Analysis-BoE’s Bailey enters a tough third year with plenty of criticism

Bank of England Monetary Policy Report press conference in London
FILE PHOTO: Bank of England Governor Andrew Bailey speaks during a news conference at the Bank of England in London, Britain February 3, 2022. Dan Kitwood/Pool via REUTERS

March 15, 2022

By William Schomberg and David Milliken

LONDON (Reuters) – Andrew Bailey is leading the Bank of England through one of the most complex challenges in decades as he faces criticism of his balance sheet in a key part of his job – how to explain his mindset and that of the central bank.

Bailey is celebrating two years as governor on Wednesday, having succeeded Mark Carney in March 2020, just as the world’s fifth-largest economy was sliding into its historic COVID-19 slump.

The BoE cut interest rates a few days before Carney’s departure and did so again four days after Bailey’s takeover. It also added £200 billion ($260 billion) to its bond-buying program.

The quick response helped quell the panic in financial markets and brought praise to the BoE.

But since then, Bailey has drawn criticism from investors, unions and some people who worked with him.

The International Monetary Fund said in late February that “predictability and clear communication on forward guidance would improve policy effectiveness” by the BoE.

Also last month, Bailey angered unions and was rebuffed by Prime Minister Boris Johnson’s spokesman when he called for wage restraint amid soaring inflation.

Other BoE policymakers tried to shift the focus to corporate pricing decisions, but Bailey hit the headlines again when he struggled to answer a question from a lawmaker about his own salary – £575,000 including pension contributions.

It wasn’t the first messaging problem for Bailey, whose career has been mostly as a financial regulator.

Late last year, many investors thought his comments meant the BoE was ready to tighten monetary policy. Goldman Sachs and other banks forecast a first rate hike in November.

As the Monetary Policy Committee left interest rates unchanged, UK government bond prices rose the most since the Brexit shock of 2016. Sterling has fallen the most in over 18 months.

Many investors were also surprised when the BoE started raising rates in December.

“He didn’t appreciate the impact his comments could have on the markets,” said Oliver Blackbourn, portfolio manager of a UK-based multi-asset team at Janus Henderson Investors.

“There’s a really fine line in the way central banks communicate. I think that in some cases they misjudged that completely.”

Market forecasts that UK interest rates will peak in 18-24 months reflect concerns that the BoE will manage to control inflation without triggering a recession, Blackbourn said.

The UK faces severe pressure on the cost of living as inflation is expected to rise above 8% – four times the BoE’s target – as the aftermath of the Russian invasion of Ukraine contributes to rising energy prices and supply chain shortages amid COVID-19.

The BoE is expected to announce a third interest rate since December on Thursday.

The BoE press office declined to comment when contacted by Reuters about the story.

Bailey has defended his comments ahead of the policy decision in November, saying he never committed to any move in advance.


Bailey’s news troubles began in 2020 when he said that the BoE’s asset purchases would not only help bring inflation back to target but would also smooth the government’s borrowing needs.

Some commentators said that this has blurred the BoE’s independence.

Other senior BoE policymakers then stressed that asset purchases were only increased to meet the inflation target.

But last July, the UK House of Lords Economic Affairs Committee said Bailey’s comments likely contributed to the perception that the surge in bond purchases was at least partly motivated to fund the government.

“If this perception continues to spread, the Bank of England’s ability to control inflation and maintain financial stability could be seriously undermined,” the committee said in a report.

People who have worked with Bailey at the BoE said he sometimes made unprepared comments, unlike Carney who rehearsed more before speaking in Parliament and to the media.

Carney had his own news problems, principally the way his trademark “forward guidance” about the likely path of interest rates was occasionally overtaken by changes in the economy.

But the Canadian was so focused on the details that his advisers made sure he knew the price of milk and bread if asked, a level of preparation Bailey doesn’t follow, a senior BoE official said.

Bailey isn’t the only senior Treasury official having trouble communicating.

Central bank leaders, including the US Federal Reserve, had to retract their view that the rise in inflation was likely temporary.

Investors have also been caught off guard by European Central Bank President Christine Lagarde’s attempts to refine divisions within the ECB.

But one person familiar with debates within the BoE said Bailey can be stubborn about sticking to his own opinion, even when peers more experienced than he is on macroeconomic policy issues try to change his mind.

These differences included Bailey’s linking of asset purchases to the government’s fiscal policy in 2020 and public expressions of concern about the size of the central bank’s debt pile, something peers have warned could contribute to perceptions that the BoE’s independence is being weakened said the person.

Another BoE official defended Bailey, saying he prepared extensively for all his duties and spent no less time preparing for public events than any previous governor.

Bailey was happy to provide direct answers to direct answers and also made ample time available to speak with colleagues and associates, the official said.

The communications challenge for Bailey is likely to only increase in his third year as governor as inflation and recession risks mount.

“Given the way markets are shaping up over policy mistakes and evolving inflation and growth prospects, investors could really use a calmer hand at the helm going forward,” said Janus Henderson’s Blackbourn.

($1 = 0.7681 pounds)

(Writing by William Schomberg; Editing by Susan Fenton) Analysis-BoE’s Bailey enters a tough third year with plenty of criticism


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