Bank governor defends inflation record as Truss review awaits

Andrew Bailey has defended the Bank of England’s record of managing inflation under his command amid growing pressure on the governor in the first week of Liz Truss’s premiership. The new prime minister promised a review of the Bank’s mandate during the Conservative leadership race, underlining frustration with Bailey and Threadneedle Street’s response to inflation at the highest levels for 40 years. Analysts at Goldman Sachs have warned of “potential personnel changes” at the Bank, speculating that Bailey’s eight-year term could be halved – meaning a new appointment in March 2024.

Speaking to MPs on the Commons Treasury committee, Bailey said a formal review would be welcomed as a “sensible and good thing to do”, but that Russia’s invasion of Ukraine was responsible for the huge inflation shock hitting Britain and had left the central bank with limited tools in response. “The person who is going to put this economy into recession is Vladimir Putin, not the MPC [Monetary Policy Committee],” he said. “By far the largest contribution to this [inflation shock] is the war.

That’s not something that is, I’m afraid, within the remit of monetary policy. ” With the annual rise in the cost of living now at five times the Bank’s 2% target , Bailey dismissed suggestions that the inflation-targeting regime used since Gordon Brown gave the Bank independence to set interest rates 25 years ago was no longer fit for purpose. Kwasi Kwarteng assures City of support for Bank of England independence Read more He said: “This is by far the biggest shock we are facing during the life of that, but it does not suggest that the regime has failed.

What it suggests is that the regime now has to do its work and respond to a much bigger shock and we are confident that it will do so. ” Last month the Bank forecast inflation above 13% this year with a lengthy recession as a consequence of soaring household energy bills hitting consumer spending power. Truss is widely expected to cap prices in an emergency support package on Thursday, which economists expect to reduce inflation and lessen the impact of any contraction.

Bailey has come under intense pressure in recent months amid a perception among senior Conservatives that the Bank under his command was slow to react to the risk of soaring inflation. Truss is likely to launch a review of the Bank’s mandate this autumn, analysts at Goldman Sachs said in a note to clients on Wednesday, a process that they said would probably come “with some potential personnel changes”. Highlighting the pressure on Bailey, the US investment bank added: “We do not expect PM Truss to remove governor Bailey from his post but his term could be reduced to four years from the current eight-year appointment.

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Bailey replaced Mark Carney as governor in March 2020 at the onset of the Covid pandemic, on a term that runs to March 2028, despite speculation that he wasn’t Boris Johnson’s favoured candidate for the role. The then prime minister was thought to want Gerard Lyons, a prominent Brexit backer and his economic adviser while mayor of London, but was warned against the appointment by the Treasury. Lyons has advised Truss during her leadership campaign.

Bailey told MPs that although a review of the Bank’s mandate could be helpful, it would need to ensure the “foundational” responsibility for targeting inflation was kept with Threadneedle Street. “It’s absolutely critical, it goes with independence,” he said. During the leadership campaign, Rishi Sunak said curbing the Bank’s independence could spook investors and “be bad for all of us”, while City economists said it could knock international confidence in the UK’s ability to manage inflation and could weigh on the pound.

Against a backdrop of speculation over Truss’s economic plans, her chancellor, Kwasi Kwarteng, used his first meeting in the job to tell City of London bosses that her government was steadfast in its support for the Bank’s independence . Setting out his economic priorities with major bank chief executives and investors, the chancellor “reiterated his full support for the independent Bank of England”, the Treasury said, adding that “their mission to control inflation” was central to tackling the cost of living crisis. .