Carney's first week abroad a predictable success
Back from holidays in a place where they read The New York Times each morning, and better for it. Of all the world news I read last week, the fact that Bank of England Governor Mark Carney released forward interest rate guidance during his first days in office was the least newsworthy of the lot:
Answering critics who said they were running out of ways to promote growth and lending, the European Central Bank and the Bank of England on Thursday did something neither had done before, committing themselves to keeping interest rates low indefinitely.
Mark Carney, governor of the Bank of England, which said in a statement that any expectations that interest rates would rise soon from their current record low levels were misguided.
The bid to reassure investors brought the two central banks into closer alignment with the Federal Reserve, which, under Chairman Ben S. Bernanke, has become more open about its intentions.
At the same time, they appeared eager to signal that they would not follow the Fed in preparing for a gradual withdrawal of economic stimulus.
Mario Draghi, the president of the European Central Bank, based in Frankurt, said at a news conference that crucial interest rates would “remain at present or lower levels for an extended period of time.” Until Thursday, the bank had steadfastly refused to pin itself down on future policy.
“It’s not six months,” Mr. Draghi said. “It’s not 12 months. It’s an extended period of time.”
Mr. Draghi also said that the central bank was signaling a “downward bias” in interest rate policy, meaning further cuts were possible or even likely.
Only hours earlier, Mark J. Carney, who became governor of the Bank of England on Monday, made a similar break with tradition. The British central bank said in a statement that any expectations that interest rates would rise soon from their current record low level were misguided.
With their promises of easy money stretching toward the horizon, the central bankers offered more certainty to investors at a time when tensions in Europe are rising again. So-called forward guidance is considered one of the tools available to central banks, but it was one the European Central Bank and the Bank of England had not used before.
European markets reacted positively to the announcements, with the FTSE 100 in London closing 3.1 percent higher and the Euro Stoxx 50, a benchmark of euro zone blue chips, climbing 3 percent. (Markets in the United States were closed for the Fourth of July holiday.) The euro fell sharply, a development that was probably not unwelcome at the European Central Bank, since a cheaper euro makes European products less expensive in foreign markets, feeding exports. The British pound also fell.
Mr. Draghi said it was a coincidence that his central bank and Bank of England introduced forward guidance on the same day. Both left their main interest rates at 0.5 percent and did not announce any other policy moves. It was a day for talk rather than action.
This is the very market-comforting strategy that has worked in Canada and the United States over the past few years, but the Bank of England had to date refused to play ball. What investors and entrepreneurs alike should find troubling is that the ECB claimed that it was just a coincidence that both institutions chose the same day to introduce this well-worn policy tool.
For Governor Carney and Mr. Draghi to have arranged the timing and coordination of their wise interventions makes sense, given the stagnant economic situation across Europe, and the essential insolvency of many banks in the Southern Euro zone. For it to have happened by chance, or to pretend that it isn’t part of a strategy to adopt Mr. Carney’s Canadian tactics across Europe and the U.K. during his first week in the U.K., should trouble all of us.
A full swing was in order. The left hand and the right hand need to act in unison, and should be proud to do so. The ball will never get out of the rough, otherwise.