A bumpy ride: the Bank of England governor’s first three years


Soon after Covid-19 first hit the UK, Andrew Bailey walked into the Bank of England as the new governor of the central bank.

Just three days after taking charge in Threadneedle Street on March 16 2020, Bailey sought to prevent coronavirus unleashing economic collapse and financial market meltdown by cutting the BoE benchmark interest rate to a low of 0.1 per cent and launching a £200bn bond-buying programme.

Three years later, he has not only had to navigate the British economy through a global pandemic but also respond to a domestic financial crisis during Liz Truss’s shortlived premiership and an energy shock that has fuelled the worst inflation in four decades.

The BoE Monetary Policy Committee last month raised interest rates to a 15-year high of 4 per cent to curb the price increases. Consumer price inflation, which peaked at 11.1 per cent in October, now stands at 10.1 per cent.

Bailey told the Financial Times: “The past three years have been busy for everyone at the bank, me included. But that’s what we’re here for. The work of the bank has a big impact on people’s lives.”

Analysts say Bailey has proved himself to be effective at crisis management, notably in relation to the BoE’s role in maintaining financial stability.

The latest example came at the weekend, when Bailey worked alongside Rishi Sunak and chancellor Jeremy Hunt to rapidly find a buyer for the stricken UK arm of Silicon Valley Bank. The California-based company was shut down by US regulators after a run on the bank.

But analysts add the BoE — like other central banks including the US Federal Reserve and the European Central Bank — fell short in its monetary policy role by being slow to respond to the surge in inflation. They also say Bailey has also been a poor communicator at key moments.

He was often almost alone in his ground floor office in Threadneedle Street during the Covid lockdowns, reflecting how most staff worked from home. Despite his distance from employees, he quickly became popular by developing a collegiate modus operandi.

But outside the BoE, Bailey started to face questions, initially for printing £450bn under the central bank’s quantitative easing programme to flood the economy with money during the coronavirus crisis, because critics said this would fuel inflation. Then Bailey was rebuked for being late to spot inflationary pressures as the pandemic eased.

Huw Pill, BoE chief economist, acknowledged there was some validity to these arguments, writing last month that he had “underestimated . . . the duration and intensity of the inflationary pressures” in the economy, and had learnt lessons.

Bailey by contrast has defended the BoE’s decision not to start raising interest rates until December 2021, saying its actions are always informed by what it knows at the time. “We do not have the benefit of making policy with hindsight,” he told MPs last month.

Some politicians have no time for Bailey’s stance. When he in February sought to reassure Harriett Baldwin, Conservative chair of the House of Commons Treasury select committee, that the BoE was on the case and acting to curb inflation, she snapped back: “No, it is your job not to have let [inflation] get to this kind of level.”

Certain economists also have limited sympathy for Bailey’s view, even though they accept the BoE could not have anticipated the big increase in energy prices that followed Russia’s invasion of Ukraine in February last year.

Kitty Ussher, chief economist of the Institute of Directors, a business lobby group, said it was “shocking” the BoE under Bailey thought unemployment would rise with the end of the government’s furlough scheme for company workers in late 2021, given surveys were already showing recruitment difficulties. “They were really slow to respond [to inflation],” she added.

Bailey’s concern about how labour shortages were fuelling inflation prompted him to urge workers not to demand big pay rises in February last year, but it provoked a furious response from trade unions.

Julian Jessop, an independent economist, said Bailey’s pay comments were his most serious gaffe. “People should ask for the biggest pay rise they can get: wages are a relative price, like any other, and should be left to the markets,” he added.

Sir Charlie Bean, a former BoE deputy governor, said Bailey had struggled to justify the central bank’s actions on inflation, partly because communication was not one of his strengths.

Comparing Bailey with the previous two BoE governors, Bean added: “He’s not the greatest of communicators and neither has the intellectual coherence of Mervyn King nor the smooth style Mark Carney had.”

Bailey told the FT: “People deserve straight and honest answers — even when the message isn’t going to be the most popular. It’s important to me that people understand what we’re doing and why.”

After his comments about workers and pay, Bailey stressed the need for companies not to increase their prices — one key reason people have demanded wage rises — and BoE officials worked on improving communication.

It was around this time that Bailey was forced into crisis management mode again. Truss, who had accused the BoE of failing to control inflation during the Conservative leadership campaign last summer, provoked turmoil on financial markets — notably a big sell off in government bonds — with her September “mini” Budget involving £45bn of unfunded tax cuts.

Pension funds pursuing so-called liability driven investment strategies focused on gilts were at risk of collapse, and the BoE responded by unveiling an emergency bond-buying programme.

“On the financial stability side, I think [Bailey and the BoE] played a blinder in the LDI crisis,” said Bean.

Bailey earned plaudits for telling pension funds there would be no extension of the central bank’s gilt buying operation. “You’ve got three days left,” he said, urging the funds to get their investment portfolios in order.

His deft handling of the crisis did not come without some issues. According to BoE insiders, he had to quell disquiet on the Monetary Policy Committee that the central bank was printing money again to buy assets, just as it had started to sell government bonds bought during quantitative easing.

Bailey and the BoE are now in a much stronger position with Sunak’s government, which has studiously avoided criticising the central bank. Bailey has a close working relationship with Hunt, said Treasury insiders.

But there are challenges ahead. BoE insiders said they were concerned a narrative could develop by the end of the year that, if inflation falls very quickly, the BoE will be accused of having raised interest rates too far. Conversely, if inflation sticks at a high rate, they worry the central bank will be seen to still be behind the curve.

Bailey will have to deal with the influential House of Lords economic affairs committee, which has launched an inquiry into how well BoE independence is functioning.

He also has to address his goal of a more diverse staff and ending what BoE insiders say is an overly hierarchical and deferential working environment.

But Jagjit Chadha, director of the National Institute of Economic and Social Research, a think-tank, summed up much external opinion in saying the BoE had performed “OK” over Bailey’s first three years as governor.

He added that the effective BoE response to the market turmoil unleashed by Truss’s “mini” Budget put Bailey and the central bank in a “good position to focus on its core business [of price control and financial stability] in the years ahead”.