As the BoE governor completes his first year in office, having taken over from Lord (Mervyn) King, Samuel Tombs, senior UK economist at Capital Economics, said: “On one hand, it was a successful year, the economy turned around and while the funding for lending scheme was set up by his predecessor, he can also take some credit.”
He said the governor was right to have emphasised last year that it was levels of economic activity, rather than growth rates, that mattered most for the outlook for interest rates and inflation.
Mr Tombs also said there was evidence to suggest Mr Carney’s focus on forward guidance supported the economic recovery by keeping market interest rates down and limiting the extent of sterling’s appreciation.
He also said, however, that it was a mistake to use the unemployment rate as the threshold for forward guidance, adding: “It turned out to be a fairly crude indicator for the amount of slack in the economy.
“What’s more, forward guidance may have given households and firms too much assurance that interest rates would not rise for the foreseeable future and may have contributed to a rise in house prices that policymakers have become increasingly concerned about recently.”
He also suggested Mr Carney’s recent Mansion House speech, in which he said interest rates were too low, could have “injected unnecessary and costly volatility into UK markets”.
Fellow economist and academic Michael Mainelli, co-founder of think-tank Z/Yen, said he thought the new governor had made an excellent start by launching a review of banking.
Mr Mainelli said: “Mr Carney has overcome the cultural crevasse well, successfully handling in short order the additional, possibly superfluous, rituals and traditions that we in the UK associate with being governor of a central bank. This has given him greater authority.”
“The governor also correctly identified the housing bubble as the biggest threat to the British economy. This clear focus is most welcome.”
Mr Mainelli added, however, that he did not think the BoE had properly tackled the recapitalisation of the banks, adding that there needed to be a “complete recapitalisation of the UK banking system, and a more robust sector”.
Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, said: “There was a widespread belief Mark Carney’s first act at the Bank of England would be to try to weaken the pound to boost a moribund economy. Instead he issued powerful forward guidance that was widely reported as a promise to keep interest rates low for three years. This, coupled with direct government support for home buyers, triggered a strong housing-led recovery.”
Adviser view
Alan Solomons, director of Harrow-based Alpha Investments & Financial Planning, said: “So far, so good – like a BMW driving over a bumpy road, he has driven well over a difficult terrain. He has done a reasonable job but not a remarkable one. Forward guidance was useful, but sometimes it comes and goes and does not happen as events take over. People are expecting a rise in interest rates, which will cool the housing market, but many people are overborrowed, so this could double their debt. He did a good job in Canada, so he is capable of doing much more.”
