Treasury must navigate Brexit optics in hunt for Mark Carney successor

Investors mixed on market implications as Philip Hammond seeks Bank of England governor

Political optics around Brexit are likely to inform the Treasury’s selection process for the next Bank of England governor as it officially puts out its call for a replacement to Mark Carney, while the employment of a diversity-focused executive search firm hints the top job could go to a woman.

According to a posting on the Cabinet Office job vacancies website, the eventual governor of the UK’s central bank will earn an annual salary of £480,000, unchanged since 2013, and should be ready to commit to eight years in the role.

In a press release announcing the job search, chancellor Philip Hammond said the candidate must have the right skills for ensuring the “continuing strength” of the UK economy and for “maintaining the UK’s position as a leading global financial centre”.

Financial Conduct Authority boss Andrew Bailey is being touted among the frontrunners.

“He clearly has all the right skills and experience,” says Hermes Senior Economist, Silvia Dall’Angelo. “He had a long career at the Bank of England where he started in 1985. He has experience of different divisions within the bank, so banking services but also he was involved in international analysis,” Dall’Angelo says.

Deputy governors Ben Broadbent and Jon Cunliffe are other names that have been floated, she says.

Looking beyond Threadneedle St

The white, male line-up comes despite the fact the Treasury, which is tasked with finding Carney’s successor, has hired an executive search firm focused on diversity, Sapphire Partners, to lead the global search for a replacement.

Minouche Shafik is one female candidate who could be in the running, Dall’Angelo says. Shafik was deputy governor from 2014 to 2017 but has since moved to academia.

“I’m not sure whether she’s interested at the moment because she has a very good position at the London School of Economics, but nonetheless she would be a very good person for the job and would allow for some diversity,” Dall’Angelo says.

M&G head of wholesale fixed interest Jim Leaviss says if he were a betting person Shafik would be his number one pick, followed by Broadbent and Bailey.

“There’s never been a female governor of the Bank of England, it would seem to be a good thing to do given the Bank of England hasn’t had enough high-level female representation,” says Leaviss, who spent five years at the central bank before joining M&G in 1997.

Santander UK chair Shriti Vadera is another woman with the chops to take the top job, he says.

Global Britain or take back control candidate?

Others have highlighted the fact Hammond has said he is seeking a candidate who “commands respect in the international arena”.

“It’s highly likely that they recruit from outside the UK,” says Architas investment manager Nathan Sweeney, who points to the fact the panel has been tasked with conducting a global search for the right candidate.

Former governor of the Reserve Bank of India Raghuram Rajan is among the top contenders, Sweeney reckons. The University of Chicago academic was also the youngest chief economist of the International Monetary Fund.

IMF chair Christine Lagarde has also been touted for the role, although the politics of Brexit may knock the French economist out of the running, says Leaviss.

“Is it likely that the government at the moment would appoint a European to head the domestic central bank when you’re trying to take back control? You do just want to get the best person for the job but there are some political overlays,” he says.

Janet Yellen, former US Federal Reserve chair, is another name that has been floated.

“We’ve just had a Canadian governor. I don’t know if there would be some pressure along the lines of ‘what’s wrong with a good old British person in charge of it’,” Leaviss says. “You don’t know what goes through their minds in terms of the optical issues rather than the common sense issues.”

Brexit uncertainty

The next governor faces an uncertain macroeconomic and political backdrop when they take on the role in February 2020 thanks to Brexit, now due to take place in October 2019.

“Clearly, a lot of options are still on the table,” says Newton fixed income manager Howard Cunningham. “There’s the possibility of the withdrawal agreement and a transition, a possibility of no deal, although parliament is resistant to that, and the possibility of no Brexit, although the government is resistant to that.”

The governor not only needs to navigate the financial stability and economic consequences of Brexit but the polarised politics that come with it.

Carney (pictured) faced criticism for stating the financial risks associated with Brexit in the lead up to and after the UK voted to leave the European Union. “I think that criticism is a bit stretched,” says Dall’Angelo, who says the position of most independent analysts and think tanks is in line with Carney’s assessment and that Brexit in its hardest version would be detrimental for the UK economy.

In the lead up to the referendum, Treasury select committee Jacob Rees-Mogg described Carney’s “pro-EU” comments as being “speculative and beneath the dignity of the Bank of England”.

Uncertainty for fixed income markets

For UK fixed income investors, Carney’s exit creates more uncertainty already on top of the political fog surrounding Brexit and the potential for a general election, says Kris Atkinson, co-portfolio manager on the Fidelity MoneyBuilder Income Fund.

“What we can say, is that it pours water on recent calls for a BoE hike in August as, given the uncertainty surrounding the UK economy, I am doubtful that Carney would make such a move his parting gift to his successor,” says Atkinson.

However, others were dismissive of the effect on markets.

Cunningham, who runs the Long Gilt and Index Linked Gilt funds alongside several other sterling bond funds, says a change to the Bank of England’s mandate, for example to introduce employment metrics alongside inflation targets, would be more likely to affect positioning than a new governor.

The monetary policy committee, which the governor must oversee alongside the financial and prudential policy committees, is democratic with its “one person, one vote” approach to setting rates, he says. “The leaning of the next governor in itself is only a small swing factor.”

Leaviss, who is lead manager on the M&G Global Macro Bond fund and a handful of Sicavs, says there is more room for a “radical” candidate than at the European Central Bank, where Mario Draghi is set to step down as president in October. “They have set out their course; they know growth is disappointing, inflation is undershooting”.

Bank of England chief economist Andy Haldane could be one figure that would “put the cat among the pigeons a little bit, but maybe in a good way”, he says. However, he still did not expect the appointee to affect positioning.

‘UK is a relative minnow’

For investors looking at funds, the appointment, due to be confirmed in autumn, is of little consequence.

“A change in Bank of England governor doesn’t form part of the conversation with fund managers per se other than to describe Mr Carney as ‘the unreliable boyfriend’,” says Adviser Centre managing director and CIO Peter Toogood.

He adds: “The UK is a relative minnow economically speaking and, put candidly, monetary policy from the US, China and Europe is a far bigger conversation piece with fund managers.”

Sweeney says he will talk to managers about how the appointment will affect their decision making if the wider environment looks set to prompt a reaction from the Bank of England.

“It’s more pertinent to fixed income managers due to their sensitivity to interest rates. However, if you look at equity markets, their movement this year is very much linked to interest rate policy and the decision to halt quantitative tightening within the US.”

Labour government could throw up more candidates

The election of a Labour government if the country goes to the polls before the end of the year could throw up further frontrunners for the leading role.

“We’d have a very different Bank of England. John McDonnell has talked about moving the Bank to Birmingham,” Leaviss says. “You would see a very different person chosen, maybe someone like Adair Turner, who’s written about monterisation of debt and writing off of debts. If you had another downturn you could see that coming through under a Labour government.”

Early elections are one of the most underestimated risks, Dall’Angelo reckons.

She says: “They would probably take place in autumn before the new Brexit deadline. It is possible there will be another extension and then either a second referendum or a hard Brexit if the next prime minister is a hardline Brexiteer, which is possible in my view.”

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