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November 28, 2012

RBC on What We Can Expect when Mark Carney Becomes Governor of the Bank of England

By Spear's

Jens Larsen, Chief European Economist at RBC Capital Markets, on what we can expect when Mark Carney, a Canadian, becomes governor of the Bank of England

EYEBROWS JUMPED ON Monday as the first foreigner was appointed governor of the Bank of England. The public doesn’t know much about Mark Carney, a Canadian trained at Goldman Sachs, but thankfully RBC believe only minor tweaks will ensue after he succeeds Mervyn King as the most powerful unelected man in the UK.

According to Jens Larsen, chief European economist at RBC Capital Markets, he is — at most — likely to be more sceptical about further gilt purchases. ‘It is hard to imagine him being more enthusiastic than King, but we do not think he will tinker with the current strategy on day one.

‘Asset purchases will remain in the tool box, and we remain convinced that the Bank of England will continue to play an important part in the “tight fiscal, loose monetary policy” strategy that has dominated UK macro policy in recent times.’

The only other deviation will be Carney’s emphasis on communication and, more specifically, his outspoken commitment to low interest rates.

Mark Carney, who is Canadian, will be the first foreign governor of the Bank of England

‘In leading the Bank of Canada, Carney has placed an acute emphasis on the communication channel as a key policy tool,’ says Larsen, ‘with Canada’s conditional commitment in 2010 — when it tied the path of interest rates to the evolution of the macro outlook — being a prime example. Governor King, on the other hand, has always been emphatically against any such commitments, conditional or not.’

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Theory is one thing, but practice is quite another. And here RBC highlights the most immediate challenge.

‘In the UK, unlike Canada, policy is set by committee,’ says Larsen. ‘Carney will be first among equals, leading the Monetary Policy Committee, not the one making final decisions, an important dynamic that he is unlikely to be used to.’

For all our sakes, let’s hope he hits the ground running.
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