Bank of England governor faces weight of expectation

The new governor of the Bank of England, Mark Carney, takes over responsibility for UK monetary policy with a weight of expectations unprecedented for any modern central banker.

His biggest challenge over the near to medium term is managing these expectations against a backdrop of growing economic challenges.

The structural shortcomings of the eurozone have been exposed since the financial crisis erupted in 2008. However, the UK is an imperfect currency union. The London prop-erty market is dangerously overheating, whereas economic activity in the rest of the country is sclerotic.

The chancellor of the exchequer, George Osborne, had to almost double the pay packet of the position to £874,000 (about €1m) for Mr Carney and give him a housing allowance of £250,000 in order to attract him to one of the most expensive cities in the world.

“If he [Carney] raises the interest rate to cool the London property market, then he risks killing off any nascent economic recovery in the north,” says Lorcan Roche Kelly, chief European strategist with the US hedge fund Trend Macro.

Indeed, Mr Carney could preside over the breakup of the UK’s currency union next year as Scotland votes on independence.

He is limited in the number of policy levers at his disposal. The official interest rate is at 0.5%, which leaves little room for easing.

There is speculation that he will give much longer forward guidance in terms of interest rate policy. There has also been speculation that he would take a much more unorthodox approach to target setting by including nominal GDP in his policy mix, although this is unlikely, says Mr Roche Kelly.

Mr Carney, 48, was governor of the Bank of Canada from the beginning of 2008 until the start of June. Previous to that he was a senior official at the Canadian department of finance. Like most of the world’s leading central bankers, his private sector career included a stint with Goldman Sachs.

The Harvard and Oxford educated economist burnished his credentials as one of the most capable central bankers among OECD countries by steering Canadian financial institutions through the worst crisis since the Great Depression relatively unscathed.

However, the fate of the UK economy hinges on the performance of Mr Osborne, who is becoming increasingly unpopular with both the electorate and the City of London.