Should Andrew Bailey be sacked as governor of the Bank of England?

In his farewell speech to the Institute for Government think tank in June last year, marking his departure from the Bank of England, Andy Haldane warned there were strong signs of rising prices in parts of the UK economy which would translate into a wider “significant and persistent” rise in inflation.

The Bank’s former chief economist — and probably the best Governor it never had — added that: “By the end of this year, I expect UK inflation to be nearer 4 per cent than 3 per cent. Such a scenario would force the central bank to raise interest rates at a faster rate or by a materially larger extent than currently expected.” 

With inflation now running at 7 per cent, and heading for 10 per cent according to the Bank of England’s latest forecast, it’s worth quoting Haldane’s prescient words in full:  “If this risk were to be realised, everyone would lose — central banks with missed mandates needing to execute an economic handbrake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs.”

“As in the past, avoiding that inflation surprise is one of the central tasks of central banks. If that happened, inflation expectations at all maturities would shift upwards, not only in financial markets but among households and businesses too. We would experience a Minsky Moment for monetary policy, a taper tantrum without the taper. This would leave monetary policy needing to play catch-up to re-anchor inflation expectations through materially larger and/or faster interest rate rises than are currently expected.”

Haldane was not the only economist to warn of the dangers of not catching up fast enough with the inflationary spiral. In April last year Julian Jessop, fellow at the Institute of Economic Affairs, together with a group of top City economists wrote an open letter to the Financial Times urging the Bank of England to end its QE programme immediately because of fears that the rapid growth of money in the system would lead to rising inflation. (Remember too, that was before Russia’s war on Ukraine, which has played such havoc with the energy and commodity markets, sparking even greater pressure on demand and pushing up prices of most essential raw materials and foodstuffs.)

The economists added that if the Bank did not end the programme, then policy-makers would be to blame for the above-target inflation rate. Jessop’s own suggestion was that as well as ending the programme, the Bank should kick-start the sale of assets immediately with £10 billion of gilts being sold each month to stagger the process.

The Bank took little notice of their plea. At the latest count, the Old Lady still owns around £875 billion of government bonds and £20 billion of corporate bonds, around half of which were bought after the 2008 financial crash and half since the pandemic. It’s a huge amount of money and assets sloshing around the system, roughly equivalent to a third of all government debt and a sum representing about 40 per cent of GDP. 

The House of Lords Economics Committee — which includes former Governor, Mervyn King — warned last summer that the Bank risked being addicted to QE, that there was a danger that so much new money around would lead to higher inflation and cause damage to the government’s finances. 

They were right, although the Bank of England’s Governor, Andrew Bailey, dismissed their fears, claiming that QE had been an essential tool in balancing the economy and keeping rates low for business and households.

But as Haldane also said in his swansong speech, the essence of policy-making is looking around corners to judge not only what is coming but how to reshape it, seeking out the biggest issues not just of today but tomorrow. “It is the Wayne Gretsky approach to public policy – skating to where the puck is going, not where it is. That can be unconventional and sometimes misunderstood,” he said.

Well, it doesn’t look as though Bailey has seen where the puck was or is going. This week’s cautious decision by the Monetary Policy Committee to increase interest rates by only 0.25 per cent points to 1 per cent, triggering the biggest one day fall in sterling for two years, has left many economists wondering if the Bank — and Bailey — know what they are doing. 

As well as taking the softer option with rates, the Bank also avoided the more controversial issue of saying when it will start asset sales. It seems the Bank is still addicted to lots of money, as Bailey would only say that a team is looking at a disposal programme and that there would be an update in August. 

That’s far too slow for many economists, many of whom are now openly highly critical of the Bank’s policy-making. 

As Julian Jessop tweeted: “Macroeconomic policy is now in an even bigger mess. Fiscal policy is too tight and monetary policy is too loose, increasing the risks of stagflation.”

In another tweet, Simon French, economist at Panmure Gordon, said: “ Quite a day for U.K. monetary policy. After interviews for @BBCNews & @SkyNews I would say biggest risk is unrealistic BoE forecasts (conditioned on no fiscal response in Oct/market rate path) gets embedded in expectations. The UK’s macroeconomic framework is not fit for purpose.”

There are a growing number of observers – industrialists, business men and women as well as economists — who think the Bank’s Bailey is making such a hash of policy that he should be sacked. 

Some privately say he must take the rap for having failed to get a grip early enough on inflation last year, for ignoring monetary supply, for being too cautious on rates and for being hopeless at communicating with the financial markets about where policy is going.

One economist told me that while blaming Bailey for the mess alone was not entirely fair — as he is only one of nine members of the MPC who vote on rates — he should be given his P45 as a sign that incompetence is not tolerated. He added: “His departure would show incompetents elsewhere in the ruling classes that they can’t get away with being incompetent, that there is retribution for poor policy-making and lack of accountability.” 

Sacrificing Bailey may be a little extreme at such a fragile moment for the country. But if the Bank is to regain any credibility, Bailey — and his Bank colleagues — clearly need to introduce more diversity in their range of thinking.

You only have to look at the background of the MPC members — internal and external — to see that many of them share a similar institutional experience, either having worked at Goldman Sachs, the Treasury or the Bank of England most of their lives. Critics say they are inevitably drawn to groupthink rather than diversity of opinion. 

Paradoxically, the Bank is obsessed by diversity — but diversity of ethnicity and colour rather than, in the jargon, “lived” experience of the real world. Look back at former committee members and there was much more colour from the lively Danny Blanchflower — who studied the economics of happiness as well as labour — to Kate Barker, a housing expert.

Or indeed, the bank’s own former economist, Haldane, who made his way to Threadneedle Street via a Sunderland council estate, keeping in touch with regular town hall meetings and visits around the country. 

It’s also maybe time — ironically more or less 25 years to the day that the Bank was granted independence by the incoming Labour government — to revisit the way the Bank uses the tools at its disposal. For example, many economists would like to see the end of the inflation targeting regime which, based on CPI, they argue is too narrow. As Jessop points out, how do you square having inflation heading for 10 per cent, an inflation target of 2 per cent and interest rates at 1 per cent? Something needs to give: perhaps change the target to one measuring real GDP — a growing view among economists — and get rates up to a more normal level of 2 to 3 per cent, still historically low. 

More crucially, the Bank needs to step up and refine its presentational and communication skills. If you look at how Bailey presented this week’s horrendous inflation forecast — and his warning that we are heading for recession — it may well be that he went over the top, giving a skewed misrepresentation of the many likely scenarios. 

The Bank’s forecast of 10 per cent inflation by the end of the year is based mainly on the belief that the energy cap will have to go up again this autumn by another startling amount. Those higher energy costs are the main factor behind its forecast of negative growth for the last quarter of the year. 

The reality is that if the war between Russia and Ukraine were to calm down — or even come to some sort of resolution — we might well see oil prices drop back. They might even drop back — now that some of the supply chain issues are being ironed out — before that. Some analysts suggest the oil price could drop down to $40 a barrel. 

Who knows where oil is going. Yet the Bank delivered its analysis as a forecast, scaring the nation and prompting sterling to plummet. But it was not a forecast, merely a projection: two entirely different signals. It was a clumsy move, one that will have dented confidence. 

I’m hearing the Bank of England’s headhunters are out searching for a new senior press officer. If things carry like this they’ll be searching for a new governor. They will need someone who knows where the puck is heading.