England’s upside down interest

By Rosemary Westwood - Monday, March 11, 2013 at 8:00 AM - 0 Comments

Governments around the world have been driving down interest rates in recent years in a bid to boost their economies. The Bank of Canada has held its rate at one per cent. The U.S. Federal Reserve rate now sits at virtually zero. This week, the Bank of England hinted it might go even further and, for the first time in the bank’s history, set a negative interest rate. In effect, it would charge domestic banks for holding their deposits rather than pay them interest.

The bank’s deputy governor, Paul Tucker, floated the idea during a meeting with MPs. Though the Bank of England’s rate stands at just 0.5 per cent, there are concerns that banks aren’t lending enough to businesses, key drivers of economic growth. If the central bank charged fees for deposits, the thinking goes, banks would choose instead to lend that money out. The move would be “extraordinary,” Tucker noted, but not unprecedented. In 2009, Sweden’s central bank was the first to cut interest to a negative rate (minus 0.25 per cent)—garnering praise for blazing a new monetary policy trail. Denmark followed suit in July of last year. And in December, two Swiss banks began charging institutional clients for deposits in Swiss francs. The European Central Bank, desperate for new tricks to turn Europe’s economy around, is also rumoured to be considering a similar move.

Even Mark Carney, the Bank of Canada’s current governor, has considered the move. During a hearing for his appointment as the Bank of England’s new governor (a position he takes up this spring), Carney told British MPs that in April 2009, in the depths of the financial crisis, negative interest rates “would have been warranted” in Canada. He avoided that, in part, by promising to keep interest rates at an all-time low for an extended period.

While negative rates could go a long way toward stimulating the economy (ultimately affecting everything from mortgages to small loans), they would also carry risks. Banks might, in turn, slash their already low rates, perhaps even charging their customers for deposits. Conscientious penny-pinchers would see their savings shrink, a fate not much better than slow growth for the country.

Bank of England governor backed another stimulus but outvoted at recent central bank meeting

By The Associated Press - Wednesday, February 20, 2013 at 5:57 AM - 0 Comments

LONDON – Top officials in the Bank of England expressed growing concern over Britain’s economy and came closer to backing another monetary stimulus in a move that piled further pressure on the pound.

Minutes of the last policy meeting of the Bank of England released Wednesday showed outgoing Gov. Mervyn King and two other members of the Monetary Policy Committee supported another cash infusion to revive Britain’s ailing economy.

However, King, Paul Fisher and David Miles, were outvoted by the six others, who preferred to keep policy unchanged.

Since 2009, the Bank of England has pumped 375 billion pounds ($579 billion) into the British economy. Under the program — commonly called quantitative easing or QE — the bank buys government bonds from financial institutions in the hopes they will use the proceeds to support the economy.

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Mark Carney on inflation, housing bubbles and how he shook up the Bank

By Erica Alini - Thursday, February 7, 2013 at 5:22 PM - 0 Comments

Besides the Q&A session with British MPs this morning, there was a written part to Mark Carney’s job interview. For you reading pleasure, we’ve uploaded the entire 45-page document here. Below is a selection of intriguing and Canada-relevant bits.

Mark Carney on Mark Carney:

I have experience in risk management in the private sector and crisis management in the public sector. In Canada, I was part of a team, which rapidly assessed the risks and instituted an effective, coordinated response to the global financial crisis, despite Canada’s deep integration with the U.S. economy and financial system.

(…)

Serving as Governor of the Bank of England will mark the pinnacle of my career. I am a strong believer in the value of public service, and I firmly believe that this responsibility offers me the opportunity to contribute where I can make the greatest impact.

On asking for a shorter term (five rather than the customary eight years):

At the end of a five-year the term, I will have served as a Governor of a G7 Governor central bank for over a decade. In my experience, there are limits to these highly rewarding but ultimately punishing jobs. Second, the five year term has advantages given the ages of my children and the disruption that is involved in moving schools and countries.

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Live from London: Mark Carney takes questions from the Treasury Committee

By macleans.ca - Thursday, February 7, 2013 at 4:43 AM - 0 Comments

Read Carney’s written evidence to the Treasury Select Committee here.

2012 on Parliament Hill: John Geddes sums up a year in 12 chapters

By John Geddes - Saturday, December 29, 2012 at 1:44 PM - 0 Comments

How many senators did Prime Minister Stephen Harper appoint in 2012? How many years does the government allow, in its latest plan, for “development and acquisition” of F-35 fighter jets? How many premiers, provincial and territorial, attended the November economic summit in Halifax? (Hint: Saskatchewan’s just phoned in.)

In all cases, the answer is an even dozen. But for our purposes here—in this third annual installment of a year-capping look back—we’re interested in 12 only as the number of months in the calendar. Select just a single story for each, and 2012 might almost begin to show some semblance of coherence.

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Accounting for Mark Carney

By Aaron Wherry - Tuesday, December 18, 2012 at 2:17 PM - 0 Comments

John Geddes considers the rules that apply to the governor of the Bank of Canada.

Paul Boothe defends Mr. Carney.

As a former central banker, I understand very well the value of central bank independence and credibility.  My own view is that I doubt very much that the independence or credibility of the Bank of Canada has been impaired … Having worked side-by-side with Mark Carney, I do know that he is a person of enormous talent, energy and most importantly, integrity.  He drives a hard bargain, but always with the public good clearly in mind.  From personal experience, gained working together in the pressure-cooker environment of senior public service, I have come to trust Mark to use his talent and energy to always do what he believes is right for Canada.  Nothing I have read has shaken my confidence in his purpose or his integrity.

I’m told Mr. Carney is scheduled to appear before the British treasury committee on February 7.

The Carney affair: ‘He’ll have to be far more careful over here’

By Aaron Wherry - Tuesday, December 18, 2012 at 9:10 AM - 0 Comments

More reaction from British MPs.

Matthew Oakeshott, the Liberal Democrat treasury spokesman, said there needed to be clear demarcation lines between the governor and parliament to maintain the Bank’s independence. “He’ll have to be far more careful over here – no riding with Cameron or skiing with Osborne,” he said.

Paul Myners, a City minister in the previous Labour administration, said he expected Carney to face tough questioning when he appears before parliament at his confirmation hearing. “I guess it would have been taken into account by the chancellor but will also no doubt feature strongly in his interview with the treasury select committee,” said Myners, who was also a member of the Bank of England court, which acts as its governing body. ”We delude ourselves if we try to pretend that the governor does not take political questions – the current one has pursued policies that have had a profound impact on the distribution of wealth, favouring those in debt over those who have saved, and favouring the well-off retired over the poor. The important thing is to be accountable to a credible and transparent court, which is not the case at the moment, and accountable to parliament.”

The question of Mark Carney

By Aaron Wherry - Sunday, December 16, 2012 at 11:00 PM - 0 Comments

Stephen Gordon explains his concerns about Mark Carney’s wooing by the Liberals and Sun Media picks up the Globe story.

This evening, I asked the Prime Minister’s Office: Does the Prime Minister have confidence that Mark Carney has done his work as governor of the Bank of Canada in a non-partisan manner and will continue to do so until his scheduled departure?

Here is the response I received.

As the PM said at the time of the BoE announcement, Mr. Carney has done an admirable job as Governor of the Bank of Canada.

The full statement from Mr. Harper after Mr. Carney’s appointment to the Bank of England was announced is here.

PM Stephen Harper and Mark Carney: Were they simply lucky?

By Stephen Gordon - Thursday, November 29, 2012 at 2:11 PM - 0 Comments

(Chris Wattie/Reuters)

The financial crisis of 2008-09 and the recession it caused didn’t do much for the reputations of many policy makers around the world, but they’ve been quite good for the careers of Stephen Harper and Mark Carney:

• Harper finally won a majority in 2011, and continues to enjoy high ratings in the polls for perceived competence. There are many dimensions where he scores much less well, but my understanding of the Conventional Wisdom is that if Harper can retain that reputation for competence when it comes to managing the economy, he will be tough to beat in 2015.
• Carney earned the reputation of being the best central banker in the world, at least in the estimation of the U.K. chancellor of the exchequer, who finally managed to persuade Carney to accept the appointment as governor of the Bank of England this week.

It is now commonplace to note that Canada’s recession was shorter and milder than those in the U.S. and Europe (Australia’s connections to the U.S. and Europe are weaker than Canada’s and it did even better) and these two men have either taken or been given credit for Canada’s performance. But are these reputations the product of making good choices or just sheer luck? As always, a bit of both.

I’m going to start with a short summary of what happened in Canada during the crisis, if for no other reason that I’ve never tried writing one before.

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Who will be the next Bank of Canada governor?

By Stephen Gordon - Monday, November 26, 2012 at 1:52 PM - 0 Comments

I am as surprised as everyone at the news that Mark Carney is leaving his post as Governor of the Bank of Canada to take over at the Bank of England. This is a shrewd move for the U.K.: Carney’s time at the Bank of Canada has been a success, and he also brings with him his not-inconsiderable personal credibility that can no doubt be used to great effect at the BOE. But where does that leave us?

The first thing to remember is that Carney’s departure and the arrival of a new governor will change nothing in the short or even medium terms. The BOC’s mandate to use its policy instruments (including, but not limited to, interest rates) to keep inflation at an average of two per cent per year predated Carney by 15 years, and it won’t be revisited for another four years. Carney has mentioned many times that monetary policy is a team sport; the Bank’s forecasts and decisions are very much the results of a group effort. The Bank’s collective expertise remains (almost) entirely intact—and the BOC’s mandate and views on how to achieve it won’t change with the governor’s departure. There’s no reason to think that the Bank will change its policy stance when Carney leaves.

It seems unseemly to address the question of successors at this point, but I’ll give it a try. Off the top of my head, I can think of three obvious candidates Continue…

Mark Carney to England

By Aaron Wherry - Monday, November 26, 2012 at 10:42 AM - 0 Comments

Finance Minister Jim Flaherty has just announced that Mark Carney has been appointed Governor of the Bank of England.

The Honourable Jim Flaherty, Minister of Finance, today announced that Mark Carney, current Governor of the Bank of Canada, has been appointed as Governor of the Bank of England effective July 1, 2013.

“On behalf of the Government and all Canadians, I would like to thank Governor Carney for his work at the Bank of Canada and offer my best wishes in his future role at the Bank of England,” said Minister Flaherty. “This appointment, which marks the first time a foreign national has headed the Bank of England, is another strong example that Canada’s monetary and fiscal systems serve as models to the world. While other countries have faced significant turbulence, our financial system has consistently been ranked as the soundest in the world.”

Carney, whose term as Governor began February 1, 2008, had previously served as Senior Associate Deputy Minister of Finance and G-7 Deputy of Canada. He was also recently named chair of the Financial Stability Board. “As Minister of Finance, I appreciate the guidance Governor Carney has provided in recent years,  in fulfilling the Bank’s mandate of maintaining the stability of our monetary system and controlling inflation,” noted Minister Flaherty.

The usual practice for selection and appointment of the Governor of the Bank of Canada will be followed. The Board of Directors of the Bank of Canada will shortly form a special committee comprised of independent directors whose mandate will be to undertake a recruitment process for the selection of the next Governor. Governors of the Bank of Canada are recommended by the independent directors, and appointed by the Minister of Finance and the federal cabinet.

And here is the official announcement from the Bank of Canada. Continue…

The idea of the Bank of England tampering with LIBOR isn’t as crazy as you think

By Andrew Hepburn - Monday, July 23, 2012 at 4:59 PM - 0 Comments

The Bank of England, London June 15, 2012. Paul Hackett/Reuters

I wrote about the private-sector side of the LIBOR scandal in my previous article for Maclean’s. Now let’s turn to the more intriguing part of the whole affair: How the Bank of England itself at one point supposedly started to encourage Barclays to fiddle with the numbers.

Even if the allegations proved to be true, you’d be excused for scratching your head in puzzlement. What’s the big deal with a central bank engaging in manipulation for the sake, supposedly, of the health of the financial system?

With governments trying to contain the effect of the financial crisis first and now the eurozone mess, we hear of central banks tampering with the markets almost every day. And, really, governments have always intervened in the economy to influence–manipulate if you will–outcomes. When a central bank adjusts short term interest rates, it is using its longstanding, legitimate power to artificially tip the market one way or the other. And, in a closer-to-home example, rent control is another form of market manipulation at the hands of the government.

We generally accept various forms of manipulations because we think the government can and ought try to influence certain markets in ways that produce beneficial outcomes for society. Take the case of monetary policy: The widespread consensus is that central banks can cushion recessions by lowering interest rates and help calm roaring inflation by raising them.

And because monetary policy is largely viewed as a reasonable area of government intrusion, interest rate changes are announced publicly. Market watchers and the general public may disagree about the need for rate cuts or hikes at any moment, but, for the most part, the government’s right to make the decision goes unquestioned.

Now, that’s not what happened with LIBOR. In this case, if the Bank of England did indeed instruct Barclays to submit artificially low rates, it had no choice but to convey such directions surreptitiously. According to the allegations, the very goal of Barclays providing false submissions during the financial crisis was to deceive the market into believing the bank was healthier than it truly was. Had the Bank of England publicly told Barclays to submit lower LIBOR figures, the charade would have been self-defeating. Everyone would know that LIBOR didn’t represent the true rate of borrowing.

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The LIBOR scandal: It can’t just be bad apples

By Leah McLaren - Monday, July 9, 2012 at 2:51 PM - 0 Comments

Dylan Martinez/Reuters

Earlier this week, when American-born Barclays chief executive Bob Diamond finally stepped down in the wake of his bank’s interest-rate-rigging scandal, it was with characteristic defiance. “I am deeply disappointed that the impression created by the events announced last week about what Barclays and its people stand for could not be further from the truth,” he said. Not entirely surprising, given Diamond’s reputation for partisan toughness, though it’s interesting to wonder exactly which incongruous “truth” and “impression” he was referring to.

Here’s another truth: between the fall of 2007 and spring 2009, Barclays, one of Britain’s largest banks, found itself, like many other financial institutions, in dire straits. It was struggling to raise funds. Had it revealed it was paying higher-than-average interest rates, Barclays risked “reputational” damage and could have ended up being bailed out like the Royal Bank of Scotland or Lloyds Banking Group. Instead, its investment banking staff began subtly rigging the London interbank offered rate (LIBOR), an average interest rate estimated by the city’s leading banks of what they would be charged if borrowing from other banks. As the rate is calculated daily and underpins trillions of dollars of financial transactions, the habitual rigging had untold reverberations on the British economy as a whole. Last week, the scandal exploded as Barclays was fined $460 million by British and U.S. authorities for attempting to manipulate rates.

As for the impression? Here in the U.K., the Barclays scandal has been taken as a clear indication that the bank, and by extension the culture of finance in the city of London as a whole, is unacceptably corrupt. As governor of the Bank of England, Sir Mervyn King told media last week after yet another financial scandal came to light (this one involving improper selling of complex financial products to small businesses), “From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates, and now news of yet another mis-selling scandal, we can see we need a real change in the culture of the industry.”

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Britvote '10: anyone and anything

By Colby Cosh - Wednesday, May 5, 2010 at 11:18 AM - 48 Comments

On the eve of the most exciting British general election in decades, it turns out to be surprisingly hard for a foreign observer to pin down precisely what sort of government might emerge from the maelstrom of a hung parliament. Liberal Democrat leader Nick Clegg has ostentatiously been keeping his negotiating options open. The one thing resembling a categorical condition he has advanced is that he will not cooperate to keep Labour in power under current PM Gordon Brown if Labour finishes third in vote share. Continue…