Lucky for the UK, the Bank of England is run by a Canadian who acts like an American

August 7, 2013
August 7, 2013

The British economy is in the pits. Unemployment remains near where it was during the worst of the Great Recession. Real household income levels are tumbling as fast as they did during the bleak, proto-punk days of the mid-1970s. And David Cameron’s  government continues to focus on balancing the budget rather than promoting growth.

Into that breach steps the world’s smoothest Canadian: Mark Carney. Much is being asked of the former Goldman Sachs banker and ex-head of the Bank of Canada; He’s first non-Brit to lead the Bank of England in its more than three centuries of history.

The Cameron government isn’t willing to do much for the economy on the fiscal front, but it has made quite clear that it expects the Bank of England to use monetary policy to help jolt UK growth.

And this morning, Carney started that work in earnest. How? By talking about the future.

Carney unveiled the BoE’s newest policy tool: forward guidance. What is forward guidance? It’s basically a conditional promise—central bankers like to leave themselves lots of wiggle room— to keep interest rates low and continue pumping cash into the economy by buying bonds until unemployment falls to at least 7%. By removing worries about when and how interest rates would rise, the policy is supposed to prompt businesses to borrow and spend rather than save.

This might sound familiar to die-hard central banking fans. Ben Bernanke’s Federal Reserve has been making similar commitments to keep its bond-buying programs at full throttle until unemployment falls to a set level, something the central bank initially said in late 2012. Of course the whole reason central banks have to resort to forward guidance is because their traditional tool of choice—raising or lowering key policy rates such as the Federal Funds rate—can’t do much when rates are already near zero. (Or if you want to get fancy about it, “the zero bound.”)

But actually it was Carney’s Bank of Canada which pioneered the use of forward guidance, announcing its own conditional commitment to keep rates low back in April 2009. (The technique was later adopted by the Fed, and more recently the ECB.)

Who came up with what particular tools when, however, is beside the point. Back in April 2009, Carney—and central bankers around the world—were struggling with an economic crisis that threatened to become a second Great Depression. Some, such as Carney and Federal Reserve chairman Ben Bernanke, decided to act. Others, like the ECB, didn’t.

Considering the dire state of the British economy, the UK is lucky to have someone who has shown a Bernankian willingness to act in service of economic growth. We’ll wait to see whether it works.

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