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Central Banks Are Nearing Policy Limits, Bank of England’s Carney Says

Paul Gordon and Brian Swint

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Outgoing Bank of England Governor Mark Carney said central banks globally are getting close to running out of tools should they need to tackle another serious economic downturn.

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had, and I’m of the opinion that this situation will persist for some time,” he said in an interview with the Financial Times to be published Wednesday. “It’s not clear that monetary policy would have sufficient space” if it needs to combat anything worse than a “conventional recession.”

That’s a view echoed elsewhere among economists and in monetary circles. At the European Central Bank, new President Christine Lagarde has echoed her predecessor Mario Draghi in urging governments with budgetary space to spend more, and all nations to make growth-boosting reforms.

Carney, who will leave the BOE in March, was the first foreign-born governor of the three-century-old institution. Starting in 2013 with the intention of shaking up the organization while gradually normalizing monetary policy, he was soon drawn into the political upheaval surrounding the Scottish referendum, Brexit and general elections.

The bank left its benchmark interest rate unchanged at 0.75% last month, with a minority of the rate-setting panel calling for a cut. Carney’s final rate decision, and a fresh round of economic forecasts, are scheduled for Jan. 30, the day before Britain quits the European Union.

New Governor

While he has extended his term -- for a third time -- to March 15, the spotlight will then shift to his successor. Andrew Bailey is a long-time BOE insider who currently heads the Financial Conduct Authority. He’ll have to guide the bank through the next wave of uncertainty as Prime Minister Boris Johnson’s government negotiates a trade deal with the EU before a Dec. 31 deadline.

Carney said Bailey still has policy space, with the BOE able to cut interest rates close to zero if needed, according to the FT. It could also “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

The governor was castigated during his term by some pro-Brexit politicians for his warnings of the risks of leaving the EU without a transition agreement. He said criticism that he had strayed beyond his mandate was wrong.

“Anybody who says that doesn’t know the breadth of the powers of the BOE,” he said, adding that officials “have a statutory responsibility to identify the major risks to financial stability.”

Private Space

Carney’s own future includes becoming a United Nations special envoy on climate action and finance after he returns to Ottawa. While he used his BOE post to call on financial institutions to change their business models to reflect climate change strategies -- for example the phasing out of carbon assets -- he told the FT that the financial sector couldn’t be the only solution.

As for his other plans, he gave little away, except to say that he’ll be happy to escape the political crossfire for a bit.

“You’re just always in public” at the BOE, he said. “You’re not always performing but you’re always in public. It’s nice to be in private.”

--With assistance from Jill Ward.

To contact the reporters on this story: Paul Gordon in Frankfurt at pgordon6@bloomberg.net;Brian Swint in London at bswint@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Paul Gordon

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