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A huge question for UK investors—who succeeds Mark Carney?

A new face at the Old Lady
October 9, 2019

If Brexit is one huge question facing UK investors, another biggie is who will succeed Mark Carney as Governor of the Bank of England. Carney is due to leave his post in late January (if the Brexit impasse drags on, he may linger awhile). 

The choice of successor matters. For the past decade, central bankers have provided the “backstop” against a slide into a 1930s-style Depression—albeit controversially, given the side-effects of ultra-low interest rates and quantitative easing. They have immense influence; recall Mario Draghi’s promise in 2012 to do “whatever it takes to preserve the euro. And, believe me, it will be enough.” Events bear out his confidence.

The new governor will inherit a trickier political situation than Carney did on his arrival in Threadneedle Street, hence the stipulation that the successful candidate possess “acute political sensitivity.” That’s a polite way of noting that although the Bank is independent, and therefore free to set interest rates in line with its 2 per cent inflation target, in practice central bank independence is under growing pressure.

Unable to browbeat the independent US Federal Reserve into cutting rates further (which might stoke the economy and his re-election prospects), President Trump has taken to abusing its chairman, Jay Powell. Meanwhile, his trade wars could trigger a slowdown, forcing the Fed to cut rates as he wishes.

In the UK, Labour has expressed interest in widening the Bank’s mandate so it is required to consider productivity and environmental targets as well as inflation. There’s little sign yet here of open bickering between politicians and central bankers. Even so, the naming of a new governor, now unlikely before the election, is a big moment for financial markets. 

The shortlist of candidates is reported to include Andrew Bailey, head of the Financial Conduct Authority, deputy governors Ben Broadbent and Jon Cunliffe, Minouche Shafik, head of the London School of Economics and Shriti Vadera, chair of Santander UK. It is a highly credible list. But whichever party forms the next government, it looks set to ramp up public spending and borrowing. And it will not want a governor who dampens the effect of that, but instead one who is willing to keep interest rates on the floor—and maybe even to create money to finance government borrowing directly. 

From the investor’s perspective, if rates are held down, or even fall, that would underpin bond markets and provide some support to equities, while doing nothing whatever for savers. But if international investors conclude this is happening because the Bank’s independence is effectively over, the value of UK assets, especially the pound, is likely to suffer.  

One warning sign would be any decision by the victor of the next election to look beyond the current shortlist for Carney’s replacement. Despite awkward moments, he has been surefooted enough to retain the confidence of the markets. They will want more of the same from his successor.

Now read Duncan Weldon—when in doubt, diversity