U.K. Chancellor of the Exchequer George Osborne’s selection for the new governor of the Bank of England (BOE) is a strong break with tradition. But ensuing policy for the BOE will likely not be.
Governors are usually well-to-do Britons, which makes Mark Carney — a Canadian and the current head of Canada’s central bank — an especially unusual choice.
But Osborne’s new recruit is unlikely to make any substantial changes to the BOE’s low interest rate policy, as Carney’s claim to fame is his early action in 2008 to cut Canada’s interest rates “as low as they could go” and his pledge to maintain them there. Carney was a pioneer, so to speak, of monetary stimulus during the crisis.
The problem is that the U.K. has already tried low interest rates for nearly four years now without success in reviving growth, which has remained below 2 percent and oftentimes negative.
Printing money, however, has consistently kept inflation above 2 percent throughout the recession — exceeding the target central bankers usually aim to maintain.
Cheap money merely forestalls inevitable reform of the U.K. economy while it disrupts the proper market allocation of capital and distorts relative prices through inflation. Osborne should have broken with tradition entirely by choosing a governor who understands this principle.