Reuters Insider - STREAM: BoE’s Mark Carney speech on forex rigging

Cass Information Systems

24/03/2014 06:55

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 Description:        Bank of England Governor Mark Carney is expected  
                     to outline changes to the Bank of England after   
                     forex-rigging allegations.                        
 
 
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Transcript (May be auto-generated)

 -independence of the Central Bank. And Mervyn King in 2005 in this room 
explained that inflation targeting regime used by the bank. Many of us who 
remember his analogies to a goal scored by Maradona in the World Cup. So our 
speaker tonight, Mark Carney follows in a very proud tradition. Let me provide a
few words of introduction about him. Born in the Canadian Northwest Territories,
he's a graduate of Harvard where he was a star hockey player and went on to 
complete his Master's and Doctorate in Economics at Oxford. After 13 years at 
Goldman Sachs working in London, Toronto, New York, and Tokyo, he was appointed 
Deputy Governor of the Bank of Canada in 2003. He then became Senior Associate 
Deputy Minister of Finance until his appointment as Governor of the Bank of 
Canada in 2008. He held this appointment until last summer when he was appointed
as Governor of the Bank of England. His arrival as we know attracted a lot of 
media comment. I think it was Martin Wolf in the FT who used the "Messiah" word.
But let me give you one further quote from the FT: "Having a non-Britain as Head
of the Bank of England has not only helped dispel some of the central banks' 
fustiness, it has also clearly accentuated the increasing openness of the 
British economy." So there was a lot of anticipation ahead of Dr. Carney taking 
up the governorship as there is tonight regarding his lecture. Before I hand 
over to the Governor, let me just say a few words about the format. Dr. Carney 
has very kindly agreed to take some questions at the end of his lecture. After 
he's left the room at the end of the Q&A, I would ask you all to leave the room 
because Dr. Carney is going to return for a session with the press, a press 
conference in this room whilst we are having a relaxing drink outside, he will 
then join us. And there will be an opportunity to meet him and talk with him 
then. So, will you please join me in welcoming Dr. Mark Carney to give the Mais 
lecture for 2014. Thank you. Thank you very much, Paul. 

Thank you, Steve. Thanks to all of you for making the time this evening. This 
really is a distinct honor. I'll just make a couple of logistical suggestions. I
wonder if we can serve the press a relaxing drink or two during the course of 
the speech to soften them up for Q&A. But I'm not sure that's necessarily going 
to work in the way I want. That's the first thing. Let me also confess we have a
discrepancy, Steve. I am honored to be giving the 29th Mais Lecture. So, I'll 
just right it out again because these guys will take me up on this if we have it
wrong. 

Notice I'd say "we" now, now that might be wrong. And you have it as the 30th. 
So I obviously missed one in my preparation for this. But sincerely, this is a 
tremendous honor. This is an amazing platform. It is charted- the evolution of 
UK macroeconomic policy through the eyes of the leading policymakers, and others
as you referenced in your comments including all of my four predecessors as 
Governor. And so it's an opportunity for me on behalf of the Bank to outline 
some of the changes that we have made and I see my colleagues, Charlotte Hogg 
and Andrew Bailey here from the Bank, a strategic plan that we put together. The
three of us along with Sir Jon Cunliffe and Charlie Bean, and all the management
at the Bank to move the institution forward. So I'm going to talk mainly about 
that. But let me step back first and put it in the broader context of what these
lectures have provided us. So really, since its inception, the Mais Lectures 
have spanned a period during which the focus of macroeconomic management was 
very firmly, initially very firmly on monetary policy. And these lectures and 
the individuals who made these lectures, gave these lectures helped establish a 
broad consensus for the primacy of price stability as well as the institutional 
framework that was necessary to deliver that price stability. And that focus, 
that initial focus obviously made sense since the greatest challenge, greatest 
challenges of macroeconomic policy in the late 1970s and certainly into the 
1980s was the fight against inflation. And that fight culminated, as you 
referenced, Steve, in the adoption of an inflation target, which helped secure 
15 years of price stability and sustained economic growth. But it has to be said
that with time, a healthy focus became a dangerous distraction. And the 
financial crisis, about which there's been some leading research and analysis 
here at Cass, the financial crisis exploded the Great Moderation and served as a
powerful reminder that price stability is not sufficient to maintain 
macroeconomic stability. And words that were contained in some of these lectures
which alluded to such risks were not followed by the actions that might have 
prevented them being realized. So those lessons have since been learned. And in 
the wake of the crisis, the Bank of England would be promised enormous new 
powers and responsibilities. And over the course of the past year, those 
promises have become realities with a statutory Financial Policy Committee and 
with the Prudential Regulation Authority formally joining the Bank. And so the 
question is now, how will we use our powers to fulfill our broad 
responsibilities? And as I said at the outset in response what the Bank has done
today is to launch a transformative strategic plan to fulfill our broader 
mission. We have a new leadership team. We are setting out 15 initiatives to 
reshape the institution. But behind that plan is a vision for the Bank that I'm 
going to set out this evening. And specifically, we have a vision of a bank that
has these many and varied responsibilities, but a single timeless mission to 
promote the public good. We're an institution that needs works as One Bank to 
exploit the synergies and complementarities across our policy functions. It's 
obviously the Bank of England as an institution over 300+ years that draws on a 
long history of intellectual leadership and international engagement and we need
to use those traditions to help shape an open, resilient global financial 
system. And it's an institution that needs to build on the immense successes of 
the past quarter century, many of which were first discussed at this venue in 
combining the successes and combining clear objectives, good governance and 
constructive transparency. So let me begin in walking through the elements of 
our plan by asking a simple question of what the Bank of England is for. Now, 
the founding charter of the Bank 320 years ago explained that the original 
purpose, at least in 1694 was to "promote the public good and benefit of our 
people," which at the time in practice was summarized succinctly by the diarist 
John Evelyn, who recorded that 320 years ago, the Bank was formed, "a public 
bank was set up by the Act of Parliament for money to carry on the war." That 
was the public good then. The war in question being against France, and in 
return for the monies raised by the Bank, it received both income and banking 
privileges: it was soon the only bank allowed to be constituted as a joint stock
company, a tremendous advantage as you'd appreciate, and it had effective 
monopoly on the note issue in the London area. So by the end of the 19th 
century, the Bank had expanded its responsibilities, it had built informal 
responsibility for a broad range of policy areas. It was the fiscal agent for 
the government. It maintained monetary stability through the operation of the 
Gold Standard. It promoted financial stability through its role as the effective
lender of last resort, and more generally – through the famous exercise and 
judicious exercise of the Governor's eyebrows, it acted as the institution which
managed and resolved financial crises. So broad responsibilities but held 
informally. Now, while the Bank's responsibility is varied over the course of 
the following century in the run-up to 1997, they remain broad and largely 
informal. And the transformative change that Eddie George helped signal here 
that year, gave birth to a modern Central Bank with a narrower focus on price 
stability but one which was grounded in clear statutory objectives, and which 
had operational independence in order to fulfill them. That independence, as 
many of you know, all of you know I suspect was the solution to the time 
inconsistency problem, which causes policymakers who promise low inflation but 
then go for faster growth to deliver neither. Removing political considerations 
from the conduct of monetary policy made possible a credible commitment to low 
inflation and strong accountability mechanisms and transparency were put in 
place to legitimize that independence. So those changes reflected the belief 
that price stability was the best contribution a central bank could make to 
macroeconomic stability and by extension to the broader public good. This 
represented a deconstruction of the old model of central banking. In my view, 
while there were enormous innovations during that period, innovations of 
enduring value, this reductionist vision of a central bank's role that was 
adopted around the world was fatally flawed. In particular, it failed to 
recognize that financial stability is as important an objective of macroeconomic
policy as price stability, and it downplayed the interrelationship between the 
two. And it failed to recognize that central banks have a vital role to play in 
maintaining financial stability because of the deep underlying connection 
between it and monetary stability. Both are fundamentally about maintaining the 
public trust and confidence in money and financial intermediation that are 
essential to oil the wheels of commerce. That trust and confidence can be 
undermined through a loss of certainty in the future value of money, a loss of 
confidence in financial institutions, or ultimately a loss of faith in the 
financial system itself. Central banks have a primordial responsibility to act 
as guarantors of trust and confidence in money because of their status as 
monopoly issuers of currency. This naturally gives them control over the 
quantity of money and interest rates – monetary policy. It also means that a 
core part of financial stability policy which is acting as lender of last resort
to private financial institutions during times of stress – falls naturally to 
central banks. There are other instruments of financial stability policy that 
seek to prevent the build-up of vulnerabilities in the first place. 
Microprudential supervision aims to maintain the safety and soundness of 
financial and macroprudential policy seeks to safeguard the stability and 
resilience of the financial system as a whole. With the Bank of England now been
tasked by Parliament to pursue with those prudential micro and macroprudential 
responsibilities, we've returned to a broad role. The best answer to the 
question of what the Bank of England is for was given by first bit of the 
original 1694 founding charter which is promoting the good of the people of the 
United Kingdom. It's a timeless mission but it's our understanding of what the 
central bank does to contribute to the public good. In 1694 it meant financing a
war with France. During the Great Moderation, it meant price stability. Today, 
reflecting the lessons of the ensuing financial crisis, it means maintaining 
both monetary and financial stability. Now we don't intend to fail in that 
mandate. Going back 320 years to refresh our purpose is part of building on the 
best of our history at the Bank of England, but we are not seeking to 
reconstruct the central bank of the past. Instead what we're looking to do is to
build a 21st century bank and I'm going to go through some of the ways how and 
some of the reasons why. The first thing is to recognize the broad 
responsibilities that we have been given, create enormous potential to exploit 
complementarities and synergies between those policy areas. And it's our duty to
do so effectively because the effectiveness of each function influences that of 
the others. In other words we have responsibility at the bank to maximize our 
effectiveness by acting and working together. That imperative is that the core 
of our new strategic plan with stresses that the contribution to the public good
of the bank will be greatest if we work together as one bank. Now those 
complementarities to which I referred can be operational arising from putting 
functions together in a way that's more efficient to allow faster decision 
making during a crisis, improve the coherence of our communications or taking 
advantage of common skills, information or analysis that are required to operate
different policies. Alternatively those complementarities might be economic, 
arising with a strong interactions in the way polices have their effect or when 
one policy affects another. It makes more sense to have those policies operate 
by one institution so that shared analysis and information leads to consistency 
of decision making and so that trade-offs between policies and potentially 
conflict between policies can be managed both effectively, and in a timely 
manner, to achieve better outcomes. And I'd argue there are strong 
complementarities between all four core functions of the Bank of England, 
namely: monetary policy, markets, macroprudential policy and microprudential 
regulation and supervision. Each affects overall monetary and financial 
conditions and therefore has the capacity to affect the achievement of both 
monetary and financial stability. And I'm going to go through a few examples of 
this to draw the point out. The interaction between macroprudential and monetary
policy is clearly central to the Bank's success in achieving its dual success in
achieving its monetary and financial stability. The case for discharging these 
responsibilities within one organization in a coordinated fashion is very 
strong. Now let me just take one pause here since I'm talking about the links 
between monetary and macroprudential to remark just how delighted I am and my 
colleagues are than Ben Broadbent has today been appointed as the next Deputy 
Governor for Monetary Policy. In that role, he will play a central to 
coordinating these functions – monetary and macroprudential – drawing on his
long experience in academia, financial markets, and as an external member of the
MPC. And as Ben recognizes, the transmission channel of monetary and prudential 
policy overlap, particularly in their impact on banks' balance sheets and credit
supply and demand – and as a consequence on the wider economy. In turn, 
monetary policy affects the resilience of the financial system, and 
macroprudential tools that affect leverage influence credit growth and the wider
economy. In turn, financial stability is a pre-requisite for monetary stability 
– the extreme example here is banking crises and their deflationary impact. In
reducing the severity and frequency of financial crises, macroprudential policy 
therefore helps to preserve the role of money as a store of value and preserve 
the effectiveness of monetary policy. Now while price and financial stability 
are clearly connected, achieving both can be difficult. As we saw so clearly in 
the run-up to the financial crisis, the credit and business cycles operate on 
very different time horizons, in fact the credit or financial cycle can operate 
on a horizon that's twice as long with an amplitude that is twice as large as 
the business cycle. In pursuing price stability, monetary policy can contribute 
to the gradual build-up of financial vulnerabilities through its effect on the 
degree of risk-taking in the economy. For example, the period of low and 
predictable interest rates before the financial crisis helped drive the search 
for yield and leverage cycle, even with inflation subdued in fact on target. It 
makes the obvious point that it doesn't take a genius to see that similar risks 
exist today. That tension between monetary and financial stability is best 
managed in a coordinated way in a single institution. The use of macroprudential
tools can decrease the need for monetary policy to be diverted from managing the
business cycle and achieving the inflation target towards managing the credit 
cycle. This enhances the credibility of the inflation target. That in turn may 
reduce the need for sharp or persistent moves in interest rates, which 
themselves might threaten financial stability. Similarly, macroprudential policy
can more effectively focus on its primary goal of systemic stability by 
recognizing that, while it affects the economic cycle, it is not best suited to 
managing it. Instead its effects on the economic cycle should – like fiscal 
policy – be taken into account in setting monetary policy, which is the 
primary and most effective tool of demand management. Taken together with the 
synergies from sharing information and analysis, there are strong arguments for 
operating monetary policy and prudential policy in the same institution. In the 
short time the Bank has been responsible for both, we have already seen the 
benefits of operating them in a coordinated way. For example, our forward 
guidance framework for monetary policy establishes a clear division of 
responsibilities between the two, recognizing that although monetary policy has 
an important role to play in mitigating financial stability risks, it would only
do so as a last line of defense. This is important because vulnerabilities can 
emerge from a long period of unusually low interest rates, as complacency sets 
in about the future path of policy and asset prices. There clearly have been 
signs of such behavior in housing markets across the advanc