Finance

BOE’s Mark Carney is Getting Paranoid (Or is He?)

If they did not know any better, people might think there is some kind of plot against the governor of the Bank of England. This comes after his recent statements in which he condemned certain politicians as well as their instructions which he said he was not going to follow. Any news related to the Bank of England are automatically reflected on the value of the pound, so this has received quite the attention from traders interested in currencies and binary options placed on them.

The meaning of operational independence

The entire purpose of operational independence for a central bank is that no politician, regardless how powerful, may choose the means to reach a certain goal, even if he or she gets to determine the goal itself. In other words, the politicians may agree to plot a certain course, but it is up to Mark Carney as the governor to choose the optimal approach. It would seem that certain politicians have taken some liberties when plotting the fiscal course and Governor Carney does not like it when other people meddle in his affairs. But is there more to his statement on objectives being made by the politicians and policies being made by technocrats? Perhaps there is.

The more involved analysts have speculated that Carney’s outburst is aimed primarily at Theresa May and some of her Tory associates who made callous statements regard interest rates and quantitative easing. However, while addressing the concerns of her voters regarding their live savings is within Mrs. May’s authority, dictating monetary policy for the UK pound is certainly not. Perhaps her words were merely taken out of context or poorly phrased.

…or perhaps not

Any attempts to downplay Mrs. May’s statement fell to deaf ears after William Hague started bashing monetary medicine, which only added credence to Carney’s earlier suspicions. The fact that the former foreign secretary is openly attacking him in the media and eroding public confidence in his policies has made Carney more than a bit riled up. Is it really paranoia if he is right? It certainly does not look good when Mr. Hague goes on record saying how central bankers have “lost the plot” and started agitating the public against low interest rates by citing all of their negative effects.

Now, if scaring people about their pension funds or property value is to be ignored, Hague’s statements could be dismissed as little more than unremarkable ratings. These are all well-known facts, as most people already believe how low interest rates are harming their finances, but there is one thing that stands out. Hague’s conclusion is that central bank needs to start raising rates or their “era of independence” might be over, and “possibly quite dramatically” which are the words one should never take lightly, coming from a politician.

In other words, Hague has issued a vague threat to abolish the independence of the Bank of England if they did not do what he says – which would also amount to the forfeiture of their independence. Fortunately, this statement was not exactly issued from a position of any real power, or the scandal would have been a lot harder to digest. It is even more perplexing that Hague was not even in favour of Brexit, despite his Euroskepticism. However, he is still a Conservative and his word carries just enough weight to give credence to Carney’s suspicions. So, either he (Carney) raises interest rates or Hague’s colleagues will abolish the independence of his institution. At least that is what this veiled threat must have seemed at the time.

Conclusion

Even though Carney feels threatened by the ruling political establishment, it is no surprise that some in that same establishment are afraid of him. Investors look to him a lot more than to PM May when it comes to financial matters. Now Carney has to decide whether to step down in 2018, as previously planned, or to stick around until 2021. It would certainly not look well if investors get the feeling he is being coerced in any way. The uncertainty that this would add is the last thing anyone needs right now. This way, when things turn sour, he will not be around to blame and where will politicians turn to next?

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1 Comment

  1. January 13, 2017 at 10:47 pm — Reply

    This is way better than a brick & mortar esstmliahbent.

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