Q26 Jesse Norman: Dr Carney, you will be inheriting a position in an institution that has gigantic power across the economy; and growing power, given the new responsibilities in the financial sector. It is formally independent of Government; it is subject to low levels of accountability externally and has had a court that has not been very effective in ensuring high levels of accountability internally. Do you think it is appropriate for that job to be referred to as that of “Sun King”?
Dr Carney: Not as it is structured under the new Financial Services Act, no.
Jesse Norman: Why not?
Q27 Jesse Norman: Your conception of leadership clearly is one that requires the leader to be able to exercise, where necessary, a detailed grasp of aspects of the institution and aspects of policy. Given the spread of responsibilities and the number of committees that you are going to be on as Governor, how can you possibly exercise any detailed grasp across that entire spectrum of activity?
Dr Carney: In many respects, there are synergies and that is part of the spirit of this very important reform. At present, as Governor of the Bank of Canada, I have responsibility for monetary policy, very clearly defined responsibility there. We then have a contributory responsibility for financial stability, which means we oversee the payment system and we analyse potential risk to financial stability, but the levers on financial stability are controlled by others. We also, by dint of our role on the Financial Stability Board, participate in the development of a series of global financial reforms, many of which are applied domestically within Canada. But we do not exercise or see through those financial reforms, so we have an opinion, for example, in the Bank of Canada, about how bail-in debt plays into resolution strategies for institutions and then in too big to fail, but all those decisions are taken by our Treasury or taken by our deposit insurer or taken by other entities within Canada. So these are all issues on which I, as Governor, in Canada need to be expert enough to contribute to decisions, but I do not see those decisions all the way through. If one does not see decisions all the way through, if one is not ultimately responsible for their implementation, in my experience that limits one’s level of expertise.
Q28 Jesse Norman: You will not be responsible for some aspects of these policies or committees?
Dr Carney: I am sorry. The analogy I was drawing is that in Canada, I am not. In the Bank of England, the institution is, for all of the aspects that I just referenced, and in my opinion that reinforces the ability to be up to speed. Let me make another point, if I may.
Q29 Jesse Norman: That reinforces the requirement on you to be on top of the detail?
Dr Carney: It reinforces the requirement on me to be on top of the detail and the point I was trying to make—perhaps I was taking too long to make it—is it makes it easier for me to be on top of the detail as well, because the institution itself sees through to the detail of those aspects of policy.
Q30 Jesse Norman: That is how you read the Bank now? You think the Bank of England does that now?
Dr Carney: That is how the Bank is becoming, because of the reform to the Bank, the addition of the FPC and the addition of the PRA.
Q31 Jesse Norman: Have you thought broadly about how much time you are planning to allocate to each of these areas of your responsibility?
Dr Carney: I would say in this juncture in the British economy and financial system, there are quite strong overlaps between the various responsibilities. I will give an example: the work that the FPC has done in conjunction with effectively the PRA, I know the PRA is about to come, through the FSA on funding for lending and co-ordinated approach that has been put in place on funding for lending, that is macro-prudential policy, and it is also monetary policy at the same time. How one allocates one’s time between the two of those one can debate, but I think at this point and for a number of years—this is one of the things that makes the job so challenging, but also so interesting—there will be quite strong overlap between putting in place the judgment-based supervisory approach of the PRA, putting in place macro-prudential tools and the monetary policy response that is necessary and the collective of these policies in order to grow the economy in a sustainable way.
Q32 Jesse Norman: Banking supervision essentially will have to take second place to that, will it?
Dr Carney: No, I don’t think so. I am sorry if I left that impression. I would almost see that this is tiered. If you are pushing me—and it is fair—a third each between the three responsibilities, for a couple of reasons. Firstly, on banking and insurance supervision, importantly there is a new approach; very capable team, but there is a new approach that has been put in place. It needs to be put in place. As Members know, one of the core challenges in the financial system and therefore in the economy right now is that the core of the banking system is not as strong as it needs to be. It is a matter of some debate.
Jesse Norman: No kidding.
Dr Carney: Yes, a matter of some debate; and those judgments can only properly be informed by on the ground supervision. Ultimately, there are some macro-prudential judgments that need to be made around that, but it needs to draw on the supervisory expertise, and again, that I think is an advantage of the new structure, because the supervisory expertise is sitting right next to the macro-prudential.
Q33 Jesse Norman: A final question: so then, on the point of your command of the detail and of the fact that you uniquely will be sitting across all of these committees, in your view there will be very evident responsibility at the top for failures within that regime?
Dr Carney: It depends what you mean. First point, as I am sure you are aware, it is not an intention to run a zero-failure regime, meaning zero failure for institutions. In fact, the thrust of many of the reforms is to ensure that institutions can fail safely, that effectively the market can work, and ultimately that will provide more competition and ultimately provide a stronger system. As you know, it is not a zero failure, but certainly the responsibility of the Governor and of the relevant Deputy Governors is to successfully execute—
Q34 Jesse Norman: You will be running a zero-failure regime within the Bank?
Dr Carney: The bank will make mistakes, but all institutions make mistakes, all individuals make—
Q35 Jesse Norman: What is your tolerable level of failure within the Bank, Dr Carney?
Dr Carney: I am not grasping exactly how you define that level.
Jesse Norman: Low, medium—do you like low levels of failure or medium levels of failure?
Dr Carney: I prefer low levels to medium levels, yes.
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Q60 Jesse Norman: Dr Carney, you have very interestingly said that you think there should be a brief but proper debate about monetary framework. Do you think that is also true about quantitative easing?
Dr Carney: My understanding is there is a review that has been launched by this Committee on quantitative easing.
Jesse Norman: No, but by the Bank. Do you think the Bank should have a wider consideration of the full effects?
Dr Carney: I would hope that the Bank would be invited to contribute to this Committee’s review of QE.
Jesse Norman: I think we would be delighted. Thank you very much.
Dr Carney: Yes. I understand the interests of the Committee in the wider effects and I read your piece this morning, your personal interest in that, which is shared by us. I am aware also of the exchanges that have taken place in the past, and it is not going to surprise you, as a central banker, I start from a position that is very similar, if not identical to those of the current management of the Bank, which is to look at the wider economy effects; to look to route quantitative easing in the context of the Bank’s remit and effectiveness of achieving that remit; to recognise that there are distributional consequences of QE—as you pointed out and as others have pointed out—but to observe that all monetary policy has distributional consequences and that response to those distributional consequences of quantitative easing is more properly the job of others, as opposed to the Bank in and of itself.
Q61 Jesse Norman: In Canada, flexible inflation targeting has yielded a rate of inflation that is fractionally higher than 3% over decades, but in this country—
Dr Carney: Two.
Jesse Norman: Two decades?
Dr Carney: No, sorry. The flexible inflation targeting has yielded inflation of 2% in Canada over decades, since 1991.
Jesse Norman: Did I say 3%? I am sorry, I apologise.
Dr Carney: Just for inflation expectations.
Q62 Jesse Norman: If I said 3%, I apologise, but thank you for that. The point I want to make though is in this country, we have had a very long succession of quarters in which inflation has been well above target.
Dr Carney: Yes.
Jesse Norman: Do you think that means that inflation targeting is too flexible in this country, and if so, put it this way, is that because they are aiming high or just too tolerant?
Dr Carney: I think that there are a couple of factors. I would agree that the MPC has quite appropriately looked through a series of one-off shocks, upward shocks to the measured inflation rate and that it has appropriately provided stimulus to the economy that is facing very large headwinds, as you know. I think the nature of the question though reinforces the point I was trying to make earlier, which is that there should be a shared understanding of the flexibility that is there. In other words, over what period does it make sense to return inflation to target? It is fair to say that in a number of those circumstances, the actual expectation of the MPC, in good faith, was that inflation would return to target sooner than it did, because there were other shocks that occurred. So I stress that my view would be that it is important—again, I am slightly repeating myself—that there is a shared understanding that there is flexibility and why there is flexibility in terms of the returning to the target; the first point. The second point is that in these exceptional economic circumstances that the UK is facing at present, with inflation above target as it is at present, in the context of this discussion on the framework I think it would be quite useful to have a shared understanding about what potentially is the optimal timeline to return and why; what the impact could be on employment; what the impact could be on output.
I have suggested this in broad terms, that there is merit to considering some sort of Federal Reserve style—I apologise for the jargon—threshold-based guidance. The question in the UK is as it would be in Canada, if we were in that situation does one make that time-contingent or state-contingent? Is it around a particular economic variable that indicates—
Q63 Jesse Norman: In terms of my question, too tolerant rather than aiming high? They have been too tolerant in monetary policy rather than aiming higher to declare—
Dr Carney: Yes, I have no reason to doubt the MPC. I think further, in looking through these shocks, they have ensured that there has not been a deeper stagnation in the UK economy.