© Reuters. FILE PHOTO: Mark Carney, Governor of the Bank of England (BOE) attends a news conference at Bank Of England in London, Britain March 11, 2020. Peter Summers/Pool via REUTERS/File Photo/File Photo
By Julie Gordon
OTTAWA (Reuters) – The political crisis in the UK shows the importance of fiscal and monetary policies not working at cross purposes, particularly in the current economic environment, said former Bank of England Governor Mark Carney on Thursday.
“The UK experience underscores that it’s counterproductive for fiscal and monetary policies to work at cross purposes,” he told a Canadian Senate committee. “Colloquially, if one foot is on the brake, and that’s monetary policy,” then the other should not “stomp on the gas.”
Liz Truss resigned as Britain’s prime minister on Thursday, forced out after her economic plan shattered the country’s reputation for financial stability and roiled markets.
Her government had planned to stimulate the economy with expensive tax cuts at a time when the Bank of England was hiking interest rates to curb hot inflation. The mini-budget crashed the pound and sent British borrowing costs soaring.
“One of the lessons is that sound monetary and credible fiscal policy will be rewarded, but mistakes will be punished,” Carney said.
Carney, Bank of England Governor from 2013 to 2020 and Governor of the Bank of Canada from 2008 to 2013, noted the importance of an independent central bank, along with inclusive policy, saying the UK tax cuts mostly benefited the wealthy.
He also said a recession is “most likely globally and most probable” in Canada, citing economic slowdowns in China, Europe and the UK, along with the battle central banks continue to wage against inflation.
He warned that the United States would likely need a recession in 2023 to tame its inflation problem, which would make it hard for Canada to dodge a slide into a period of negative growth.
“I’m afraid it’s a bit like air travel these days. We know where we’re headed, we just don’t know when we’re going to get there,” Carney said.
Recession worries have intensified in Canada, as broad and persistent inflation has led the central bank to hike interest rates aggressively, with another oversized increase looking more likely at its next meeting on Oct. 26.