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February 7, 2013 @ 12:13 pm

Mark Carney discusses future of Bank of England

Mark Carney faced a question and answer period in front of the UK parliamentary Treasury Select Committee on Thursday. He discussed his upcoming position as governor of the Bank of England and his view on the central bank’s monetary policy. He succeeds current governor Mervyn King on July 1st.

Below are some comments:

On changing policy:

“The benefits of any regime change would have to be weighed carefully not only against the potential risks but also against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework. Although the bar for change to any flexible inflation-targeting framework should be very high, it seems to me important that the framework for monetary policy—rightly set by Governments and not by central banks—is reviewed and debated periodically.”

On the impact of Quantitative Easing, Carney said the following:

“The studies by the Bank of England and Federal Reserve of their respective Asset Purchase programmes are broadly consistent. It is clear that the programmes have had some positive effects. They find the effects on financial markets to be material. Gilt yields were reduced. Corporate investment grade and high-yield spreads also fell markedly. The evidence is that the simulative effects then fed into equity prices. I do not think there is such a thing as a fixed ‘multiplier’ from asset purchases to other financial asset prices. It seems to me likely that the scope to influence financial markets varies with market conditions. Asset purchases probably have a greater effect when markets are functioning poorly and liquidity premia are high.”

“The benefits of large scale asset purchases, and indeed persistently low interest rates, need to be judged against the potential costs of having a very stimulative policy for a very long time. Such policies can encourage excessive risk taking, distort the functioning of sovereign debt markets, and build vulnerabilities in the financial sector. In addition, central banks need to be mindful of the potential impact of very large purchases on market functioning. The potential costs of QE and the uncertainty about the effect of QE on bank lending behaviour are solid reasons for supplementing QE with the Funding for Lending Scheme.”

On the BOE’s exit from QE

“A credible plan is needed in advance in order to maintain confidence. The exit needs to be achieved without disrupting the gilts market. Such disruption could lead to sharp movements in a range of other asset prices, or possibly threatens to financial stability.

“It is my intention that the MPC periodically revisits its exit strategy and updates the public, reporting any changes in a timely and transparent manner.”

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