Carney’s BOE Future Gives Investors More Brexit Uncertainty
By Lucy Meakin and Stefania Spezzati
A debate about the future of the Bank of England governor may be the last thing U.K. markets need.
Amid uncertainty about Britain’s relationship with the European Union, Mark Carney has been hailed as a source of stability even as he faces renewed political criticism. But with a self-imposed year-end deadline to decide how long he’ll stay at the BOE, that security could be shaken.
Carney’s choice could have repercussions for the battered pound, down 18 percent since the EU referendum, and U.K. government bonds. The governor, who addresses lawmakers on Tuesday and begins a crucial set of policy meetings a day later, was quick to respond with stimulus to cushion the U.K. from a Brexit fallout as the country absorbed the result and the prime minister resigned.
“More uncertainty is not something that would be welcomed,” said Jane Foley, a senior foreign-exchange strategist at Rabobank in London. “Obviously there’s lots of personal and professional reasons for him to consider, but as far as markets are concerned continuity and communication are going to impact.”
Carney’s decision may be colored by the year he’s just come through.
Dubbed the only “adult in the room” by former BOE policy maker David Blanchflower, the governor has been lauded as a bulwark for markets, a far cry from 2014 when he was criticized for his unreliable communication. He appeared on television the day after the referendum to reassure Britons and cut the benchmark interest rate for the first time in seven years in August.
But he’s also spent much of the year on the defensive, clashing with lawmakers who accused him of being too political in the referendum. Another round could come on Tuesday, when the governor faces members of the upper house of Parliament, who say they plan to grill him on how the BOE “misjudged” the fallout from Brexit.
That public appearance -- probably his last before the BOE’s Nov. 3 interest-rate decision -- follows a barrage of attacks on central banks from U.K. politicians. While Chancellor of the Exchequer Philip Hammond said this month that Carney is “doing a good job,” former Conservative leader William Hague questioned monetary-policy independence and lawmaker Michael Gove, one of the leaders of the Brexit campaign, blamed central bankers such as Carney for multiple economic disasters.
According to David Owen, chief European economist at Jefferies, this is “not the time for the government to have a public disagreement with the BOE.”
“Threatening the BOE’s independence would hardly engender confidence in the U.K. or sterling,” he said in a note on Friday.
Against the euro, the pound is down 21 percent this year, and was at 89.03 pence as of 9:44 a.m. in London. It’s near a three-decade low versus the dollar at $1.2231. While U.K. stocks trade near record levels, that’s mostly due to sterling’s weakness. In dollar terms, the benchmark gauge has lost about 8.5 percent this year.
Policy makers have been fighting back against their attackers, with Carney wryly noting that he’s testified to parliament more than any other governor and stating that the central bank won’t take instruction from politicians. Chief Economist Andy Haldane last week launched a defense of quantitative easing -- derided by Prime Minister Theresa May as having “bad side effects.”
Canadian-born Carney has said he’ll decide by the end of the year whether he’ll serve a full eight-year term through 2021, or to leave in 2018 as originally planned when he took the job three years ago.
But sticking to the latter would see him leave in mid-2018, about midway through the two-year EU exit period if Prime Minister Theresa May sticks to a plan to trigger the process by March 2017.
If Carney’s departure “was seen as being due to government meddling in BOE’s independence then the reaction could easily be quite violent,” said Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki. “The current environment could easily support such an interpretation. After all, Carney himself has already felt the need to tell politicians not to meddle.”
Even so, markets may have to get used to the idea of a new figure -- and whatever policy implications his replacement and the time lag before the appointment might have.
“Carney was only supposed to be staying for five years, not the full eight, partly for personal or family reasons,” said Alan Clarke, an economist at Scotiabank in London. “We shouldn’t necessarily take him sticking to that five year plan as a surprise or some Brexit or government-related plot.”
As for concerns about government intervention in BOE policy, Carney’s former colleague Paul Fisher said in an interview in Sydney that he sees no need to worry.
“Mark is more than capable of defending his independence,” he said.
Traders have been having a rough ride already. A pound flash crash this month saw the world’s third most actively traded currency pair plunge more than 6 percent in just two minutes. At around 11 percent, one-month implied volatility in sterling is the highest among Group-of-10 currencies.
The fallout of the Brexit referendum is also weighing on gilts. Investors are becoming increasingly bearish thanks to the pound’s weakness, accelerating inflation and lack of clarity on the government’s negotiating stance, sending 10-year yields to the highest since the vote.
If Carney decides to leave early, “the initial market reaction would be to sell the pound,” said Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. “What that means for central bank independence and how it would be linked to Brexit would provide speculators with another perfect scenario for selling.”