The Bank’s task is serious but there is talent it can draw on
HIGH expectations from businesses, politicians and the public surround the new Bank of England governor Mark Carney. But will he be able to perform a miracle on Threadneedle Street and help stimulate economic growth in the short term, while holding down inflation over the long term? Have we invested too much hope in what he can actually deliver?
The task facing Carney was the topic of an insightful business lecture hosted by ACCA (the Association of Chartered Certified Accountants) in London this May, with contributions from the banking sector, economists, academics, think tanks and accountants.
This wasn’t a discussion for the participants’ own entertainment: none present were content to simply stand back and observe just what a tough job the new governor has. The aim of this meeting of minds was to give Carney some insight into what the finance sector considers important factors the Bank of England should bear in mind.
We know what the challenges are, as does the new governor. Minutes from Carney’s first Monetary Policy Committee (MPC) meeting come out today, but yesterday saw inflation as measured by the consumer price index rise to 2.9 per cent in June, up from 2.7 per cent in May. The retail price index rose to 3.3 per cent from 3.1 per cent. Sluggish economic growth and a fragile banking sector at home, and a simmering financial and sovereign debt crisis in Southern Europe are just two of the other challenges the Bank faces.
But how Carney and the MPC go about meeting those challenges is a different matter. ACCA called upon the views of a number of experts to try and answer this question. They included James Barty, a former banker and now a senior consultant with think tank Policy Exchange; Simon Hills, a director at the British Bankers’ Association; Amit Kara, European economist with UBS; Robert Stenhouse, an ACCA council member and director in the national audit and accounting team at Deloitte; and professor Tony Travers, a director of the LSE Greater London Group, a research centre at the London School of Economics.
The underlying point of the discussion that took place was that the new governor is not alone – as a leading City-based policymaker and regulator, he can call on the expertise of some of the best financial talent in the world. Industry experts urged Carney to consult and communicate with the accountancy and audit profession. Gone are the days of number crunchers focused on spreadsheets. Accountants and other finance professionals now play a much bigger role in how businesses operate, and have a clearer view of the wider picture than they used to. Consulting us may help the Bank tread the right path to recovery.
As the Bank tries to balance economic growth with monetary stability, policy will need to be adjusted to the shifting shape of the recovery. If the governor chooses to use more QE, he needs to reconsider which kinds of asset purchases will best boost the economy. He also needs to stay alert to the threat of inflation in the longer term and under an ever-wider definition.
While using forward guidance (a pre-commitment to individuals and businesses on the level at which the future Bank of England base rate will be set) to reassure businesses and households that interest rates will remain low, the governor needs to proceed with caution to preserve the Bank’s credibility.
But how Carney seeks to achieve his aims is as important as the goals he sets. He needs to be outspoken and actively shape the debate on the future of financial services in the UK. The financial sector is vital to our economy, but negative attitudes towards bankers and certain kinds of business activities can give the impression to outsiders that an “anti-business” climate exists in this country. With that in mind, efforts to re-regulate banking are underway both domestically and abroad, and a balance needs to be struck that will allow London and the rest of the UK to continue to be a successful exporter of financial services in the future.
Perhaps more controversially, it was suggested at the event that the Bank of England would benefit from a change in personnel – to make its thinking less academic and more understanding of the financial sector. Some felt that a superficial knowledge of how the financial sector works has led to the Bank making mistakes in the past, including not seeing the financial crisis looming. There is a broader talent pool out there, including individuals with practical financial services experience, for the new governor to tap into.
Carney may have a secret weapon of his own. He is an outsider. This gives him the opportunity to speak to the British political establishment in a different manner, and establish greater certainty around how the Bank, the new regulatory bodies and HM Treasury will interact in the longer term.
Two years or so ago it would have been almost blasphemous to say this, but the Bank of England governor should now support the banking sector. The governor has to ensure that banks follow sound rules, while at the same time standing up for the sector against potentially damaging populism. He needs to restore confidence in banks. As much as many among us hate to admit it, the banking sector is an important pillar in the UK’s economy and a vital contributor to a sustainable recovery.
Without doubt, the task ahead of Carney is daunting and, although economic conditions in the UK appear to be improving, the outlook is likely to remain volatile for the foreseeable future. Growth is weak, confidence is low, the political environment is becoming increasingly heated, and a number of internal and external factors are threatening to starve the real economy of the capital that it needs to invest and grow.
I am sure everyone has a “to do” list of sorts for Carney to deliver on, but this one looks at how the financial services sector can play its part in getting the economy back on its feet, with the Bank of England’s assistance, and comes with an offer of assistance in return.
We all, ACCA and those who took part in formulating the advice to the new governor, which will be submitted to him this month, welcome Carney into his new role and stand ready to offer advice whenever it is needed from our profession. We know we can play a central role in revitalising the economy.
Sarah Hathaway is Head of ACCA UK.