Was British Prime Minister Theresa May sending a warning to Bank of England Governor Mark Carney when she highlighted the damaging side-effects of his ultra-low interest rates?
May took the unusual step of commenting on central bank policy on Wednesday when she said near-zero rates and the BoE’s huge bond-buying programme had hurt savers.
“A change has got to come and we are going to deliver it,” May told her ruling Conservative Party as she spelled out her plans to work for lower-earning Britons following the shock Brexit vote in June that helped make her prime minister.
The blunt words represented a clear change of tone from Downing Street, under its new occupant, towards the Bank of England and were among the most direct from a prime minister since the BoE won operational independence in 1997.
May wants to show she understands the frustrations of many voters who delivered a stinging rebuke to Britain’s establishment in June by deciding to leave the European Union.
Aides denied she was seeking to influence the BoE’s policy decisions with her comments. Instead, she was signalling the need to pursue new ways to spread the benefits of growth, they said.
But Mohamed El-Erian, chief economic adviser to Germany’s Allianz, said officials at the BoE would be “astonished” by the comments.
“The remarks are unlikely to have an immediate impact on Bank of England policies,” El-Erian told Reuters. “But they are part of a broader warning that is applicable to central bank autonomy around the world.”
U.S. Republican presidential candidate Donald Trump has accused the Federal Reserve of keeping interest rates low because of political pressure from the Obama administration.
In Germany, Chancellor Angel Merkel said in April that it was legitimate for people to question the European Central Bank’s record low interest rates.
Carney too has faced harsh criticism from some leading supporters of the Leave campaign in June’s referendum who have accused him of bias.
Carney has dismissed the criticism and described himself as “absolutely serene” about the way the central bank prepared for the Brexit vote.
He was widely praised for showing investors that Britain’s economy remained in safe hands during the chaotic days that followed the referendum shock in late June.
The BoE will also be a key player as Britain enters politically fraught negotiations with the rest of the EU about how much access it will have to the bloc’s markets. Sterling hit 31-year lows against the U.S. dollar this week.
The BoE is due to decide in early November whether to follow through on signals it might cut rates again to a fraction above zero.
May’s comments also come at a sensitive time personally for Carney who has said he will decide before the end of this year whether he will leave the BoE in mid-2018 as originally planned, or take up an option to stay until 2021.
However, Carney would probably agree with parts of her speech in which she said the BoE’s actions had helped the economy through the aftermath of the 2007-09 financial crisis.
Similar to May, he has said governments needed to do more to encourage growth through their budgets and through reforms to make economies more competitive after years of reliance on near-zero interest rates and bond-buying.
Indeed, May’s finance minister, Chancellor of the Exchequer Philip Hammond, has said he is considering how much help Britain’s economy needs after the Brexit vote. He is due to set out his first budget statement on Nov. 23.
But May’s comments could make it harder for the BoE to expand its bond-buying programme in future, should Britain’s economy need more help.
Hammond told CNBC television on Thursday that he would take any future decision to approve more quantitative easing “carefully and cautiously”.
Former BoE rate-setter Andrew Sentance said he did not think May wanted a full-on confrontation with Carney, but Wednesday’s comments were a sign of a new relationship with the BoE and the government which sets the mandate of the central bank.
“We have enough challenges right now with Brexit without May overthrowing the independence of the central bank,” Sentance, who is now senior economic adviser to PwC, said. “But the mood music around monetary policy is definitely changing.”