Carney’s Bank of England honeymoon is over

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When Mark Carney was appointed Governor of the Bank of England, government and business leaders let loose with the sort of praise normally reserved for the most brilliant soccer stars.

The former governor of the Bank of Canada, and the first non-Briton to run the Bank of England since its founding in 1694, was "the outstanding central banker of his generation," said George Osborne, the chancellor of the exchequer. The shadow chancellor, Ed Balls, called his appointment a "good choice, good judgment," the Confederation of British Industry praised his "strong track record" and the chairman of the House of Commons treasury select committee, Andrew Tyrie, concluded that the new man "ticks all the boxes."

That was in November, 2012. Mr. Carney officially replaced Mervyn King as governor of the Bank of England on July 1, 2013.

But on his first anniversary on the job, the plaudits have rather died off. Instead, he is taking heaps of criticism over muddling his message on interest rates.

On June 24, Pat McFadden, a Labour member of the treasury select committee, likened Mr. Carney to an "unreliable boyfriend" for the way he was sending out messages on rate hikes, or lack thereof. "One day hot, one day cold, and the people on the other side of the message don't know here they stand," Mr. McFadden said.

Mr. Tyrie said the bank, since Mr. Carney became governor, has doled out "quite a lot of guidance, not all of it seeming to point in the right direction."

Mr. Carney's honeymoon is over.

In the meantime, there are serious concerns over whether the bank will get the timing of its inevitable rate increases right as the British economy sets sail after five years in the doldrums.

In that sense, Mr. Carney's big test still awaits him. "He has yet to take on the big challenge, which is raising interest rates from rock-bottom levels," said Andrew Sentance, the senior economic adviser to PwC (formerly PricewaterhouseCoopers) who was a member of the Bank of England's rate-setting monetary policy committee (MPC) from 2006 until 2011.

Mr. Sentance, and other Bank of England watchers, fear that the MPC, which is chaired by Mr. Carney, will move too slowly on rate hikes, then have to make up for lost time with a rapid-fire sequence of potentially damaging rate hikes. Indeed, it appears the MPC was surprised by the strength of the British recovery last year, when it rolled out its "forward guidance" policy – the assurance, more or less, that interest rates would stay put at 0.5 per cent until the jobless rate dipped below 7 per cent. That rate has since fallen far faster than any economic guru had predicted, and was 6.6 per cent at last count.

Mr. Carney was the golden boy when he accepted the Bank of England job. At the Bank of Canada, he won international kudos for his role in keeping the Canadian economy and its banking system intact during the worst financial and economic crisis since the Great Depression.

When started the job last summer, he moved quickly to shake up the stodgy Bank of England culture by appointing a new team of well-respected deputies, some of whom would oversee the bank's greatly expanded regulatory duties. "He made a significant contribution to the organizational side," said Sam Hill, RBC Capital Markets' senior UK economist. "So far so good."

But even as economic growth was slight, the British economy was quite busy creating jobs, though the Bank of England was apparently not aware of it at the time. "The bank did not understand what was happening in the UK labour market," said George Magnus, senior independent economic adviser to Swiss banking giant UBS. "There was a huge black hole in their labour knowledge."

Britain learned in the early spring that jobless rate in the first quarter of this year fell to a five-year low of 6.8 per cent, at which point investors began to price in an early rate hike. But Mr. Carney last month discouraged the scenario, suggesting there was enough spare capacity in the economy to make an early rate hike improbable. Then, in his Mansion House speech on June 12, he went from dovish to hawkish, saying the first increase "could happen sooner than markets currently expect."

Before the treasury select committee less than two weeks later, the message got muddled again, when he hinted that there was no urgency to raise rates, saying, "Our best judgment is that the increase in rates is likely to be limited, relative to history, and the process is likely to be gradual." That's when Mr. McFadden, the MP, hit him with the "unreliable boyfriend" analogy.

Mr. Magnus thinks Mr. Carney should have been consistently ambiguous in his comments. "My humble advice would be to acknowledge that there is a huge amount of uncertainty in the raft of indications they follow and that he might opine in an Greenspan-esque way," he said, referring to the famously vague comments of former U.S. Federal Reserve chairman Alan Greenspan.

Economists are now playing the guessing game on the timing of rate increases. Some think it could come as early as August as the British economy powers ahead with a 3 per cent growth rate, the fastest among the Group of Seven economies. But Mr. Hill of RBC thinks late in 2015 is a safer date, noting subdued inflation and wage growth. Given the mixed messages from Mr. Carney, it's not surprising that the forecasts are all over the map.