The appointment of Mark Carney as Governor of the Bank of England is a political coup not only for George Osborne. It has also given heart to conspiracy theorists (see here for a peculiarly silly example) who believe the world is ruled from Goldman Sachs, where Carney spent 13 years. Carney’s cachet in fact reflects not the power of Goldman’s but the reputation of the Bank of Canada, where he has been Governor since 2008.
The Bank of Canada has a good name in international markets as well as the domestic economy. That is reflected in the surprising strength of the Canadian dollar during the financial crisis. Normally, a high-yielding currency does best in times of global financial stability. In a crisis, investors usually prefer the safety of the US dollar, as the world’s leading reserve currency. But amid immense ructions in the financial system, the Canadian dollar and the Swiss franc have been big beneficiaries, rather than the US dollar and the euro.
Part of the reason is the credibility of Canadian monetary policy. Canada had an inflation problem in the 1970s. John Crow, Governor of the Bank of Canada from 1987 to 1994, withstood political criticism to run a tight monetary policy. Canada adopted inflation targeting in 1991, a year ahead of the UK. Whereas the UK’s adoption of that framework was an outcome of the failure of the previous policy of targeting the exchange rate and joining the European Exchange Rate Mechanism, Canada’s policy was a natural development from what had gone before. It has achieved what it set out to do.
Canada’s financial system proved notably resilient to the global banking crisis of 2007-09. Restrictions on mergers of the big domestic banks were a source of stability. Carney commented to international central bankers in 2009 that “price stability does not guarantee financial stability and is, in fact, often associated with excess credit growth and emerging asset bubbles”. That judgment describes recent British economic history. The new Governor of the Bank of England has expertise and experience in charting a different course.
Read our editorial on Mark Carney’s appointment