When Canada's Mark Carney became governor of the Bank of England last year, Avery Shenfeld, the chief economist of Canadian Imperial Bank of Commerce, described him to me as the Ringo Starr of central banking: "He may not be the best drummer in the world, but he's joining the best band."
The U.K. economy is roaring ahead, on track for the fastest growth of any Group of Seven nation this year and with employment climbing at a record pace -- and Carney's drumming skills are about to be sorely tested. Having suggested a year ago that interest rates would probably stay on hold until at least late 2016, he sprung a surprise in his annual Mansion House speech last night:
"There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced," he said. "It could happen sooner than markets currently expect."
So the March or April or May 2015 increase economists and traders had penciled in for the Bank of England's official rate to climb from its current record low 0.5 percent level becomes a 2014 affair.
That has the potential to make life interesting for Chancellor of the Exchequer George Osborne. By the time the next U.K. election rolls around on May 7, 2015, Carney may have notched up two or even three or possibly four interest-rate increases. And the U.K. electorate, which remains as debt-addicted as ever with household debt running at 140 percent of disposable income, according to Carney, will be feeling the squeeze of higher borrowing costs.
If the pound in voters' pockets feels like it isn't going as far, then the feel-good factor of an improving economy will be much harder for the government to sell during the election campaign.
Carney says he's targeting inflation, not the housing market, yet that is where higher interest rates can do damage and he highlighted the risk in his speech:
"The economy is still over-levered," he said. "The housing market is showing the potential to overheat. Rapid growth in or high levels of mortgage debt can affect the stability of the economy as a whole."
It can't be news to Carney that the U.K. housing market is on fire. Along with his salary, Carney was granted an annual housing allowance of 250,000 pounds -- worth about $407,000 at the time it was announced, closer to $425,000 at today's pound-ascendant exchange rate. When the central bank's Financial Policy Committee delivers its stability report on June 26, you can expect to see some fairly forthright measures to curb the mortgage market, probably by enforcing higher deposits for would-be home buyers.
It would be a step too far to suggest Osborne may regret hiring Carney. Nevertheless, the governor has shown a marked Keynesian willingness to change course when the economic facts suggest a new direction is warranted. He'll need to be better than Ringo to manage the delicate balancing act of raising rates by enough to damp the housing boom and meet the Bank of England's 2 percent inflation target, without trashing consumer confidence.
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