Carney takes centre stage ahead of Bank of England job

Reuters' William Schomberg previews Carney's appearance in front of the panel of MPs.

Britain's next central bank chief, Mark Carney, gets his first chance to show how he plans to fix the country's stagnant economy on Thursday, with expectations running high that the Canadian is set on change at the Bank of England.

Carney, the first foreigner to run the bank in its 318-year history, faces a three hour question-and-answer session with MPs that could also signal how he will bring his banking expertise to bear on Britain's crisis-hit banks.

After taking over at the Bank of Canada in 2008, Carney earned a reputation for successfully protecting his home country from the global financial crisis and he now faces the bigger challenge of getting Britain out of a rut of almost zero growth.

His new boss, Chancellor George Osborne, hailed the 47 year-old former Goldman Sachs banker as "the outstanding central banker of his generation" when he made the surprise announcement in November.

Since then, Carney's various comments on policy have been seized upon as signals of what he plans to do when he takes over at The Bank on July 1, although he will be only one of nine interest rate setters.

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UK December industrial output tops forecast after weak quarter

Olesya Dmitracova and Patrick Graham report:

British industrial output rose more than expected in December, although oil field shutdowns drove the biggest quarterly fall since early 2009, data showed on Thursday.

Within that, manufacturing output climbed 1.6 percent on the month in December after a fall of 0.3 percent in November, the Office for National Statistics said.

Industrial output, which includes energy production and mining, grew 1.1 percent after a revised 0.2 percent monthly rise in November.

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Who's on the Treasury Committee? Here's a full list from the Parliament website:

Mr Andrew Tyrie (Chairman) - Conservative
Mark Garnier - Conservative
Stewart Hosie - Scottish National Party
Andrea Leadsom - Conservative
Rt Hon Pat McFadden - Labour
Mr Brooks Newmark - Conservative
Mr Andy Love - Labour Co-Operative
John Mann - Labour
Mr George Mudie - Labour
Jesse Norman - Conservative
Teresa Pearce - Labour
Mr David Ruffley - Conservative
John Thurso - Liberal Democrat

Carney says his decision to take the job was driven by the demands of his daughters. Tyrie says this is a novelty. Does Tyrie have any daughters?

We have moved into a new touchy-feely world, when the head of a central bank feels free to discusses his daughter's integration into secondary school as a reason for changing his mind about applying for a job. I can't decide whether this is a sign of progress in society or an alarming unwillingness to put duty first.

And while the Select Committee is dealing with these rather tedious housekeeping issues, you might like to read this Breakingviews curtain raiser published the other day by my learned colleague Edward Hadas. www.breakingviews.com

Asked about his 250,000 pounds housing allowance, Carney points out: "My pay and pension is equivalent to the pay and pension of the current governor."

Asked if he took the job because he has political ambitions in Canada, Carney points out that taking one of the toughest jobs in central banking in a country that is not Canada, shows that he does not.

Not that football pay comparison again. Please. The more interesting observation, I think, is about nationality. And contrary to received wisdom it seems far more "right" to insist on an English manager of the soccer side than insist on a Brit at the Bank of England. Why? The soccer side is clearly a nationalistic endeavour. The Bank has global responsibilities. Full disclosure: I know next to nothing about football. And care less.

And here are some highlights from his written testimony:

BAR TO CHANGING POLICY
The benefits of any regime change would have to be weighed carefully not only against the potential risks but also against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework. Although the bar for change to any flexible inflation-targeting framework should be very high, it seems to me important that the framework for monetary policy-rightly set by Governments and not by central banks-is reviewed and debated periodically."

COMMUNICATION
"When conventional monetary policy has been exhausted at the ZLB (Zero Lower Bound), the additional stimulus that is likely to be called for is impossible to achieve using the conventional interest rate tool. Extraordinary forward guidance is one unconventional policy tool, along with quantitative easing and credit easing."

"To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up. Market participants may doubt the willingness of an inflation-targeting central bank to respect this commitment if inflation goes temporarily above target. These doubts reduce the effective stimulus of the commitment and delay the recovery."

"What matters to these asset prices, however, is not so much the current setting of the policy interest rate but, rather, its expected path over time. Thus monetary policy affects the economy primarily through policy-rate expectations.5 The more those expectations are aligned with the policy path necessary to achieve the policy objective, the higher the probability the policy objective will be achieved."

"To exploit fully the power of this framework, guidance about future policy actions, leveraging central bank communications, may be effective."

NOMINAL GDP TARGETING
"In theory, committing to restore the level of nominal GDP to its pre-crisis trend could raise expected inflation over the short and medium term but keep longer-term expectations well anchored. That would reduce real interest rates for a time, providing added stimulus to the economy."

"However, when policy rates are stuck at the ZLB (zero lower bound), there could be a more favourable case for NGDP level targeting. The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand."

"The main drawback of an NGDP level target in this regard is that it imposes the arbitrary constraint that prices and real activity must move in equal amounts but opposite directions. As potential real growth changes over time, either the nominal target will have to change or else it will force an arbitrary change in inflation in the opposite direction. The challenge of determining the UK's potential growth rate at present highlights that this is not an academic concern. Another consideration is that statistics like nominal GDP are subject to revision, and these revisions can be large."

HIGHER INFLATION TARGET
"In my view, moving opportunistically to a higher inflation target would risk de-anchoring inflation expectations and destroying the hard-won gains that have come from the entrenchment of price stability. Moreover, if inflation is both higher and more uncertain, a higher inflation risk premium might result, prompting an increase in real rates that would exacerbate unfavourable debt dynamics across public and private borrowers."

PRICE LEVEL TARGETING
"PLT may merit consideration as a "temporary" unconventional policy tool in countries faced with extraordinary circumstances, notably those with policy at the ZLB and with a heavy burden of debt. However, it also relies on inflation already having undershot the long-run target so that the price level is today below trend. That is not the case in the UK, where price pressures since the onset of the financial crisis have not, in fact, been weak."

MONETARY POLICY FRAMEWORK
"In my view, flexible inflation targeting-as practiced in both Canada and the UK-has proven itself to be the most effective monetary policy framework implemented thus far. As a result, the bar for alteration is very high. In any possible review, it would be vital to recognise that long and varied experience demonstrates that delivering price stability is the best contribution that monetary policy can make to the economic welfare of citizens.

"I have not made an assessment of the merits of altering the monetary policy framework in the UK, and of course any change to the Monetary Policy framework would be the sole responsibility of HM government. I do think, however, that it is important that the policy framework is reviewed periodically."

Flexible inflation targeting is the most successful framework...but debate should be encouraged....that is a central (albeit paraphrased by me) statement, surely.

We've gone through Carney's lengthy written testimony. Ineresting stuff. He sets a high bar for fiddling with the Bank of England's remit but said the question should be asked periodically. Doesn't rule out nominal GDP targeting but not keen on higher inflation target or targeting price levels. In a nutshell, he's prepared to think the unthinkable but maybe not to do it ... yet anyway.

Carney: I fully imagine during the course of my term I will be outvoted at times

Carney has sometimes been described as an abrasive character but this is an unruffled performance which shows command of detail and a bit of humour. Was never likely the politicians were going to monster him on his debut but they seem completely disarmed nonetheless.

Carney: If more stimulus is required while he is in office, he will do his best to persuade other MPC members.

Meanwhile, the Bank of England holds interest rates at 0.5 percent, and leaves QE asset purchase total unchanged at £375 billion.

Asked about QE, Carney says that evidence from the Bank of Canada shows returns from QE decreases as the scale of QE is increased.

Carney: I cannot see a circumstance where I would support 'helicopter money'. The BoE has considerable flexibility within existing tools if more stimulus is needed.

The Treasury Committee stops for a break. Yup, looks like we're only half way through folks. We'll be right back.

Carney says he does not know if it would be better to break up RBS and Lloyds. Improving banking competition in the UK is extremely important

Apologies for the loss of the live feed there folks. Minor technical problem, we should have it up and running again shortly.

Here are some Carney quotes on British banks:

RBS'S BEHAVIOUR RELATED TO LIBOR
"The behaviour that's been exhibited and confirmed this week particularly around for example Libor is reprehensible and should be prosecuted to the full extent of the law in the various jurisdictions that are affected."

IMPROVING UK BANKING COMPETITION
"Without question, competition measures to improve competition in financial services including in this country are extremely important. There are some measures this committee has focused on that have been taken up this week by the chancellor and that would appear to be welcome and I am sure there are other measures that can be taken."

ON POSSIBLE BREAKUP OF RBS AND LLOYDS
"Do you think they need two state-owned or primarily state-owned banks, will be better if they're broken up and if so do you intend to press for that?"

"With respect to the direct question, I don't know is the honest answer. I haven't looked at the particular circumstances of either of those two institutions and the relatives merits of economies of scale, scope that would be necessary, the valuation that could potentially be achieved and the ultimate interests of taxpayers."

And that brings our live coverage to a close for today, thanks for following.