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Carney curveball heralds UK bank upgrades

by: Dan Jones
  • 27/11/2012
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Carney curveball heralds UK bank upgrades
The appointment of the Bank of Canada's Mark Carney as the next Bank of England governor has been heralded as an "outstanding choice" by analysts and led to upgrades for UK banks.

Chancellor George Osborne announced Carney’s appointment yesterday, confounding a consensus which had expected deputy BoE governor Paul Tucker to take the role.

Carney’s arrival at the Bank next July raises a number of questions for investors, particularly as central bank policy continues to guide market movements.

The 47-year old has presided over a period of relative economic stability in Canada, meaning policy tools such as quantitative easing have not been required.

With no minutes released for Bank of Canada policy meetings, opinion is divided on whether Carney errs more on the hawkish or dovish side of things, though he is seen as a strong communicator.

“Policy wise, he can neither be clearly put in a dove or hawkish camp and is mostly adept at manipulating market expectations,” said SocGen’s FX team.

The analysts expect sterling – which ticked higher yesterday following the announcement – to continue to slowly rise against the euro over the longer-term as investors gain confidence from Osborne’s appointment of an ‘outstanding candidate’.

Nomura chief economist Geoffrey Rush said investors should “continue to expect more of the same policy mix” and said the appointment suggested a clear attempt to change a BoE culture that has been questioned in the aftermath of the LIBOR scandal.

At Capital Economics, chief UK economist Vicky Redwood said it is “unlikely” that Carney will dominate policy as King has done, with power likely to be delegated around the enlarged bank in future.

Nonetheless, Carney’s role as head of the Financial Stability Board is seen as relevant, given the BoE’s increased focus on such concerns.

That position has caused Carney to come into conflict with high-profile figures in the past, not least J.P. Morgan CEO Jamie Dimon, as he pushed for tighter regulation.

But his experience of the private sector – via 13 years at Goldman Sachs – may be a net positive for UK financials, according to some.

At UBS and Citigroup, analysts suggested the appointment will prove positive for UK banks, pointing to the potential for a more conciliatory regulatory approach. UBS has upgraded RBS from neutral to buy following the appointment.

More clues will be provided when Carney appears before the Treasury Select Committee ahead of his appointment next year. By then, some difficult questions may have emerged, given what Capital Economics describes as the “precarious state of the Canadian housing market”.

“In the event of a collapse of the housing market, [he] could be more remembered for having left interest rates too low for too long,” added Nomura’s Charles St-Arnaud.

As for the UK? Carney said yesterday the country is well-equipped to face down its own problems, but remains under no illusions over what lies ahead.

“I am going to where the challenges are greatest,” he told Canadian reporters on Monday.

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