Carney’s Tenure: Brief Thoughts

Carney’s tenure at the helm of the Bank of England became a
distraction. 
Ahead of this week’s MPC meeting and Quarterly Inflation
Report, he addressed the
issue.  

Several press reports over the weekend had him leaving post haste. 
Ostensibly, he lost the support of the government.  Prime Minister
May was critical about the social impact of low interest rates.  Several
Tory MPs who favored leaving the EU argued Carney was too biased in favor of the Remain camp.  

Yet rather than resign, Carney
extended his term.
  When he first took the post, he offered to stay for five years.  That would take him
into 2018.  He now says he will state until mid-2019.  He
specifically cited the desire to take his term beyond the expected Article 50
process to help ensure an orderly transition in the UK’s relationship with
Europe.   

Carney’s decision does not change anything but does take away some
downside scenarios. 
The MPC meeting and the Quarterly Inflation
report and all three PMIs remain tap for this week.  On balance, we expect
the MPC to keep its last rate cut, which would be 10-15 bp, in its pocket for a
while longer.  It is not needed at
the moment, and it would be too small to
have much impact in any event.  As we have noted previously, speculators
in the futures market have been trying to pick a bottom in sterling for the
last few weeks.  

The euro reached its best level against sterling (GBP0.9047) in two weeks
earlier today and reversed lower on Carney’s news.
  It found support
near GBP0.8960, ahead of the 20-day moving average (~GBP0.8940).  It has
not closed below this average since mid-September.  The pre-weekend low
was near GBP0.8945.  A break of that area could signal a move initially
toward GBP0.8885.  

The idea that Carney would quit because he was criticized is wide of the mark.  If the concern was
the independence of the central bank, institutionally, quitting would only feed
it.  Quitting would undermine the independence of the next Governor
too.    This did not seem
the most likely scenario to us.  The same is true of Yellen.  Some
still think that if Trump wins, he will
fire Yellen.    The US Presidency is a powerful office, but not
unchecked.  It is beyond the President’s authority to fire the Fed
Chair.  Of course, she could quit, but that would do more to undermine the
independence of the Fed more than Trump’s campaign rhetoric.  

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