The Bank of Canada’s Mark Carney mused about priorities in reply to a question about the lessons he would take to his next job in London, but said he would only discuss Britain’s needs when he talks to a House of Commons committee next year.
Asked about lessons he would take to his next position, as the head of the Bank of England, Carney stressed the importance of speedy, transparent action to address potential flashpoints.
He felt Canadian policymakers were open about the depth of their troubles, for example, in the asset-backed commercial paper market and had benefited from the bank’s flexible inflation target, which underpins monetary policy.
“We didn’t have bank failures and we didn’t have other issues ... in part we didn’t have those because we made tough decisions in a timely fashion,” said Carney, who will leave the Canadian Central Bank on June 1 and become the BoE Governor on July 1.
He stressed that none of his comments were directly applicable to the British Central Bank and it would not be appropriate to comment on British policy ahead of planned testimony to the British Parliament’s Treasury Select Committee.
“So the first thing is transparency,” Carney said. “You have to level with people on the scale of the problem. It does no good to try to spin your way out of the crisis, if you will.
“Secondly, the importance of having a plan, explaining that plan, and then executing the plan ... Someone has to take a decision, take control, and we played a role in that.”
Carney also said a Canadian strength was the strong coordination among the major financial authorities, as well as the depth of talent at the Central Bank.
One major change he will face is that the Bank does not operate by consensus and with one voice, as does the Bank of Canada, and the governor can be outvoted.
The Bank of Canada has an inflation target of two per cent within a range of one to three per cent, but Carney has also discussed the idea of flexible targeting, where rates could be higher than needed to keep inflation at two per cent, to lean against an asset bubble, say in the housing market.
“But in order to get the most benefit from that framework, transparency, communication, is absolutely crucial,” he said. “And there’s ways to use communication to potentially amplify that power in extraordinary circumstances, which may be appropriate in some jurisdictions, not in other jurisdictions.”
He said the Bank of Canada explored the idea of changing the target altogether from inflation to nominal gross domestic product (real gross domestic product plus inflation), but decided against that.
Exploring the idea of “enhanced guidance” – such as the Bank of Canada’s conditional commitment in April 2009 to keep rates low through the second quarter of 2010 and the US Federal Reserve’s current interest rate policy – he said the tactic could be used more broadly. One possibility was a commitment to highly accommodative policy even after the economy and inflation picks up, to achieve a better path for the economy over time.
“To ‘tie its hand’, a Central Bank could announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus,” he added.