-Carney Seen as Pragmatic, Not Wedded to Ideology

By Courtney Tower

OTTAWA (MNI) – Comic opera told the British in 1885 that it is sublime to
let the punishment fit the crime, and that is the approach Bank of Canada Gov.
Mark Carney more soberly takes to monetary policy and likely will bring to the
Bank of England in July.

Though not nearly W.S. Gilbert’s playful satire in The Mikado, the version
Carney brings to Threadneedle Street is a pragmatic approach to delivering
monetary policy that fits particular situations in their own contexts.

“He will take with him to the Bank of England, first of all, pragmatism in
monetary policy, to fit the practice of it to what applies in the more difficult
circumstances there,” Craig Wright, chief economist for the Royal Bank of
Canada, the nation’s largest chartered bank, told MNI.

And David Tulk, chief macro strategist at TD Securities, said in an
interview, “At the Bank of England or the Federal Reserve in the United States,
each member of the deciding monetary policy committee is known as a hawk or a
dove, but not in Canada.”

Carney and his five deputy governors make the decisions by consensus and no
record of their discussions is published, Tulk said, “So a lot of people are
asking about Carney, ‘is he a hawk or a dove?’, and they are coming up empty as
to where he sits in that.

“He’s been very dovish when he needs to be and quite hawkish when
conditions warrant,” Tulk said. “I would say he is far more a pragmatist than
wedded to a specific ideology.”

An alumnus himself of some years spent at the Bank of Canada, Tulk said
“monetary policy is bigger than any one person.” A big change for Carney in
London is that “he will have to try to adapt to a more opinionated world in the
U.K,” which publishes minutes of policy discussions.

What Tulk and Wright describe as Carney’s pragmatism includes a strong
adherence to the chief monetary policy pillars of the Bank of Canada, inflation
targeting and a floating exchange rate, but also a readiness to innovate within
them if need be. There has not been the need in Canada for much innovation
beyond maintaining the present stimulative 1.0% policy rate, unchanged since
September 2010.

In the early days of the financial crisis and subsequent recession, Carney
and his crew brought the key target for the overnight rate down from 2.25% where
it was Dec. 1, 2008 rapidly to 1.50% in one 0.75 basis point swoop, then by
quick stages down to 0.25% and to an effective zero rate of 0.25% by April 1,

Although Carney has rejected quantitative or credit easing the BOE, the
Federal Reserve and other major central banks are engaged in, analysts say he
showed his pragmatism in April 2009 by staying with the inflation control
mechanism but tweaking it.

He introduced the conditional commitment, now followed elsewhere. He
assured the financial world and business that the 0.25% rate would continue for
12 months ahead, on condition that circumstances would not change materially.
But conditions did change, and the rate was changed after 11 months.

Carney also added some flexibility to the inflation control policy band of
1% to 3%. Though the BOC retains the band, it allows the Consumer Price Index to
go above or below the band for longer, albeit an unstated period, than the usual
six to eight quarters. The rate would then not rise or fall as quickly as it
might have to bring inflation in line.

The BOC this week to be an outlier among central banks by continuing to
advise that policy rate increases are likely ahead and to signal no rate
reductions or any kind of quantitative or credit easing are in sight.

Carney is different because the domestic situation is and has been
different, analysts such as Wright, Tulk and Jonathan Basile, director of
economics at Credit Suisse in New York, said.

Canada did not have the housing crash, the depth of recession, or imperiled
banks, partly because of established Bank of Canada policy but also because of
strong federal financial regulations and oversight, healthy banks, good
corporate balance sheets, a comparatively strong economy, they said.

Carney has become steeped in the experience of inflation targeting, which
will make for continuity and a comfortable fit at the BOE, Basile told MNI.

“He seems to have the right background for what they (the BOE) want, a
sense of flexibility within the basic parameters of the establishment. And he’ll
be balanced on both sides of the inflation/risk spectrum.”

Wright said Carney exhibited his pragmatism in the conditional commitment
approach by stating “that the Bank could go down the path of quantitative or
credit easing if that should be necessary. These were in his toolbox, and he
would use them if needed.”

“We in Canada haven’t needed those tools,” Wright added. “But if the U.K.
situation is different when he gets there, then one would expect from Gov.
Carney a different response.”

David Madani, Canada Economist for Capital Economics, based in Toronto, who
came there from the BOC in 2010, said Carney has been a good leader but
essentially has followed established BOC policy on inflation targeting and on
the floating exchange rate.

Quantitative easing as practiced at the Bank of England will be new to him,
“but it is a challenge for any central banker because it is so experimental and
remains to a large degree unproven, he’ll have to get his head around that.”

Right from his start as BOC Governor, in fact when he was still
Governor-to-be, Carney told a House of Commons committee in Ottawa what he has
adhered to since, that “I am in the fortunate position of inheriting an
exceptionally sound and robust policy framework.” Keeping inflation low, stable
and predictable was “the best contribution monetary policy can make to the
promotion of the economic and financial welfare of Canada.”

The BOC and the federal government in late 2011 signed their fifth
five-year agreement on inflation targeting, within the 1%-3% band. Carney told
the Commons committee the central bank nevertheless was researching whether it
might be better to target a lower rate of inflation or to pursue a price level
target instead of an inflation target.

Later, in a Montreal speech a year ago, he rejected both possibilities for
Canada. Price level targeting, he said, could possibly be considered “as a
temporary unconventional policy tool in countries faced with extraordinary
circumstances, notably those with policy at the zero lower bound (effectively, a
zero policy interest rate) and with a heavy burden of debt.” However, it was
unlikely to provide quick extra stimulus.

A lower than 2% target rate for inflation “is intuitively appealing,” he
said, reducing inflation-caused distortions, “in a perfect world.” Even then,
what he called “an economist’s utopia,” economic models disagree on what the
benefits would be. And to really work, a central bank might have to get down to
an effective zero rate, where “conventional monetary policy can no longer be
used to stimulate the economy.”

Both a lower and a higher rate were, Carney said, “siren calls.” The higher
rate would “risk de-anchoring inflation expectations and destroying the hard-won
gains that have come from the entrenchment of price stability” in economies.

At a U.S. Monetary Policy Forum in New York last February, Carney argued
that “flexible inflation targeting remains the best response,” providing “a
robust framework (that) remains appropriate no matter the circumstances.”

For Canada as for the Bank of England, then, “it allows central banks to
deliver what is expected while dealing with the unexpected.” The Bank of England
and the Federal Reserve had demonstrated that there could be inflation targeting
and, at the same time, aggressive easing, he said.

Carney’s detailed defense of what he called “a monetary policy framework
for all seasons” in New York reaffirmed that alternatives were studied but
rejected as being the best ones for both crisis and non-crisis economies.

For both economies, he said, so-called “flexible inflation targeting”
provides the best response. It seeks to return inflation to its medium-term (six
to eight quarters) target, except when shocks are especially strong. In that
case, the BOC can take longer to return inflation to target.

Perhaps Carney’s guiding light at the BOE will be what he said in Montreal:
“We make monetary policy in the real world, where shocks are a fact of life.
That is why the Bank responds with a flexible approach, taking decisions guided
by considered analysis and informed judgment rather than mechanical rules.”

–MNI Ottawa Bureau; tel: +1 202-371-2121; email: dcoffice@mni-news.com

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