New Bank of England boss to swap Canada growth for UK stagnation
By Nia Williams | November 28, 2012 4:00 AM EST
When Canadian Mark Carney becomes Bank of England chief next year, he won't only be swapping a vast, sparsely populated, resource-rich country for a small, crowded island on the edge of a European continent in crisis.
The outgoing Bank of Canada governor will leave behind an economy which weathered the global financial crisis quite well and is now achieving respectable growth, at least by Europe's dismal standards.
Carney, whose appointment to the British central bank was announced on Monday, will face new, and in some areas uncharted, problems in an economy that has only just got out of recession.
"He's going to be coming into the job at a very difficult time," said Howard Archer, chief UK and European Economist at IHS Global Insight. "The economic challenges are far deeper than those facing Canada."
Carney, who starts the new job next July, faces some sobering contrasts.
UK growth is forecast by the Organisation for Economic Cooperation and Development to be 0.9 percent next year, half that of Canada's at 1.8 percent.
Britain is struggling with a budget deficit equal to 8 percent of annual economic output, while Canada's is just 1.4 percent of GDP, and heading for balance by 2015 if the government gets its way.
Nearly half of British exports go to the euro zone, pinned in recession by its debt crisis. Around 75 percent of Canadian exports go to the United States, where demand is still weak but looks to be getting better.
And on monetary policy, one of two core elements of Carney's new job along with bank supervision, the tales could not be more different.
The Bank of England (BoE) has presided over a period of record low interest rates while pumping 375 billion pounds into the economy to stimulate growth through buying government bonds.
Under Carney, the Bank of Canada has raised rates and seen no need to embark on a similar policy of quantitative easing because of the economy's relative strength.
These contrasts mean the policies that have served Carney well in Canada are not immediately transferable to Britain.
Some of this has already been reflected in currency markets.
Carney's surprise appointment was well received, partly because he is credited with steering Canada through the global crisis with only a relatively shallow recession.
The perception that he is a "safe pair of hands" with a mild bias towards higher rates helped the British pound to rally to a 2-1/2 week high against the Canadian dollar after the British government's announcement.
But those gains were quickly pared back as investors realized Carney is unlikely to tighten British monetary policy while growth remains fragile.
"People will realize that having a mild tightening bias in Canada in the current environment will not necessarily lead to the same bias in the UK," said Audrey Childe-Freeman, head of FX strategy at BMO Capital Markets.
The Bank of Canada (BOC) was the first central bank among the Group of Seven industrial nations to tighten policy in 2010 after the global crisis had driven rates down. It has held rates steady for over two years, talking about raising them again partly to help pare back rising household debt. Market players expect a rise in the fourth quarter of 2013, after Carney has gone.
British interest rates, by contrast, are expected to stay at 0.5 percent throughout 2013. Investors are speculating instead over whether the BoE will opt for further quantitative easing.
Bank of England chief Mervyn King, who retires next year, said as recently as Tuesday that Britain might need more QE.
Carney will also take over bank supervision when the Bank of England's role is expanded next year. The Canadian central bank does not directly supervise banks, but Carney heads the Group of 20's Financial Stability Board. He will keep this job at the body that sets global banking rules when he moves to London.
Britain's banking sector, a major part of the economy, is troubled. No Canadian banks needed bailing out by the state during the financial crisis, whereas Royal Bank of Scotland and Lloyds Banking Group had to be effectively nationalized by the British government.
Banks in the UK have been so focused on shoring up their balance sheets that the transmission of monetary policy from the BoE into the economy has not been as smooth as it might have hoped.
"In the UK there has been a need to look at ways of circumventing the financial system," said Adam Cole, head of FX strategy at RBC Capital Markets, who highlighted the BoE's Funding for Lending Scheme as an example of that.
Canada has had few if any such problems.
Another difference is that BoE decisions result from a vote of nine policymakers, while at the BoC they are made by consensus, which in practice means Carney has the final say.
Convincing other policymakers to agree with his point of view will be another challenge for Carney if he is to keep his reputation as one of the world's most capable central bankers.
As Neil Mellor, strategist at Bank of New York Mellon said: "You're only as good as your last crisis."
(Reporting by Nia Williams. Editing by Jeremy Gaunt)
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