You're listening to a podcast from the today programme on B.B.C. radio four, the Chancellor of the Exchequer runs the economy, and therefore affects all our lives.
Well, up to a point.
Twenty years ago, the Bank of England was given independence, the power, above all, to set interest rates control inflation for the ten years that follow that momentous decision, it seem to have been the right thing to do.
Gone were the days of runaway inflation when prices shot ahead of pay rises, and instead, things were pretty stable.
Then came the great financial crash, and we've never properly recovered.
Does that suggest.
Maybe it's time for the government to take back currently share some of their powers, it handed over twenty years ago.
Mark Carney, has been the Governor of the Bank of England, since two thousand thirteen, and he is with me now.
Good morning to you.
Good morning jog, and you'll have heard ed balls, saying, a few minutes ago, you yesterday, saying, in effect, yes, it is time to do things rather differently.
Do you agree.
Well, let's let's start with the decision of twenty years ago, which was to delegate what's called operational responsibility.
The responsibility to set interest rates to set monitor policy in order to achieve an objective that set by the government.
So it's very important and, ultimately, by Parliament, so it's very important, and the key word of stability In that are the key words to build the price stability, in this case, inflation at two percent annual growth over the medium term.
So Parliament sets that, and then delegates responsibility for the Bank to achieve it, and that system has worked quite well.
Or did work quite without that that element of it has worked quite well.
And then we give you two explanations for two examples of that.
First, if you look at the twenty years prior to that inflation averaged six percent, it was very volatile high unemployment vault of growth for the twenty years after the past twenty years, even with the crisis.
Inflation is average just under two per cent in it's only been one fifth of all talk and, very importantly, the Bank was in her position, both immediately after the financial crisis.
And after the bracts a referendum in her position in order to provide stability and then support for the economy when it needed it.
So that's worked well, didn't work well and out what ed balls, to which he was referring to was that the Bank, more or less, just had that responsibility, responsibility for inflation, not a responsibility, and certainly not the tools to address issues in the financial sector or broader issues of financial stability, and that's what was changed about fourth about five years ago, with George Osborne's reforms, which brought back powers to the bag to oversee banks and building societies, insurance companies, but also, they Have some brought her powers to help control the level of debt in the economy.
So the system has changed.
We've been to big changes to the system.
In the last twenty Alice, we've gone too far.
Has it gone too far.
No, I don't think so, because I think the system as designed here, and having come from the outside into the system.
I think it's incredibly well designed, because the big decisions rest with Parliament, they decide what the level of inflation should be, and delegate responsibility to that Bank of England, and they decide what powers, the Bank of England has, in order to supports financial stability, to make sure we have, for example, a. banking system that can withstand shocks, whether they come from abroad, or become domestically and still lender households and businesses across the country.
Now, I think, a key element of this system, we have to remember this, and certainly at the Bank have to remember is, we have a responsibility to her den Afi wrists in the economy, and not just a Delphi those wrists in keep it quiet and write a little note for a file or have a private conversation with the Chancellor about them, but we have a responsibility to come on the today programme to publish reports to go out into the country and highlight where there are emerging vulnerabilities and ideally, we will have powers to take action against those if we don't, we at least have To surface them, and that was one of the..
I mean, in fairness, there was one of the shortcomings of, but of many central banks.
Prior to the crisis is they didn't spot the weaknesses that we had and what Gordon brown says.
Now, the man who set this whole thing up.
And he says, the government cannot maintain stability without the Bank pretty, obviously, but then he says, the Bank cannot do so without the government.
And what he's talking about is a closer relationship, and, as you heard, ed balls saying the Chancellor should chair an oversight of the financial system involved in the Bank, but actually potentially other players as well, isn't there an argument, a strong argument for that, given the history of the last ten years.
Well, you know, ed balls Gordon brown architects of some of the biggest reforms in date formed the remark remarking right now.
So obviously take seriously, what would they say, I think we should also take seriously, how the system has been working all, they don't have as well position and how it works and how they reach their ugly.
.just expand on that, which is that, as the cyst that we are mandated under Statute under law.
I have to notify, on behalf of the bag, the Chancellor, if we think any public funds, any taxpayer money's might be at risk around a financial Institute, this is a sort of almost informal arrangement.
I know it is That that that's safe or, if I may, that's of, no, I'll get you a point, but that's, that's the formal responsibility, it's not pub that is not public, for obvious reasons, because we're trying to, if it's a specific institution, we're trying to address those issues.
We also have a formal statutory responsibility, the Chancellor, and I was Governor have to sit down and discuss the outlook for a financial stability, the rest in the economy and the international wrist that discussion is made public summary of that discussion is, after the Zambezi up after the fact, but pretty quickly after the fact.
So it's not, this is not an archive material and why shouldn't you have something like Sir John gave you may have heard him on this programme half an hour ago suggesting something like a national economic Council, where it's entirely public, we know what is going on.
We know who he's talking to whom, and what their views are well John, I think we are very open about work, we see the rest, we're not holding anything back in terms of what we are, we see potential rest in this economy.
So why not have a national economic Council, well, then the question is, who should address those issues.
So let me lay all of you let me have that that's all of them.
Let me, let me expand on that, let's let's take the current circumstances in circumstances in the U.K. economy as The independent financial policy Committee of the Bank of England sees we see some issues in household, that we may come onto those we've action.
We've taken action on those using a supervisory power is another part of the bag in order to tighten underwriting standards for banks and building societies.
So that's first point.
Second, we see a series of issues potential issues around bracts, and we've been open about those issues.
I want to ask you about that in the Middle he's, well, let's hope you will come with, let's hope so.
So we are a profiling specific issues, and then, where we have the power, where we have responsibility.
We're taking action to mitigate those wrists, as we should, and all of that is in the public domain, and we will we are cross examined by the Treasury, select one of the things that's come out of all that is that your ability to forecast this, you're not alone in that running a Bank.
In this respect, your ability to forecast is a pretty dodgy, not an expression, you use.
I'm sure be not be very good adhere to what, aren't you a bit more honest like Janet yelland who runs the American at federals have c. says the way inflation works as a mystery.
Well, now that you confessed to act.
Well, I think there's some specific issues in the United States, which is that the the wage performance has been particularly weak, and then on Top of that there was, I mean, let's not Oliver, you've got the making is that forecasting is an imprecise.
I hope the forecasting absolutely is an imprecise.
And that's not all the more reason why you shouldn't work jointly with agencies of government, or whatever it happens to be there for.
I don't, I don't think that follows, there is a debate around them, broader point, but I don't think it follows the chel ranches were for in the meat, and let me make the the genius original reforms and the Osborne reforms were to give the Bank, a specific tasks.
Give them the tools necessary to achieve those us.
I'm not here, I am bound under Statute to report wrist of financial stability, to say, what we're doing about them end to report if were the limits of our ability to address some of those issues.
All right, so, so I think what in examining this question, we have to look at, or they're a series of situations where they're a risk to this economy around the financial system, for example, around household that other things with the Bank can spot a problem, but not do anything about it.
How do I let me give it, and then we give you one example, one tangible example today, we were saying, there is an issue, and we can't we don't think we can solve it and then and that relates to bracts and specific issue around for exit, Which is that in the derivative market, they're a series of contracts.
There are tens of thousands of contracts involving hundreds of institutions, European and U.K and the legal validity of those contracts post Brax is in question.
It depends on the type of arrangements that's ultimately struck now that can't be solved by action by the institutions themselves, they cannot be solved by actions by the Bank, or even the U.K. government itself, it has to be solved.
Ultimately, by actions by the E.U. twenty seven in the U.K., but we surface that issue, we talk about the limits of our power, cos we are doing things to mitigate this issue, but we told by those power any it to be up there to be Frank it plays directly into this question of an implementation arrangement, a transition deal same different words for the same thing that is absolutely in the interests of the E.U. twenty seven right, and in the interests of this country and interest of this, Matt.
What did you mean when you said, the speed limit of the economy has slowed because of it.
Well, it's, it's slowed for a couple reasons, the speed limit of the economy's made up of what d'You think's, it's made up of two things, first, the degree of productivity growth in the economy.
So, are we doing things better because of investment, and when a project every drop and productivity has been very poor.
Since the financial crisis and, Secondly, what's happening to labour force is labour force growing, either because people are staining work longer, or because of inward migration now.
In both cases, we've seen a or down tick, both in productivity and part of that has been because of uncertainty.
Businesses have, and that will grow having uncertainty. haven't been investing as much, it's obviously, it's not yet clear what the final arrangements, precisely because of that period of uncertainty, there will be damaging effect on the economy is your view in the short term.
What is the short term, a lot, the sort the short term, in this is this important point, which is the the horizon.
That's relevant for monetary policy, which is over the course of the next two to three years.
So our sense which time we'll be into the transition period.
Nearly out of their dresses will be ideally into the transition period.
At that point, and so wear this is relevant for monetary policy on interest rates is that if the speed limit has slowed, and we have, we're in a position where we've used up a lot of that capacity in this economy, which is good news.
Unemployment's Attlee, and we had very low low, and we have the highest more people in work than ever before.
These are all good things, but it means that we should be thinking about him.
We are open about this, we're thinking about taking her foot, a bit off the accelerator.
So, In other words, you're going to kovin cons, the opposite, we've got into eat.
That is the consideration, you're right.
All right, we welcome diverse in interest rates, terms, what you gonna do well what, what the majority of independent members of the M.P.C. have said, and I include myself in this majority is that we can see that, in coming months, if the economy continues on this track, it may be appropriate to raise interest that's much more cautious than people expect you to be at this stage, because you've given us many, many hints over the years, and sometimes sometimes inevitably those hints of not borne fruit, why it's still so cautious what well.
I mean, we we take decisions at regularly scheduled, you've got coming up in November.
We have one coming up, and start of November, I mean, I'm, I'm very pleased to be here.
John, but I can personally take the decision to nobody can give us some indication can't you.
Well, that's it.
I think the indication that the M.P.C. is given his is about is about is clear, an indication as one can write, so we can expect a rise in interest rates before next month, is out.
Let's put it like this before November is out.
Let's put it like that.
What we have said, is that, if the economy continues on the track, but it's been on an all indications are that it is in the relatively near term Can expect that interest rates would increase somewhere, but we've also said, and this is an incredibly important point for people listening, who don't follow it day to day or night, but they wanted it to be heavy, but we are in any circumstance.
Globally, and certainly here in the U.K given uncertainty given other factors is were talking about, to keep with the metaphor, just easing a bit off the accelerator to keep with the speed limit of the economy.
So interest rate increases when they come when and if they come will be to a limited extent in gradual, it will be noted that you said.
First, when they come, and then you corrected yourself, because I thought you were going to interrupt any, as it does, if I think we'll take a message on that will be what effect is that going to have the odd people with as they do at the moment, with huge personal and household debt that's got to be seriously worrying, has it.
Well, it is, if you a bubble here, haven't we.
We don't, no, we don't.
I think context, over the course, since the financial crisis in British households have pinned down a tremendous amount of debt that level of debt burden relative to income in this economy has gone down by its increase went, you know, I'm be at the, but no, it is not.
It has gone down by twenty percentage points in the past year, the overall Level has just begun to grow in line with normal G.P., so you're not worried about it at all.
Where were worried about him. course, this gets back to a responsibility to her den a fire risk emerging rous and to take action.
What we're worried about is a pocket of risk, a risk in consumer debt credit card dad turned depth requires personal loans that has been has begun to grow fairly rapidly, but temperature.
Now that he's only eleven percent of the overall level of debt, so it's a tenth of the overall level of debt, and actually most of this is too much higher call the Boer wars, then had been in the past, but we think banks had been giving too much credit for if I am using the word to mix in the world, but they had their taking too much credit for a good economic at a relatively good economic environment and not been as disciplined as they should be in there under reading standards in the pricing on this step.
And so the advantage of the system.
We have now is that we can identify this overall risk, as this financial policy Committee, and because the puree, which is also part of the Bank, which is the supervisors of those bags, they can do something about it.
As the supervising what get to make an order, the bangs Desk to two don't clamp down there, go on responsible lending and that we don't Really is, I don't know whether you would share it or not.
Well, what I wouldn't share is the order.
We don't make the credit decision.
O.K., but you don't result from the expression responsible lending were worried about the shift from what has been responsible lending too reckless lining, and this is what happens right, what we got reckless lending.
The banks have got to stop it.
No, we have the prospect of the possibility of developing, and this is when you have the biggest impact on financial stability is getting in early, so it's early stage.
Remember overall big picture dead has been coming down relative to income in this economy, it's starting to move back up, it's a lot of that makes sense.
New homeowners younger couples borrowing it early stage in life that makes sense, but some of it, he's um, he's getting a little frothy and should be should be addressed our end.
We have the tools to address it.
All right, a quick a quick thought about this when he's capitalism broken, because the labour party is telling us labour leadership is telling us that it's broken.
At the moment, and you heard a thing that's been said of the labour party conference in Brighton is capitalism is capitalism broken in any respect any Cecilia suspect there are, from our perspective, the foundations of the two foundations of prosperity.
One is to building, so not worried about high vaulted inflation or deflation, for that Matter.
Secondly, financial stability, having a financial system that can I, but the gap between rich and poor.
These are important issues.
These are not evil shall issues to make their crucial issues, of course, but they are not issues.
These are issues for government their issues for broader society.
They're not the responsibility of the Bank of England.
Now, and this is, this is an important point.
So when we talk about independence of the Bank of England, a role is very carefully defined for price stability, financial stability, we have a limited number of tools.
We are accountable for achieving those they are absolutely crucial to achieving broader societal Gauls, after all, the people who get hurt, when inflation goes up or a banks go down, or the least well off and society, the poorest in society with oat question time and time again, or job is to make sure that doesn't happen, our job is to make sure that the taxpayer doesn't have to bail out somebody in the city that's clearly a responsibility.
Now, there are a host of other things that need to be done in order to grow this economy, and then society has to decide how to distribute the gains from that growth, not the Bank of England, you're going to be leaving this job in too, so you'll have to remind you when your acts for the date of the that the date when you were twenty nine Canada day, that's a Question that's there, but obviously tried twenty nineteen, it'll look a little bit to people outside this country, perhaps as if you're clearing off because we're about to head into a really dark period.
I don't think so, Aye.
I committed, but a year ago to stay an extra year precisely because of the timing.
I mean, this is obviously, this is an important period the Bank is playing a supportive role, both in giving technocratic advice to the government and managing somebody's wrists around, but, as you know, by the end of March.
Twenty nineteen, that's the end of the Article fifty period, then I think we should be in the interests not just of the United Kingdom, but absolutely interest of the twenty seven, we should be into a transition period and implementation period.
And, in the end, the things about getting these institutions right getting these committees rate, which is what the brown in the Osborne reforms, if I can con that have done with the Bank of England is, it's not about one individual, it's about a series of individuals, taking the Sergeant.
And a final sentence, if you would, on the spectrum of being desperately nervous and worried about it and fairly optimistic about it, or even very optimistic about Brecht it, where are you, we are appropriately prudent, she would, why did I know you'd say that I think I would have said that it didn't matter what you asking me about Problem.
Probably not, but, but, but, but come on some idea could could Breck should work, or is it doomed to fail.
Well, we need to, we need to do everything we can to make it work, and from a Bank of England perspective.
That's making sure the system, the financial system is ready for it.
You can help us through the bumps, and it's also about been able to work with her European partners in a future arrangement, so that we can manage what he is a very, very important and successful financial system for Europe as a hall, and, quite frankly, for the world.
So, our focus is on doing those things, and helping to make it work.
Others have much brighter responsibilities, and there were they accomplish wilted will be, will give you the answer that question for Governor, mark you, thank you very much indeed for that.
Thank you, and dump was listening to all of that.
This is my job to decode it isn't quite a lot of the central Bank, the speeches for inter Bank entries are always listen to very carefully by markets for any kind of hint about what might happen to interest rates, and we just said, the Governor say if the, if the economy continues on the stricken, he went out of his way to say it looks like it will continue on this track may be appropriate to increase interest rates, and the next time they could Do that is just a month away.
The second of November, the pound beginning to, well, we'll have to keep an eye on the town to see if the markets take out of her, but I've taken out of it, but it wouldn't be any surprise of strengthened and a little bit on the back of somebody, I think, right anything else.
The other thing is that the Governor chose t. to bring forward another, another potential threat from bricks at which hadn't been talked about before, which is a big threat to the city, all these derivatives contracts which people don't know about the underpinning of the financial system, he said.
At the moment, it's not clear where they'll have legal with entity in the future, not something for the Bank to fix something for for the government really to fix, as part of the bricks at negotiation, I'm Nick Robinson and on my political thinking podcast, or try to give you something that you might not get even listening to the today programme pulling the curtain back a bit politics, no spin, no sound bites.