George Osborne faces some hard choices after the EU agreed to create a pan-European framework for supervising banks, and the next governor of the Bank of England suggested it might be time to focus monetary policy on growth rather than just keeping a lid on inflation, according to Turcan Connell Asset Management's Chief Investment Officer Haig Bathgate.
The new EU framework means that banks in euro-zone countries with more than €30 billion of assets will be regulated by the European Central Bank in Frankfurt rather than at a national level. Given the piecemeal reaction of governments and central banks to banking regulation and bailouts since the financial crisis, this more decisive step augurs well for Europe's banking industry and should help the continent emerge from the debt crisis. While the Chancellor said it was a good deal for the UK after negotiating some safeguards for countries outside of the euro, the direction of travel as regards regulation is clear – more and more will be done at a European level. The UK will have to decide sometime whether it's in or out.
At home, Mark Carney, who is due to take over as governor of the central bank in July, has indicated it might be time for policy makers to start targeting growth in their deliberations rather than focusing on containing prices. This would bring UK monetary policy closer to that practiced in the US, where the Federal Reserve has just said it will keep rates on hold until it gets unemployment below 6.5%. The decision to break with the inflation target would rest with Osborne, who might not want to be associated with a policy that could send living costs higher. He might however be persuaded by the fact that the Fed's actions have had considerable success in lifting the US out of the doldrums, while under the policies of the present Bank of England leadership the UK economy is still sputtering.
Listen to Haig's discussion on BBC Radio's Good Morning Scotland here.
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