Blackfriar: A weight of expectation on the new governor’s shoulders

The weight of expectation must be palpable. As an outsider, the former head of the Bank of Canada might be expected to implement radical changes. But he must use his persuasive skills to win over the hearts and minds of people who have worked at the Bank for decades.

He inherits an economy which is showing signs of recovery. His job will be to make sure that nothing is done to threaten the green shoots. If he fails, critics will wonder why an internal candidate wasn’t appointed.

So what will be the character of Mr Carney’s governorship?

In recent months, there’s been speculation that the Bank of England could start to produce more forward looking statements similar to those issued by the US Federal Reserve in order to boost economic confidence.

In his Budget speech earlier this year, Mr Osborne said that the Central Bank’s inflation target would remain at two per cent a year – but that was not enough.

Mr Osborne said he was publishing a review of the Bank’s mandate and said it might need to use “unconventional monetary policy instruments” and give a clearer idea of what it will do in the future. Such a change might make the Bank operate in a way similar to the US Federal Reserve, which has given signs about how long it will continue to provide support to the US economy.

It will be interesting to see how Mr Carney uses this extra room for manoeuvre.

Earlier this month, the Bank’s Monetary Policy Committee decided that the costs of more Quantitative Easing (QE) would outweigh the benefits.

Yesterday, Vicky Redwood, chief UK economist at Capital Economics, said Mr Carney would take on the mantle left by his predecessor, Sir Mervyn King, in calling for more action to boost the recovery.

“We still expect Mr Carney to usher in a renewed round of policy stimulus soon after he takes over next month,” she said.

She added: “The recent rise in rate expectations has highlighted the potential role for forward guidance and the rest of the committee will probably be open to more measures to boost bank lending.

“Mr Carney might even persuade the others to resume QE if the economic data struggle to maintain their recent positive tone.”

In the early months, part of Mr Carney’s role will be managing expectations.

Yesterday. David Battersby, an investment manager at Leeds-based Redmayne Bentley, told Blackfriar: “Mr Carney will be a breath of fresh air. He’ll have his own ideas and will try to stamp them across the Bank quickly.”

However, Mr Battersby cautioned that people might be hoping for too much, too soon from the new governor.

Mr Battersby hoped that Mr Carney’s arrival will lead to improved forecasts from the Bank, which would give it more political clout.

It’s possible that, apart from targeting inflation, the Bank may also support measures calculated to reduce unemployment, particularly among young people.

There’s good reason to believe that Mr Carney’s arrival may lead to the introduction of policies other than QE in Britain.

He has promoted long-term public commitments to low interest rates during his time as Canada’s central bank chief, and Mr Osborne has asked him to assess the viability of this strategy in Britain. Most economists believe that Mr Carney will provide markets with a steer on policy.

Any actions by Mr Carney which helps businesses make long-term plans for growth will be welcomed by Yorkshire’s corporate community.

Yorkshire’s small businesses would love to see more competition in the banking sector, because it means they are more likely to get a fair deal.

An announcement from the Office of Fair Trading (OFT) yesterday will have been music to their ears. The OFT said it was “bringing forward” its planned study of small and medium-sized enterprises (SMEs), which will cover England, Northern Ireland, Scotland and Wales.

It is seeking views on a range of issues, such as whether small business lending is being held back by a lack of competition between banks, and if services provided are adequate and offer good value.

The move follows calls for an inquiry from the Commission on Banking Standards. The commission’s report recommended a market study of SME banking.

There have been long-standing concerns that a lack of competition is leaving firms with little or no choice.

Bank of England data recently revealed that loans to small and medium enterprises fell by £700m in April despite its flagship Funding for Lending scheme. Lending to businesses overall plunged by £1.2bn.

The OFT probe is long overdue. It must lead to concerted action to help small firms get a better deal from the banks.