New governor at the Bank

Adam Bushby explains how the Bank of England will change when it welcomes new head Mark Carney in July

Few political appointments are met with the groundswell of positive opinion surrounding that of the new governor of the Bank of England (the Bank), Mark Carney. The Canadian was appointed governor of the Bank in November 2012, and will take up the post this July.

Carney's reputation was cemented during his tenure as the head of the Bank of Canada, with the country suffering less than the UK and the US during the global financial crisis. Carney kept Canada's interest rates low for an extended period to enable banks to continue lending while the economy recovered. This policy provided some monetary stimulus, but maintained a commitment to low inflation because interest rates were only held down for a fixed period.

But Carney has indicated that he could adopt a more aggressive stance at the Bank of England to jumpstart the UK's struggling economy. How he seeks to do so could see the Bank plough a different furrow. Speaking in Toronto in December, Carney said: "If yet further stimulus were required, the policy framework itself would likely have to be changed."

All change

The options available to Carney have been widened by chancellor George Osborne, who announced the first changes to the Bank's remit in almost a decade during his latest Budget speech.

The Bank will now have the opportunity to balance a more flexible inflation target with measures to boost economic growth. Alex Moore, consultant at the World Bank, explained: "There has been talk about a projected change in mandate for the Bank of England, and the latest Budget has provided some change in focus."

Before Osborne's announcement, the Bank's role was to set and maintain the rate of inflation - the current target is 2 per cent, although it has been higher since 2009. The Bank can be fairly flexible in the manner in which it meets this target - for example, it can keep interest rates low in an attempt to boost investment and lending, or inject money into the economy via quantitative easing (QE) to create liquidity - but it explicitly did not have a growth-promoting agenda.

On the fence

The latest reform may be seen as a compromise between calls for radical change, and those from economists who wish to stick with traditional inflation targeting, such as incumbent governor Sir Mervyn King.

Despite the enthusiasm for Carney's appointment, it would be disingenuous to discount the work of his predecessor, who remains one of the most highly regarded financial economists in the world. Sir Mervyn is thought to be in favour of sticking with inflation-targeting because the central bank needs to reassure investors that inflation will be kept low and stable.

When Carney takes over the reins in July, this compromise reform may well satiate his appetite for change as a proactive central banker, but more radical reforms cannot be ruled out if the UK's economic outlook continues to be bleak.

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