ideas on growth and his £874,000 pay package. He added that the behaviour of those involved in the Libor rigging scandal “is reprehensible and should be prosecuted to the fullest extent”.
Painting a bleak picture of the economy, Mr Carney said levels of household debt remain a problem and that the “rebalancing is unlikely to be either smooth or rapid”. He added that when he joins the Bank there will “unquestionably” still be room for “considerable monetary stimulus”.
Among the more “unconventional” policies he said the Bank should consider was a more “flexible” 2pc inflation target that allowed prices to stay high for as long as three years, compared with current policy of bringing it back to target within two years. The arrangement would allow rates to remain low for longer or permit more stimulus, such as quantitative easing (QE).
Mr Carney also raised the prospect of guaranteeing that rates would be fixed for a set period, or until unemployment or growth hit a certain target – as in the US . “In the UK today, there is a valid discussion to be had about the potential use of this tool,” he said, saying there was “merit” in the US strategy.
The recommendation put him at odds with Sir Mervyn King, the outgoing Governor, who has long rejected rate guarantees and Mario Draghi, the European Central Bank president, who yesterday said: “We never pre-commit.”
However, the Bank appeared to steal some of Mr Carney’s thunder yesterday by proving it is already effectively operating a “flexible” 2pc target without being explicit about it. In a rare move, the Bank released a statement after keeping rates on hold at 0.5pc and leaving QE unchanged in which it warned that inflation “may remain above the 2pc target for the next two years”.
The Bank dropped a big hint that it would not raise rates to rein in inflation. “Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery ,” it said.
Mr Carney called for a review of the Bank’s inflation mandate but stopped short of radical reforms . Having previously raised the prospect of moving to a nominal growth target, he said: “I’m not convinced it is a risk worth taking.”