04 July 2019
Who’s the Guv’nor?
The best choice for the Bank of England.
By Frank O’Nomics
The preoccupation with who will become the next Prime Minister may be missing the point. The management of taxation and spending will have a great bearing on our economic well-being, but monetary policy and financial regulation may ultimately be more important. If rates rise at the wrong time the economy will be overly constrained, while a reckless accommodative stance and unfettered lending could lead to a dangerous level of inflation and a financial crash. Mark Carney’s term as governor of the Bank of England finishes on 31st January 2020 and the choice of his successor is quite rightly being closely monitored. Who should get the role really depends on your view as to how proactively hawkish or dovish a stance on interest rates current circumstances demand, but it seems timely to offer a little FrankO’Nomics analysis of the next arbiter of our monetary policy.
At the outset there are two key points to be made about the importance of the current process. The first is a general and obvious one – this is an unelected role. Hence the choice of the new Prime Minister and his Cabinet selection are key – as they will need to be able to work effectively with the new Governor (the Prime Minister makes the appointment on the recommendation of the Chancellor). The second is the difficulty of changing both the Chancellor of the Exchequer and the Bank of England Governor within a short space of time. That creates a level of disruption for both pillars of economic management, fiscal and monetary, at a time when domestic issues surrounding Brexit and geopolitical problems of Sino-US trade are more than problematic enough. Not an easy situation and one that requires careful consideration.
When looking at the domestic candidates for governor, the most obvious seems to be Andrew Bailey, the current Chief Executive of the Financial Conduct Authority. He has a background managing the aftermath of the financial crash and is widely seen as a safe pair of hands. Issues faced at the FCA, notably those concerning scandals at RBS and London Capital and Finance, have however damaged his cause. This is a little unfair. The FCA is always going to be in the frame when trying to understand why a problem should have been foreseen, but this did not stop 12 MPs signing a letter asking for his removal. The real issue with Mr. Bailey is that he has no background in rate setting. The timing and vigour of the next MPC intervention could be critical in making sure that we avoid a recession and he might finish up with the casting vote.
The other domestic candidates can be split between those already at the Bank and those outside. The current chief executive of Ofcom, Sharon White, will certainly understand political sensitivity and has spent time overseeing public finances when working at the Treasury. However, the level of her experience is likely to make her selection too great a leap of faith. Baroness Vadera, the chairwoman of Santander, has similar credibility, but her association with Gordon Brown could make her politically less palatable. It would be far less of a risk to plump for some of the Bank’s internal candidates. Sir Jon Cunliffe is the front-runner here, his background in advising on Europe and managing financial stability, as well as his experience on the MPC making him perhaps the safest choice, and the man who could provide the best continuity through a period of great change. Former MPC members will also have some cachet and there has been a lot of speculation that Dame Nemat Shafik, a former deputy governor, will be considered. Beyond her experience at the Bank she has had senior roles at the IMF and the LSE. She is not only a very credible candidate; she would also become the first female governor of the Bank, which would be a very positive move and fit with a declared diversity initiative.
The appointment of Mark Carney meant that there is now no need to look solely at domestic candidates and the pool of potential external appointees is impressive. Perhaps the most talked about is Raghuram Rajan, who has served terms as both chief economist at the IMF and as governor of the Reserve Bank of India. His would look a very credible CV but, while he regards financial stability as a central part of a central bank’s monetary policy mandate, he might be viewed as having opinions that are too strong, having previously argued that financial innovation has created greater risk. It is hard to argue with that, but a voice that could suppress innovation may not be welcomed. Of the other overseas candidates Agustin Carstens, the general manager of the BIS (the so-called central bank for central banks), stands out. He has served as a finance minister in Mexico but, like Mr. Rajan, has no experience in the UK and, given that he seems to be favoured by the current Chancellor, may be a non-starter. Of perhaps greater interest to incoming politicians, given the need for a profile outside of Europe, are some potential American candidates. The most notable is Christopher Giancarlo who has chaired the Commodity Futures Trading Commission, working with the Bank to block EU imposed controls on clearing houses. The FrankO’Nomics view is that he may be too similar to the current incumbent.
The FrankO’Nomics analysis produces 2 candidates who really stand out. Sir Jon Cunliffe, who would be the least risky or contentious selection, and Dame Nemat Shafik, who has the experience and offers some much needed diversity to the role. It is worth noting that an all female headhunting panel has been appointed to search for the right candidate, and 60% of their placements over the last 4 years have been women. One further consideration is that, while it is easy to come up with names of those who could do a good job, whether they actually want the role is another matter altogether. Finally we must remember that, much as we would like to know the answer now, the official announcement will not be made until October. We could, of course have a different party in power by then, in which case – all bets are off.
