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The Bank of England’s Knockout Artist

LONDON – In Canada, if you say you come from London, the natives often ask if you mean London, Ontario, or London, England. I always find the question somewhat irritating, perhaps revealing the persistence of an arrogant imperial mindset.

But soon, perhaps, they will no longer need to ask: in London, we are all Canadians now. With what one commentator described as “his rock star looks and PR charm,” Mark Carney, the former governor of the Bank of Canada, has taken the city by storm in his first weeks as Governor of the Bank of England.

Change is the order of the day at the Old Lady of Threadneedle Street. Out goes the fusty old inflation-targeting regime, with its fixation on the consumer price index and disregard for financial-sector imbalances. In comes a brave new world of “state-contingent threshold-based forward guidance,” complete with three conditional “knockouts” that would cause the guidance to be changed. We have had to learn a whole new lexicon of central-bank speak. These are heady times at the BoE (in the heart of the financial district of Ontario-on-Thames).

The simple point that Carney made in his first policy pronouncement was that interest rates will remain unchanged, and the BoE’s variant of quantitative easing will remain in place, at least until unemployment falls below 7% (from its current rate of 7.8%). Though it all sounded straightforward, markets were confused. The pound initially fell sharply, and then recovered, while long-term government borrowing rates have risen by around 30 basis points.