As it happened: Carney faces MPs over Forex rigging

1412 At the final curtain, a telling exchange between Andrew Tyrie, the chairman of the committee, and Mr Carney.

Mr Tryie: “At the heart of this [is that] we have a governance structure that’s still opaque, complex and Byzantine and we desperately need to sort it out and now it’s been subjected to its first test it’s not doing very well.

A short pause.

“You’re not rushing to challenge that, Governor.”

Another pause.

Mr Carney: “This is an unhappy situation to be in. I stand by it in regards of the actions of the governors [of the Court of the Bank of England] addressing this issue. We have the governance structure we have inherited from the Parliament. It’s our job to make it work.”

At that, Mr Tyrie thanks Mr Carney for his time apologises for the marathon duration.

1401 Philip Aldrick, economics editor and veteran of many interminable meetings, writes: “Jearing has now been going on for 4.5 hours. It’s not an American Football game guys.”

The chairman has already established that it’s more of a game of cricket (see 1240)…and clearly not the Twenty20 version.

1357 Andrea Leadsom is going for the jugular, asking Mr Fisher about the 2006 minutes that talked about volatility created by hedge funds that made dealers buying at fix price “increasingly fraught”.

Mr Fisher sticks to his earlier explanation. “The shocking thing about libor and this is that dealers between firms may be colluding. That’s what’s really shocking here. There’s no hint of that in any of the discussions [in 2006 and 2008]. What we’re talking about here is normal market trading.”

He adds: “It isn’t our job to go off hunting for rigging in the markets.”

Ms Leadsom: “Isn’t it? It isn’t the job of the Bank of England to do that?”

1345 Mr Tyrie, the committee chairman, again asks when rigging was first raised as a problem. Mr Fisher has already denied it was eight years ago in 2006, but what about the 2008 minutes? Is that the same allegation of manipulation as surfaced in October? “I don’t think so”, replies Mr Fisher, the executive director for markets. “My understanding of the allegations is…the dealers have been colluding to fix prices.” He asserts that the 2008 minutes do not have specific allegations of manipulation.

1339 The Bank will report to the G20 on forex manipulation, Mr Carney says.

1336 Mr Carney: “This is as serious as libor, if not more so, because this goes to the heart of the integrity of markets and we have to ensure the integrity of markets.”

1330 Mr Carney is asked if there are other skeletons in the Bank’s closet: “I’m acutely aware of our responsibility to complete a thorough investigation of all aspects related to this issue. It’s incredibly important for the foreign exchange market and it’s fundamentally important to the integrity of the Bank of England.

“I would not leave you with the impression that we feel like we have done something and we can relax. We owe it to the people of this country, we owe it to Parliament and we owe it to our employees who have acted with integrity, dedication and in the true spirit of public service. We cannot come out of this in the back end with a shadow of doubt about the integrity of the Bank of England.”

1322 Asked why the official was suspended, Mr Carney says: “The suspension relates to the keeping of rigorous internal control procedures, escalation and record management as well.”

1312 Mr Carney adds: “There appear to have been individuals who have lost sight of what a real market is.”

1311 ‏The Bank of England will create a fourth deputy governor post in charge of markets, Mr Carney reveals. More on that to follow.

1310 Bank staff will have to attest formally that they were not aware of market abuse. “The institution has to be beyond reproach. We have to have the highest standards of integrity”, says Mr Carney.

1307 Mr Carney: “No Bank employee condoned, facilitated or participated in market manipulation. But that’s a pretty low bar and obviously the bar my colleagues at the Bank hold themselves to is much higher than that. In the review of this situation we had cause to further the investigation and, in order to do so, we suspended an employee.”

1300 Mr Tyrie asks Paul Fisher about how long the Bank knew about forex manipulation. “The Bank has had evidence of attempted fixing for eight years, has it not Mr Fisher?”

Mr Fisher: “No. I can see why people would think that from the minutes.”

He goes on to explain that concerns were raised eight years ago about volatility created by hedge funds, which exposed banks and their traders to greater risk ahead of the “4 o’clock” fix.

1248 Mr Carney is now spelling out what he knew and when he knew it. He says he first heard on October 16 and convened the Bank of England Court immediately. “Within 48 hours we launched a thorough, systematic investigation”, says Mr Carney.

1245 Mr Tyrie kicks off by asking why the Bank released the name of the Bank official who was suspended. “We didn’t release the name”, replies Mr Carney, sharply.

“How did it come out?”, asks Mr Tyrie.

“I have no idea…we have a very active press in this country. It’s a sign of a healthy democracy.”

Mr Carney adds that the suspension of the official was not a disciplinary matter.

1240 Andrew Tyrie, the committee chairman, almost soothingly tells Mr Carney that he’s doing very well before offering a five-minute break before the forex questioning. He comes across slightly like a dentist promising that this won’t hurt at all.

“I know you’re a Canadian, so it probably doesn’t mean much to you, but you have played a very elegant straight bat to all the questions you’ve been asked”, says Mr Tyrie.

One gets the impression that the fielding side are limbering up for a few bouncers.

1220 MP Mark Garnier questions Mr Carney again on the Hong Kong dollar example, which was cited as the best-supported of currency boards. Is Mr Carney implying that it would not be possible to protect a sterling peg?

“No, I don’t want to indicate that and arrangements can be put in place or could be put in place to be consistent with a durable currency board”, he says, very, very carefully.

“However, careful thought would have to be given to what is guaranteed and the fiscal cost of doing that and the time over which those reserves could be built up. Also, I think it’s a function of the degree of commitment to the arrangement. If it’s a temporary arrangement, it’s more difficult in my opinion than if it’s viewed as a permanent arrangement.”

1212 We’re now on to the fascinating nitty gritty of Scotland pegging to sterling or “sterlingisation”. Mr Carney says it would require larger reserves and more arduous capital and liquidity standards for commercial banks in Scotland. If the arrangement is perceived as temporary, the reserves necessary to back will need to be greater. Hong Kong, says Mr Carney, has reserves worth several times its GDP. Asked about speculation forcing Scotland to drop the peg if it was deemed to be a temporary arrangement, he says: “That would be a risk for which it would be prudent to provision.”

1204 Mr Carney says Scottish banks may redomicile in London, with a “distinct possibility” RBS may have to move to England.

1158 MP David Ruffley is questioning Mr Carney on the Bank’s lack of “contingency planning” on independence.

Mr Ruffley: “It’s quite surprising that you appear not to have had instruction from Her Majesty’s Government, particularly the Treasury, to do a bit of work on that, on how the MPC and FPC [Financial Policy Committee] post-independence, might operate. Is that correct?”

Mr Carney: “There’s been no instruction from anyone in Government to think about that. No instruction to think about it, though if I may add Mr Ruffley, given the position of the Government and opposition, since there’s no intent of having that contingency, it’s understandable in that regard.”

1148 He says that there is no work under way to look at how Scottish representatives would slot into the MPC, the Bank’s rate-setting committee.

1146 Mr Carney says, under questioning, that an independent Scotland would be more exposed to the vagaries of the global economy. Scotland, because of its dependence on oil and gas, is already more volatile than the rest of the UK, he explains. “One of the reasons for the moderations in the volatility is through a consequence of the fiscal arrangements of the United Kingdom Government”. In other words, the British tax system acts as a buffer or stabiliser.

1134 Mr Carney is talking about the complications of forming a currency union: the ceding of sovereignty, the misalignment of economic cycles and underlying structural differences in the economies.

1131 Mr Carney is back in the room and we’re moving on to Scottish independence.

1125 There is some rancour among journalists over the destruction of recordings:

1121 Mr Tyrie calls the questioning to a halt for a five-minute break. “I’m sorry it’s something of a marathon”, he says. The tough questions on what the Bank knew about forex rigging are still to come.

1120 Paul Fisher says he is at his most optimistic since joining the Bank’s Monetary Policy Committee in 2009, because of rising real wages, but adds he is “not optimistic we will make up for the enormous amounts of lost ground going forward”.

1118 Mr Carney says that the “wealth effect” of rising house prices has had little impact on the recovery to date: “We haven’t yet seen that flow-through that comes from a feel-good factor that comes from the housing market.”

1110 A moment of levity as Andrew Tyrie asks Paul Fisher why there aren’t verbatim transcripts rather than minutes. Paul Fisher responds that it was difficult to produce a transcript that “makes sense”.

Tyrie: “Is that because you’re shouting at each other and throwing furniture?”

Mr Carney laughs, and says there are so many good ideas coming out that it’s difficult to represent them on paper.

1107 Mr Carney is insisting that QE is on the Bank’s patch, not the Treasury’s. He says the actions to reduce QE “will be taken to achieve our mandate, our remit of a 2 per cent inflation target. They will have the by-product of reducing the exposure of the fiscal authorities”. So the Bank is speaking to the Debt Management Office but will take the decision. “These are operational decisions of monetary policy conducted to achieve the remit given to us by Parliament.”

1044 John Mann, the Labour MP for Bassetlaw in northern Nottinghamshire, is asking Martin Weale about the susceptibility of companies in the North to rising interest rates. He then asked Mr Carney about whether the Bank would try to hold off raising interest rates before the election – precisely the sort of political jiggery-pokery that the Bank was made independent in 1997 to prevent.

Carney: “There’s absolutely no danger of my vote or anyone on the committee’s vote, in my opinion, being influenced by any political timing.”

1037 Paul Fisher, the Bank’s executive director for markets, is explaining why the base rate is unlikely to get back to historic norms of about 5 per cent. “The spread between the Bank rate and the rates of interest that really matter, typically mortgage rates, will for many, many years be higher than it was in the five to ten years leading up to the financial mess of 2007.”


“Partly, it was, in retrospect, an unsustainable situation, to some extent a reflection of the degree of confidence that house prices would never fall, therefore you don’t need much of a spread between the interest you charge and the bank rate.”

1022 On the prospect of a QE exit, Mr Carney says: “We’re not going to sell £375bn of gilts.” In other words, the huge bond-buying scheme won’t be wound down any time soon.

1021 Mr Carney says that interest rates will be raised before the Bank weans the economy off quantitative easing – its huge bond-buying operation to pump money into the economy.

“It would be most appropriate to adjust interest rates to a greater degree [than half a point at a time] than that before we considered an adjustment in Quantitative Easing. That’s based on a pragmatic sense of where we would have flexibility. In other words, if the time comes when we could start to tighten rates as appropriate, we could maintain the ability to adjust it down as well as up. It would be more difficult to adjust Quantitative Easing in both directions, so we should create some room so we have some flexibility before we start to move QE.”

1016 Ed Conway of Sky News detects a marked difference in tone from Mr Carney’s debut nearly a year ago. The honeymoon is over:

To think that barely more than a year ago Mark Carney had a rapturous reception for his first Treasury Committee hearing. V different today

1011 A reminder that the Tweeters among you can also follow @PhilAldrick, our economics editor, for reporting and instant insight.

The committee is delving into the difference between the Office for Budget Responsibility’s “output gap” and the Bank of England’s “spare capacity”.

1004 Philip Aldrick, Economics Editor, writes: “Carney responding to criticism about ‘fuzzy’ forward guidance: ‘I have absolutely no regret that we are here with half a million more people in employment.’”

The explicit link between unemployment and interest rates was diluted last month by the introduction of a raft of new metrics.

1000 Conservative MP Brooks Newmark suggests to Mr Carney that his policy of forward guidance is “dead and buried”. Mr Carney insists that the policy worked, citing a survey that 75 per cent of businesses indicated it gave them more confidence in the recovery and led to “higher spending decisions which contributed to strength of employment”. He adds that when forward guidance was put in place, Britain was on the brink of a triple dip recession and subsequently enjoyed the best growth of any developed economy.

0953 Bad news for homeowners. Carney: “Mortgage costs will increase. There should be an increase in the floating rate of mortgage costs over the next few years.”

0952 Ms Pearce asks Mr Carney whether he believes rising house prices are good for the economy. “It depends on why house prices are rising and the extent to which they’re rising because incomes are rising and there’s a credible prospect of rising real incomes”, he says. “That’s good and healthy and reflects a balanced economy. However, if prices are rising because of an expectation of future rises, if it’s to a degree self-fulfilling or [there are ] extrapolative expectations that start to exhibit bubble-like properties, that’s bad for the economy … It could put a large number of households in a vulnerable position that could take years to emerge from.

Asked how close an eye he is keeping on the Chancellor’s Help To Buy Scheme, he replies: “Very close. Very close, I can assure you.”

0941 Teresa Pearce, the MP for Erith & Thamesmead, asks about what tools the Bank has to combat a housing bubble, particularly in London. She queries whether the Bank has enough to take the heat out of the London market, which is driven by foreign buyers.

Mr Carney replies: “There are two property markets in London: one driven by cash buyers, of which a large proportion are foreign, and more conventional property market which is mortgage-based for residents. In terms of the former, we don’t have tools that affect that directly because we operate effectively through underwriting standards and credit tools.”

0936 Mr Carney is discussing the inflation report, saying that in his view the “output gap” is “towards the upper end” of 1 per cent to 1.5 per cent, suggesting that the economy could have more of a spring in its step. “My personal view is that there would be spare capacity in firms as well as the labour market but there are different views on that in the committee as well”, he tells the committee.

0932 Andrew Tyrie, chairman of the committee, has already made clear his feelings on the way that the Bank of England runs itself. He complained of “Byzantine” governance last week, saying that the Bank needed “a board worthy of the name”.

Alistair Darling, the former Chancellor, has likened its 12-person Court of Directors as “reminiscent of Louis XIV’s court of the Sun King”. We can expect the committee to take an active interest in how the Bank is managed.

However, first up on the agenda is the more quotidian business of the Bank’s policy on interest rates and inflation. Mark Carney is defending his “forward guidance” policy – relating interest rates to the unemployment rate. Mr Carney was forced to alter the policy after a faster than expected fall in unemployment.

0920 The honeymoon may be about to come to an abrupt end.

Mark Carney is likely to endure his most uncomfortable morning as Governor when he takes his place in front of the House of Commons Treasury Committee at 9.30am.

Last week the Bank found itself in the maelstrom of the foreign exchange rigging scandal. Mr Carney has ordered an internal investigation, conducted by the law firm Travers Smith, and published 180 pages of internal documents.

Economics editor Philip Aldrick has posed five questions for the Governor, questions which may well be playing on minds of MPs.

– When did the Bank first hear that the forex market may have been manipulated? What was done about it?

– Does the Bank have any information to corroborate or dispute the allegation that it turned a blind eye to admissions by traders that they were sharing customer orders?

– Why did Andrew Bailey claim last month that the Bank had “no evidence to substantiate the claim that Bank officials . . . were informed of price manipulation”, when the minutes showed otherwise?

– Why did Andrew Bailey claim last month that the Bank had “no evidence to substantiate the claim that Bank officials . . . were informed of price manipulation”, when the minutes showed otherwise?

– Are heads expected to roll at a senior level at the Bank?

– Will the Bank’s involvement in forex damage its reputation?

– Is corruption rife in the City?