In a move that comes as a great surprise to just about everyone, Bank of Canada governor Mark Carney has announced he will be stepping down to take the same position at the Bank of England in 2013. It’s doubly surprising since the much celebrated central banker had sworn up and down that he was not going to take the job.
David Madani, economist with Capital Economics, says the timing is bad for Canada given the jittery housing market. But on the other hand, where it matters—interest rate policy—he sees no material impact, at least for the near term.
In fact, the most significant outcome of Carney’s move may be what it says about the state of the U.K.’s financial sector. “It’s interesting that in all of England you can’t find one economist to replace [BoE governor Sir Mervyn King],” muses Benjamin Tal, economist with CIBC World Markets.
“It does speak volumes,” adds Doug Porter, deputy chief economist, BMO Capital Markets. “There was some dissatisfaction on how the Bank of England has done in recent years. I think it’s just that they were really looking to shake up the organization.”
What kind of governor will Carney be across the pond? The U.K.’s challenges are somewhat different from Canada’s: as a result of the Conservative Party’s austerity campaign, the U.K.’s economy has suffered more than Canada’s, which has taken more of a Keynesian approach; and the City, as London’s financial hub is known, has had a reputation for a much looser approach to regulation than that found in either Canada or the U.S. Tal says the U.K.’s finance sector has to change and he expects Carney will attempt to move it in the direction of greater regulation. Given the relative prosperity of Canada and the apparent vindication of Carney’s approach, Tal says “history is on his side.”
Porter tends to agree but expects the realities of the U.K.’s economic situation will force the country’s monetary policy to stay the course—in other words, “very loose” and “for quite a long period of time.”
The fact of the matter is when you talk about central banks, you’re talking about powerful institutions rooted in their own management styles and tradition (even if the latter has just now seen a very unusual break) and it’s not likely that one person can radically change things, even if he or she wanted to.
Carney, who also has 13 years at Goldman Sachs in London, Tokyo, New York and Toronto, will face a cultural and institutional learning curve. Says Tal, “It will be much more difficult to change things. … Being governor of Bank of Canada will look like a walk in the park.”
Like a coach in pro sports, success with one team doesn’t guarantee success with another. If Carney is the right pick for England, Porter says it will “take the full five years to answer that.”
So why did the BoE choose him? Yes, there’s the desire to send a message to the Bank of England and the financial sector, and yes, Carney has a solid track record, including as head of the Financial Stability Board. But it’s also a matter of character and leadership. Porter says Carney “changed the culture” at the Bank of Canada. His pick by the BoE may represent the green light to go ahead and try. Fortunately, and at the risk of putting it tritely, he basically works well with others.
That’s the feeling of Dan Muzyka, president and CEO of the Conference board of Canada. “He came in in 2008 and he got to surf a tsunami, and he did it well,” says Muzyka. “He also worked very effectively with others—he had to work with government, with the financial service industry and with international agencies and coordinate across economies to deal with the waves that were going through in 2008-2009. I think we all owe him a debt of gratitude.”
While Canada’s loss may be another country’s gain, the Great White North should be OK, say observers. People like BMO’s Porter and Capital Markets’ Madani predict a relatively smooth transition, with the possible successor being senior deputy governor Tiff Macklem, who would likely continue Carney’s policy prescriptions. Historically, the BoC has promoted internally, but it’s worth pointing out that Carney was not an internal pick. Still, says Porter, “If it’s an internal candidate I would assume there’s no significant change in Canadian monetary policy.”
Carney will assume the position on July 1, 2013 and has indicated that he will apply for British citizenship.