Depending on your point of view, the decision by BoE Governor Carney to step down in June 2019 is either a one year extension of his term, having previously said he would leave in 2018, or he is leaving two years earlier than the mandated eight years. Either way, at least we have some clarity on where we stand ahead of the release of tomorrow's Inflation Report.
The whole affair does raise a number of issues regarding the role of central banks. For one thing, does it even matter whether Carney stays a year longer? His decision is based on the notion that the Brexit negotiations will be completed by that point and he will thus have steered the BoE through this critical period. That said, the hard work will only just be beginning. So whilst an extra year is welcome, in reality he probably only has a couple more years of any real authority. Once he enters the last year of his contract the markets will be less willing to hang onto his every word. Just ask Sir Alex Ferguson, who announced he would retire as Man United manager in 2002 but his team stopped listening to him and they underperformed as a result. And as we now know, Ferguson reversed his position and stayed for another 11 years.
Then there is the ongoing saga regarding the personification of central banking. Just over twenty years ago, central banks were secretive places where senior officials went out of their way to be anonymous. Alan Greenspan put a stop to that, of course. But the Fed has done just fine since he left. Indeed, Greenspan's reputation, which was such that Republican senator John McCain once remarked that he would like to “prop him up and put a pair of dark glasses on him and keep him as long as we could," has since taken something of a beating.
Carney himself was hailed as the "rock star" central banker. But his decisions have been far from flawless and his forward guidance policy got off to a very shaky start, although he redeemed himself in many people's eyes with his conduct during the Brexit campaign. However, personification of policy issues is to miss the point. Central banks are not about one man (or woman). They are organisations with long institutional memories, staffed with competent people, and in theory it should be possible to find a few possible replacements from amongst the senior members of staff.
The media made a big thing of the extent to which Carney's reluctance to commit for the full eight years was the result of increasing conflict with the new administration. There may indeed be something to that. The Times reports today that he was "incensed by the criticism of the global elite ... because he saw it as an attack personally." There is no doubt that the government badly handled many economic issues at the Conservative Party conference last month. Thus Carney's extension, whilst not the full three years which the government undoubtedly wanted, represents a compromise which allows him to say he is not cutting and running during the worst of the Brexit negotiations. It also makes Carney look like a guy who hangs around when the going gets tough - no longer the unreliable boyfriend, as he was once memorably described - which is likely to serve him well in future.
Indeed, the small matter of his own personal ambitions may have played a role in all of this. A Canadian election is scheduled no later than October 2019 and Carney would then be well placed to return home to claim a senior political position, should he wish to pursue such a career as often claimed. He would also be well placed for a slot as head of the IMF once Christine Lagarde's term expires in 2021, with the horse trading likely to start well before that. These factors may have been the personal decisions which Carney was referring to when asked last week about his future as BoE Governor.
The big question is how crucial will Carney be to the UK's immediate economic future. There is no doubt that he is a big beast in the economic and political spheres in which he will have to operate. He is far from indispensable but for a government short of serious economic talent, he gives it some cover as it tries to figure out how to move forward on Brexit. Carney has demonstrated his willingness to stand up to preserve central bank independence. This may not be popular in certain sectors of government but it is what he is paid for. As it happens, I do believe that easy monetary policy is more of a hindrance than a help at this stage of the cycle. The difference between myself saying that, and Theresa May expressing the same sentiment, is that I am arguing for a change of the policy mix between fiscal and monetary. The PM made no such claims.
Whatever else Carney does over the next couple of years, the real fun will be watching him take on his Brexit critics. The likes of Jacob Rees-Mogg will undoubtedly be critical of Carney's decision to give the job another year but sniping is Rees-Mogg's default position. Ultimately Carney's position has become highly politicised thanks to the Brexit shenanigans and over the next couple of years that position is unlikely to change.
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