Published December 20, 2012
OTTAWA – Musings on unorthodox monetary policies are giving incoming Bank of England Governor Mark Carney a "radical" image before he even sets foot in his future home, but his record as head of Canada's central bank reveals him as a free-thinker on paper rather than in practice.
At three crucial crossroads during his mandate at the Bank of Canada, Carney talked about delving into bold, new frontiers of monetary policy. But when each decision time came, he opted for the more conservative path.
Carney, governor since 2008, oversaw an exhaustive research program at the Bank of Canada on possible alternatives to the bank's 21-year-old, inflation target, only to decide a year ago to stick to it for another five years.
With interest rates at rock bottom at the height of the global crisis, the bank published a plan for printing money, otherwise known as quantitative easing, but unlike his United States and UK peers Carney chose never to use that tool.
The decision surprised markets, even though Canada's economy was more robust than others and its banks never needed bailouts.
And for all his talk about using monetary policy to prevent asset price bubbles, it was the finance minister, not the central bank, who acted to cool an overheated housing market.
"His successes or imaginative approach was mostly in the financial sphere here, rather than a real clear break in monetary policy," said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets.
"So I think he'll spend most of his time (in Britain) dealing with how to fix the banking system," he said.
Britain's unprecedented appointment of a foreigner to head its central bank came as a shock to many in Canada and Britain even as British finance minister George Osborne hailed him as "the outstanding central banker of his generation".
Carney, who starts his new job on July 1, is most highly regarded for his work on global financial regulatory reform.
In his first speech crafted with a British audience in mind, on December 11, Carney stirred controversy by saying that, in times of crisis, central banks might consider targeting nominal gross domestic product, instead of inflation.
BRITAIN WORRIES, CANADA SHRUGS
The remarks sparked a flurry of warnings from BoE officials and British newspapers dubbed his ideas "radical".
Osborne welcomed the discussion but suggested the bar for change was high.
Bank of Canada-watchers simply shrugged, given that Carney mused on similar lines in November and February of this year.
"It's more of an academic approach where he is simply reviewing all the opportunities just to give a fuller understanding of the literature as opposed to advocating one approach over another," said David Tulk, chief Canada macro strategist at TD Securities.
Carney stressed several times that he was not recommending anything for the Bank of England, but listing policy options available to any central bank that has lowered interest rates to zero, with nominal GDP-level targeting the most extreme example.
The BoC's "wonky, somewhat dreary research" on alternatives to its 2 percent inflation target could provide lessons to other countries, he said, although the Canadian central bank studied price-level targeting rather than nominal GDP targeting.
Under price-level targeting, a central bank would aim for a numerical level in the consumer price index while nominal GDP-level targeting looks at both GDP and inflation. In both cases policy makers must take past deviations from the target into account and try to make up for them, while inflation targeting looks only at the future.
The Bank of Canada launched a research project into the merits of price-level targeting in 2006. In November, 2011, after years of discussions and dozens of papers, it decided the drawbacks were too great and the concept would confuse people.
"The bank has had success with inflation targeting. It has stabilized inflation... So why mess with success?" said Paul Ferley, deputy chief economist at Royal Bank of Canada.
To his credit, Carney has put some creative ideas into practice. He is best known for preceding the U.S. Federal Reserve in making an explicit commitment to keeping interest rates low for an extended period.
As early as 2009 he sang the praises of "flexible" inflation targeting, which the BoC now espouses and which means tolerating inflation straying from the target for longer than usual in order to prevent financial or economic instability.
LET'S NOT EASE
Carney was also one of a global club of central bankers talking openly about quantitative easing, and in April 2009 the bank laid out a detailed framework for unconventional policy that included asset purchases.
The market fully expected a first round of quantitative easing, given that the Bank of Canada had run out room to cut interest rates that were already at 0.25 percent.
But to most people's surprise on decision day, he issued the commitment to hold rates low until mid-2010 and left it at that.
"There was some expectation at least going into that period that the Bank of Canada would pursue outright quantitative easing, or maybe some form of credit easing. What they did was more appropriate, in our view, for the economy," said Tulk.
Likewise, Carney has frequently reminded Canadians that he may need to hike interest rates to curb alarmingly high household debt, which implies taking his eye off inflation for a period to pursue the target of financial stability.
But some say his words ring hollow after four years of rising debt and four separate government interventions in the mortgage market.
"At this point to be fair, they've relied a lot on jawboning and if ultimately that jawboning was expected to cool the acceleration of debt, it didn't," said Chandler.
(Reporting by Louise Egan; Editing by Leslie Gevirtz)