Can the new Bank of England King get the Economy back to its old prosperous ways?

Yesterday 65 year old Mervyn Alister King made way for the new Canadian Governor of the Bank of England, 48 year old Mark Carney. Carney comes into power at a difficult economic time when the UK has struggled to experience significant growth despite numerous efforts. Carney also has big boots to fill after the relatively successful tenure of his predecessor who was governor for 10 years and his monetary policies helped the UK to have positive GDP growth for a long period. However most recently King has been unsuccessful in tackling the economy after the global meltdown in 2007, as after placing in historically low interest rates, growth has failed to pick up.

The Bank of England is no ordinary bank. It is not like a high street bank. So you may be wondering what the Bank of England actually does?

1) The Monetary Policy Committee at the Bank of England (consisting of Governor) meets every month and its main task, set by the government, is to keep inflation at 2%
2) It is looking at what it expects inflation to be in about two years' time, as it assumes changes in rates will take that long to work
3) It sets Bank rate, which is the percentage it charges on loans it makes to banks and other financial institutions. That influences what the banks and building societies charge for loans and mortgages and the returns they pay to savers
4) It acts as the banker for the government. The government needs a bank just as we do.
5) It designs and issues banknotes.
6) It replaces notes that are old

Why are interest rates important?

(To households)
If interest rates are too high, the incentive to save will be high as there will be higher returns on savings. So instead of spending in the firms, households will decide to save instead so there is less consumption. This will cause a fall in business confidence and so less investment and less jobs.

On the otherhand if interest rates are too low then the incentive to save won't be high enough so everyone will spend as returns to savings won't be high enough. Then there will be too much money chasing not enough goods causing the "deathly"inflation

(To Firms)
To encourage growth in the economy Sir Mervyn King dropped interest rates, this reduces the cost of borrowing so this means production costs become lower for firms who take out new Loans and have existing loans . As a result profit expectations become higher, so firms are more willing to invest as there is higher returns for shareholders. This means more jobs and higher GDP. But because business confidence was so low, firms didn't really care about these changes so no growth occurred unfortunately.

Recent interest rate trends

1) January 2003 - January 2008
Fluctuated between 3.5% - 5.7%

2) January 08 - January 2009
Dropped dramtically fallen from 5.5 % to 0.5%

3) March 2009 to January 2013
Interest rates have remained at 0.5%


Mark Carney Profile
Age: 48
Hometown: Fort Smith, Canada
Appointed by: George Osborne, Chancellor of the Exchequer (Tories)
Osborne Description: "outstanding central banker of his generation"
Salary : £620 000 (20% more than King)
Contract Length: 5 years (Normally 8 years)
Previous Employment: Governor of Canada central back
Top banker in Goldman Sachs for 13 years (where he already worked in London)
Education: Went to Oxbridge and Harvard just like King and the 3 other previous governors
Why he's so liked? : With his help, Canada didn't suffer severely like other western countries during recession

Mark Carney is clearly a distinguished banker but just because he's been effective in helping the Canadian Economy, this does not been he'll be able to help us out of Economic mess after all, the UK's GDP is almost twice of Canada's and interest rate mechanisms have significantly different effects due to varying levels of home ownership which makes up a large proportion of UK household expenditure. Whether Carney is successful depends on many factors, but whatever happens, EconomicsMate will keep you updated.