Last week he made sharp remarks about how he wasn’t going to “take instruction” from politicians and reminded the world what operational independence for a central bank means: “The objectives are what are set by the politicians. The policies are done by technocrats,” he said.
What had got Carney’s goat? One assumes it was Theresa May’s grumble at the Tory party conference about the “bad side-effects” of ultra-low interest rates and quantitative easing. No 10 briefed that the PM was merely expressing sympathy with savers rather than attempting to meddle in monetary policy. Maybe, but May’s form of words was clumsy. She should know that loose talk can move gilt prices in the current climate.
But now comes William Hague’s blistering attack on modern monetary medicine. In timing and substance, it could almost be designed to deepen Carney’s paranoia. Central bankers have lost the plot, argued the former foreign secretary, listing 10 pernicious effects of low interest rates – everything from damage to pension funds to bubbles in house prices.
Hague’s analysis, in itself, is unremarkable. Many people think near-zero interest rates and QE are doing more harm than good these days; the point is well worth debating. But Hague jumped to an explosive conclusion. Unless central banks start to raise rates “the era of their much-vaunted independence will come, possibly quite dramatically, to its end”.
Hague is not a government minister these days. Nor was he a Brexiter – to the surprise of some, he came out as a Eurosceptic remainer before the referendum. But he is still a heavyweight Conservative figure. Was he making a threat: raise interest rates or my former cabinet colleagues may choose to abolish the Bank’s independence?
That interpretation may be a stretch given that Hague didn’t mention Carney or the Bank or England by name. But Carney could still be forgiven for feeling uneasy about the political drift. The governor spent the pre-referendum period defending himself against the leavers’ charge that he was aiding George Osborne’s “Project Fear”. Now the Bank’s monetary policy is under assault. In Carney’s shoes, you might conclude that political aggravation is a bore and that it’s best to leave Threadneedle Street, as scheduled, in 2018 rather than extend the five-year term until 2021.
He has said he’ll make his mind by the end of the year. We should hope he stays. He’s not everybody’s cup of tea but the last thing the UK needs, in the post-Brexit world of uncertainty, is a suspicion that governor of the Bank of England has been encouraged towards the exit by political whispering from the wings.
Central bank independence doesn’t have to be for ever but this would be a terrible moment for the UK to contemplate reform. Financial markets haven’t got a clue about the new government’s tax and spending policies, its promised industrial strategy or even its plan for negotiating an exit the EU, which seems to depend on which minister is speaking. Even in the face of these uncertainties, gilt yields have not soared since the referendum. Watch them fly if Downing Street is seen as wanting to influence interest rates or remove the governor of the Bank or England.
May should recognise a danger to herself. Whether Downing Street likes it or not, international investors regard Carney as a grownup in the room at a time of upheaval. If she is committed to keeping the Bank independent and retaining its current mandate – and let’s hope she is – the prime minister should quell the noise and lobby Carney to stay. If that argument doesn’t convince, here’s a more cynical one: an independent Bank governor is someone to blame when a political honeymoon period ends, as May’s surely will.
guardian.co.uk © Guardian News and Media Limited 2010
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