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Carney, May and the sterling imbroglio

Carney, May and the sterling imbroglio

Bank of England governor cast as aggrieved partner

by David Marsh

Sun 30 Oct 2016

The imbroglio over suspicions the UK government is seeking to tamper with monetary policy has plenty of fresh potential to derail sterling. Theresa May, the British prime minister, made an error earlier this month by appearing to lecture Mark Carney, the Bank of England governor, at the Conservative party conference in Birmingham.

This could be one of the reasons why, when Carney makes up his mind around Christmas (as he now says he will) about his future at the UK central bank, he may decide to step down in 2018 after only five years – an option he reserved for himself on taking the job in 2013.

Carney explained, with due delicacy, at a House of Lords committee session on 25 October how May’s dual emphasis in Birmingham on correcting elements of interest rate policy and hardening terms for the UK’s European Union withdrawal has contributed to this month’s further sterling decline.

There is nothing intrinsically wrong with countries recalibrating, from time to time, the framework for setting interest rates. The so-called ‘independence’ of central banks is in any case a misnomer, at a time when they are manifestly entering fields so interwoven with politics.

It is, however, both wrong and misguided for a novice prime minister to ignore a cardinal rule: you do not hint at changing the rules of engagement between Downing Street and Threadneedle Street during what is starting to resemble a good old-fashioned sterling crisis. Down that path lies perdition.

May heightened her Birmingham rhetoric in a bid to win the esteem of core Conservative supporters upset by her pre-referendum espousal of the Remain cause and hitherto sensible tendency to keep the UK’s EU withdrawal options open.

However, any credibility she may have regained will have been eroded by revelations on 26 October concerning a private talk she gave at US investment bank Goldman Sachs on 26 May. In that address, just weeks before the referendum, she espoused strong, logical objections – going beyond what she had said in public – to leaving the EU.

In just a few weeks May has relinquished some of her earlier reputation as a steady pair of hands. And she has confirmed her credentials as a Remainer in the worst possible way, by betraying a lack of resolve to proclaim publicly the full strength of this conviction.

May is telling people that observers misinterpreted her Birmingham speech, that she does not wish to attack Carney, and that she wants him to stay until 2021. But this is not how the story has unfolded.

Carney, for his part, has profited from May’s missteps by regaining the moral and technical high ground. It is true that he went a little too far before the June vote in appearing to back the Remain camp with rather more zeal than was wise. But he has now recovered his poise: he can play the part of the aggrieved party.

With last week’s statement to the House of Lords committee on his future, (which some present interpreted as a signal that he intends to step down early), Carney can claim that he is trying to disassociate a purely personal decision from the political matter of discord with the government. If he decides to leave, he can proclaim his motivation is the former consideration, although many will suspect it is the latter.

Meanwhile Carney can justifiably castigate Conservative politicians who have attacked him on monetary policy without appearing to realise that they are committing another cardinal sin: inciting foreigners to dump sterling. Some of his tormenters’ rhetorical flair appears to exceed their common sense.

Unless he makes a misstep, Carney will retain the upper hand. Oscar Wilde would see the point. For reluctant Remainer May, losing the EU could be regarded as unfortunate; losing a central bank governor in the process would be an embarrassment.

David Marsh is Managing Director of OMFIF.

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