UK economic update: Okay, now let’s get the job done

On Tuesday, Canadian born Mark Carney met with the Monetary Policy Committee (MPC) to discuss the length of his term as Governor of the Bank of England (BoE).

To recap, Carney was appointed for 5 years back in 2013. However, following the Brexit vote in 2016 he agreed to extend this by 1 year through to June 2019. The reason given was to assist with an “orderly” exit from the European Union.

Given the importance of the role it is highly necessary for any successor to be appointed in advance of the post being relinquished and to be highly credible. To this end there has been a great deal of speculation as to who might be appointed. Meanwhile, in recent months, the stability of government and its key decision makers have continued to be plastered across news headlines elevating the importance of the decision.

The announcement that Carney agreed to stay at the helm for a further 7 months, through to January 2020 came as a great relief to the Chancellor Phillip Hammond who was obviously delighted at being able to offer reassuring news to Parliament, and to the markets. The FTSE 100 rose 0.66% after the announcement showing that the market too thought this was a good move.

This is positive for the UK for several reasons:

1. Carney is a well-respected global voice.

2. He is up to date with the chain of events.

3. It allows the Cabinet to focus on the job in hand.

In addition to his key role as Governor of the BoE, Carney is also Chairman of the G20’s Financial Stability Board. Both appointments give him a high level of credibility in global policy decision taking which is critical to ensuring confidence in our financial system. This matters a great deal in the ordinary course of events but is particularly pertinent as the UK economy prepares to leave the EU.

Carney is not without his critics. Some blame him for being too political over Brexit. They say he supports staying in the EU and uses his position to scaremonger. The type of evidence which backs up their assertion is when he gives warnings about a ‘no deal’. For example, yesterday’s news reported on Carney giving a ‘chilling’ analysis briefing and dire warnings to cabinet about a disorderly Brexit.

Critics also say that Carney panicked after the Brexit vote cutting interest rates in August 2016 by a quarter of one percent to 0.25%, the lowest level in history. At that time, the reason given was that growth would slow dramatically in the wake of the leave vote. The BoE also slashed their growth forecast from 2.3% to 0.8%, however, economic data turned out much better than feared and the ‘emergency’ rate cut was subsequently reversed as illustrated in the chart below.

Chart: UK Central Bank Interest Rates and GDP (%)

Source: Bloomberg, September 2018

Carney, during his tenure, has overseen some important milestones. For example, the results of the 2017 BoE stress tests helped demonstrate that the UK banks are now very resilient. In fact, 7 UK banks, covering 80% of the banking system’s assets, are now expected to be able to cope and continue lending in a scenario more volatile than the 2008 financial crisis. The scenario testing undertaken simulates a 4.7% decline in growth (measured by gross domestic product or GDP), interest rates at 4% and a 33% fall in house prices. We note that the warning to cabinet yesterday using a similar figure for the property crash in his outline scenario may have been saying the banks can cope. In any event, UK banks are now three times more resilient than they were a decade ago, under Carney’s watch, and this has instilled greater confidence in the UK banking sector.

While job rotation has been high at the centre of Government, the independence of the BoE and ongoing stability at its helm is something to celebrate. Even if you are not a supporter of Carney’s reappointment it remains a fact that he has stood by his post. Decisions made by the BoE must be well-informed and, in this respect, “continuity at the bank”, as Carney outlined in a letter to Chancellor Hammond, is one way of improving the chances of this happening.

Aside from the plusses and minuses around Carney, Chancellor Philip Hammond will not now be distracted by having to search for a new Governor. The extension of Carney’s contract to 2020 will allow a smooth hand over to his eventual successor during a period where a lot of today’s unknowns around Brexit will have been dealt with.

The Bank of England met yesterday and unanimously agreed to maintain base rate at 0.75%.

The information contained in this publication does not constitute a personal recommendation.