BOE leadership: Carney’s conundrum

Mark Carney’s testimony to the UK’s House of Lords economic affairs committee was notable both in regard to his personal intentions and the future interaction between fiscal and monetary policy. In respect of the former, his emphasis on personal circumstances in terms of whether he wished to serve a full 8 year term at times felt uncomfortably close to sounding as if he wished to spend more time with his family. Even if this may have been unintentional it has contributed to the speculation over his future.

Following today’s press reports, it now appears that Carney now wishes to stay for his full term subject to (presumably supportive) meetings with UK PM Theresa May and Chancellor Philip Hammond. This could be interpreted as meaning that he has recognised the need to build bridges with the new UK government; should he decide to continue, we would therefore expect him to become more supportive of the UK’s Brexit process, even after the notable shift in position during his most recent testimony towards believing the Brexit impact would be manageable.

We believe the combination of Mark Carney’s difficult position and UK PM Theresa May’s earlier stated desire for change supports our earlier view of a likely shift towards fiscal measures to support the UK economy during Brexit, with less emphasis on monetary policy. Carney’s testimony last week also hinted that monetary policy would not be expected to do all of the heavy lifting in coming years, providing some fundamental support to the idea that UK bond yields had become overly compressed in recent months.

Regardless of the outcome of the speculation over the Governor of the Bank of England we believe the BOE will remain independent and it is in the UK government’s interest that it is seen to be. Carney was in our view correct to highlight that a loss of independence would raise risk premia on UK assets, which is something the UK can ill-afford over the next 2 years. Which specific individual leads the BOE is in this regard something of a sideshow for investors. Our views on sterling or UK bond yields are not contingent on who is Governor, provided institutional independence is maintained.

Quick conclusions

1. Mark Carney is in a difficult position as by remaining in place he may be perceived as less independent than a fresh appointment, thus reducing the institutional weight of the BOE during a volatile period for the UK.
2. The search for a replacement would be likely to focus on a lower-profile technocrat. There appears no political appetite at present for changing the institutional arrangements which govern the independence of the BOE. If Mark Carney decides to leave, a brief period of volatility cannot be excluded but investors are likely to quickly refocus on economic fundamentals.
3. Our views on sterling, UK bond yields and would remain unchanged in the event of a new Governor, provided the BOE’s independence was not compromised.