A shake-up of Britain’s top monetary policymakers, which started this week, caps a year of change at the Bank of England under Governor Mark Carney and might help him withstand growing pressure to raise interest rates.
Adding to a host of new faces already at the bank, three of the nine seats on its interest rate-setting committee are due to change hands between June and August, beginning with BOE banking expert Andy Haldane. He attended his first rate-setting meeting yesterday after starting this week as BoE chief economist.
Like Haldane, the two other new policymakers – US academic Kristin Forbes and Nemat Shafik, a top International Monetary Fund official – fit well with Carney’s broader focus on the influence of finance on the economy.
But as “outsiders”, Forbes and Shafik have not followed Britain closely. This has raised questions about how likely they may be to challenge Carney – at least initially – on the need to keep interest rates at rock bottom as the country’s economy recovers strongly.
“They probably aren’t as well versed in the intricacies of monetary policy or the situation in the UK,” said Peter Dixon, an economist with Commerzbank in London.
“Consequently they are going to take a bit of time to find their feet. That might just be sufficient to allow Carney, should he wish to do, to prevail in his view that rates don’t need to rise any time soon.”
A senior, London-based executive with an investment firm said all three of the new arrivals, plus recently appointed BoE deputy governor Jon Cunliffe – who is an expert in international banking – were unlikely to rock the boat on interest rates.
“While the MPC formally is still nine independent votes, I think Carney will have a much stronger block vote than Mervyn King ever had or indeed wanted,” said the executive, who spoke on condition of anonymity.
King, governor of the BOE for 10 years until last year, was the leading force behind the creation of the MPC but was sometimes in the minority in key votes.
Since leaving Canada to take over the BoE last July, Carney has had the backing of all the MPC’s members on the need to keep rates at a record low 0.5 per cent. But that unanimity is starting to come under strain as Britain’s economy picks up.
The growing debate at the BOE on when to start weaning the economy off its stimulus is echoed at the US Federal Reserve which is also undergoing a shake-up among its rate-setters.
As the debate builds, investors are impatient for clues about the likely views of the new MPC members
There, former Bank of Israel governor Stanley Fischer and former US Treasury official Lael Brainard are expected to provide backing for chair Janet Yellen’s determination to keep on helping the weak labour market to recover.
Last month, Carney signalled he was in no hurry to rethink Britain’s ultra-loose monetary policy when he said the economy was only edging towards a hike in interest rates, despite a plunge in unemployment and strong house price growth. His comments reduced bets in financial markets on the chance of borrowing costs going up this year. Since then, however, two members of the MPC have discussed publicly the possibility of starting gradual rate hikes sooner rather than later.
With the recovery showing no sign of weakening, economists expect the MPC to split in the coming months when Martin Weale, the member most concerned about inflation risks, and possibly one or two other policymakers might vote for a rate hike.
As the debate builds, investors are impatient for clues about the likely views of the new MPC members.
Haldane said in April he would start his new job with an independent mind, something he displayed in his previous role which often pitted him against a powerful bank lobby.
“I can certainly assure you that I will not come in toeing a particular line,” he told a panel of lawmakers.
Forbes, who will be an external member of the MPC and follows other US economists to serve at the bank, is due to join in July. Shafik, who will become a new BoE deputy governor, arrives in August respectively. They have so far declined to comment on their new roles.
Shafik, a former British civil servant, worked on the IMF’s efforts to tame the eurozone’s debt crisis while at the Fund.
Forbes was an economic adviser to the White House under president George W. Bush. She has written extensively about the way financial crises can spread and on capital controls.
Rob Wood, a former BOE economist who now works for Berenberg, a bank, said Shafik and Forbes, are likely to be cautious when they arrive in London as newcomers to the British economic debate.
But once settled in, they would not be afraid to set out their own views. “These aren’t people who are wet around the ears,” Wood said. “They will be completely free from any group-think and they really are wild cards.”