ALEX BRUMMER: Bailey gets the thumbs up when he promises to get inflation under control regardless of the consequences
If the new Downing Street incumbents were anywhere near as ruthless as Chelsea FC owner Todd Boehly, one of the first steps taken by Liz Truss and her Chancellor, Kwasi Kwarteng, would have been to oust the Governor of the Bank of England.
War in Ukraine or not, after 25 years of constant inflation, Andrew Bailey was at the forefront as consumer prices climbed 10.1 percent year-on-year, with a forecast jump to 13.3 percent in the fourth quarter.
The current rate of inflation is more than 10 times the Bank’s target, the highest among the G7, and despite reckless comments (for much of 2021) that inflation is temporary, it turns out to be anything but was.
Rate hikes: Governor Andrew Bailey has unequivocally “supported the independent Bank of England’s mission to bring inflation down quickly”.
Western governments, at their peril, forego the services of independent central bank governors.
My main memory of this is when Jimmy Carter’s 1979 energy crisis turned into an acute dollar crisis and G. William Miller was replaced by the legendary Paul Volcker.
As the new Truss Government pulls the trigger on fiscal policy – today there will be a £100bn bailout of household and some business electricity bills – the Bank of England’s task of fighting rising prices becomes increasingly critical .
And with the pound falling to its lowest level against the dollar since 1985, the risks of a governor’s ouster could be staggering.
It should therefore come as no surprise that the Chancellor, in a meeting with the city’s grandees, unequivocally “supported the independent Bank of England’s mission to bring inflation down quickly”.
All the early talk of changing the bank’s mandate has gone up in smoke as the realities of the office dawned.
Still, as Bailey himself says, a review of the bank’s mandate may be needed at some point.
The composition of a monetary policy rate-setting committee, which bears no resemblance to the top level of the Truss team in terms of diversity, might be appropriate.
Bailey, in his recent testimony before the House of Commons, made it clear that the bank must meet the inflation target “no matter how harsh that may be in terms of the consequences”.
His words, Kwarteng’s and looser fiscal policy mean borrowing costs may have to rise faster and more than most consumers would like.
Today, it is widely expected that a previously dovish European Central Bank will take the bold step of raising interest rates by as much as three-quarters of a point.
With sterling weakness and looser fiscal policy, the bank could be advised to do the same next week and hike interest rates to 2.5% from 1.75%.
Certainly, it looks like the housing market could take the pain, with Halifax reporting a 0.4 percent increase in prices in August and an 11.4 percent annual rate of increase.
The bank’s independence and Bailey’s leadership appear secure. But now it has to deliver.
cast list
Featuring the Square Mile’s big hitters, Kwarteng Coffee shows how little has changed since the financial crisis of 2007-09.
Any efforts to create a new class of challenger banks, equipped with new technology, have been severely frustrated. Some of the most innovative digital lenders have encountered problems.
Greensill exploded. Losses at buy-it-now pioneer Klarna soared to £500m last year as Apple and several of the high street banks cannibalized its model.
Wise entered the London market profitably, but was plagued by founder Kristo Kaarmann’s lax tax rules and governance issues.
And the FT reports that the £29billion Revolut is involved in a cost-cutting review amid fears of a downturn.
No wonder they were missing from the Chancellor’s mission. Of more concern is the lack of a seat for Debbie Crosbie, head of leading mutual lender Nationwide. Next time maybe?
lounge lizards
Say it, but WH Smith, the newspaper and bookseller with an independent history dating back to 1792, is proving to be a handsome winner from the chaos at UK and international airports.
The delays, which left passengers hanging around for hours (and in some cases days), sent sales of everything from snacks to headphones and neck pillows soaring.
The travel division reports a 29 percent jump in sales over the past six months, ahead of pre-pandemic levels. Hooray.
