The surprise departure of one of the most senior decision makers at the Bank of England (BOE) has opened up a rare vacancy at the top of one of the most important central banks in the world.
Andy Haldane surprised the City on Tuesday by announcing plans to leave the BOE after a 32-year career at the central bank. Haldane has been chief economist at the Bank of England since 2014 and is one of nine members of the Monetary Policy Committee (MPC), which sets UK interest rates.
The recruitment of a new chief economist at Threadneedle Street will have profound consequences for the future path of UK interest rates. That, in turn, could impact government borrowing costs and have a knock on effects for the economy.
Haldane's departure is seen as making any imminent interest rate rise less likely, which will relieve officials in the Treasury.
Economists generally fall into two categories: doves and hawks. Doves are less worried about inflation so long as employment and economic growth is healthy. As a result, they tend to favour lower interest rates to let economies "run hot" for longer. Hawks, meanwhile, tend to want higher interest rates to control inflation.
Haldane was the BOE's "arch hawk," according to Deutsche Bank's chief UK economist Sanjay Raja.
While colleagues were trumpeting the chances of a golden summer for economic growth, Haldane recently gave a speech warning about excessive stimulus unleashing the inflationary "tiger." He said UK interest rates may have to rise sooner than the market expected.
His departure leaves the doves in control of monetary policy.
"The bar for policy tightening may have risen just a little," Raja said. "The MPC may be able to exercise more patience around the growth and inflation outlook, rather than pivoting prematurely to a tightening bias as we enter the post-pandemic era."
This is good news for the government, which has borrowed almost £400bn ($550bn) since the start of the COVID-19 pandemic. The sky-high debt pile leaves the government unusually sensitive to even the slightest change in interest rates — a fact chancellor Rishi Sunak has repeatedly highlighted.
Haldane's exit could also have implications for more experimental and unconventional tools such as negative interest rates.
"In theory, at the margin this tilts the committee towards a more favourable view on negative interest rates if more stimulus were needed, though we still think this is unlikely," said James Smith, an economist at ING.
The precise balance of power on the MPC will depend on who replaces Haldane. His replacement will play a crucial role in drawing up the Bank of England's forecasts — a core tenant of policymaking — and will likely have a vote on the MPC.
An early name in the frame is Gertjan Vlieghe, who has been an external member of the MPC since 2015. Prior to that he spent a decade in the City of London but early in his career Vleighe worked at the Bank of England as an economic assistant to former governor Mervyn King.
"The circumstances could align for Vlieghe to take on the role of Chief Economist given that his second term is set to expire at the end of August 2021," Raja said. "And there is precedence for external members transitioning to an internal role. Deputy Governor Ben Broadbent was formerly an external member before joining the internal MPC camp as Deputy Governor of Monetary Policy."
Broadbent is an outside contender himself but his current role as a deputy governor makes it unlikely. Other possible internal candidates include Victoria Cleland, the current director for banking, payments and innovation, and Sarah John, the current chief cashier.
"Traditionally you would expect it to be filled by a BoE ‘insider’, but in the new world of transparency that is no longer necessarily the case," said Stuart Cole, head macro economist at Equiti Capital and a former senior FX trader at the Bank of England.
"James Bell, who heads up the monetary analysis team, would probably consider himself to be a potential candidate. But equally it may be decided [they want] to bring in somebody from the outside, with fresh ideas."
Externally, candidates talked up include: Gerard Lyons, a former economic advisor to Boris Johnson who missed out on the governor role last year; ex-Federal Reserve official Kevin Warsh, who was overlooked for the top job at the Fed in favour of Jerome Powell; and Clare Lombardelli, the current chief economic advisor to the Treasury.
More outside shots include: Paul Tucker, a former deputy governor at the BoE who now chairs the Systematic Risk Council; Dame Minouche Shafik, who was reportedly the government's initial favourite to succeed Mark Carney and now runs the London School of Economics; and Kristin Forbes, an MIT economist and former White House advisor who served as an external MPC member until 2017.
The Bank of England has promised to advertise for Haldane's successor in due course. He is due to step down from the MPC after the June meeting.
"We expect speculation on Haldane's successor to ramp up," Raja wrote in a note on Tuesday. "But don't expect a decision anytime soon – it's likely that a decision will be some months away."
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