The man behind the money. Photography credits: Sarah M Lee

Grading the governor

From a global pandemic to a cost-of-living crisis, Andrew Bailey couldn’t have become Bank of England chief at a more challenging time. In an exclusive interview, Lionel Barber assesses his performance—and asks whether the worst is finally over
October 4, 2023

Andrew Bailey has plenty to get off his chest, though he’s not quite reached the point where he screams: “I’m as mad as hell and I’m not going to take this anymore!” By nature, central bankers are reserved characters, and the governor of the Bank of England is no exception. But after a welter of criticism of the Bank’s performance and whispers about whether he is up to the job, Bailey feels it is time to set the record straight.

We are sitting in the governor’s office overlooking what passes as his private garden inside the Bank of England, a walled courtyard lined with trees and immaculately trimmed hedges. Overhead, passing aircraft make outside meetings unworkable. Underneath lie the Bank’s vaults holding a total of around 400,000 bars of gold bullion, a detail that Bailey later casually drops into the conversation.

This often-forgotten fact serves as a reminder that the Bank of England’s role goes beyond setting interest rates affecting millions of UK mortgage-holders. As the world’s second-largest custodian of gold reserves, the Bank supports other central banks’ access to liquidity. Forget Little England—the Bank, founded in 1694, has stood for centuries as a guardian of global financial stability.

Bailey began his eight-year term as governor in March 2020 in the most challenging circumstances. On his first day in office, Matt Hancock told the House of Commons that all unnecessary social contact should cease in response to the Covid-19 pandemic. On his third day, the pound slumped against the dollar, triggering a crisis in financial markets. On his fourth day, he chaired an emergency meeting of the Monetary Policy Committee, tasked with setting interest rates. The world economy had juddered to a halt, raising fears of a depression. Then, just as the global economy was recovering, Russia invaded Ukraine. The energy price shock triggered double-digit inflation after a four-decade hiatus, with the Bank accused of being asleep at the wheel.

“Well, I do wonder about my sense of timing,” says Bailey, a little ruefully, but “you have to be prepared to deal with what comes your way. You can’t say, well, let me pick and choose the conditions.”

Bailey, 64, is a Bank of England lifer. Bespectacled and stocky, he comes across at times more like the local bank manager than the Bank governor. While he possesses a first-class intellect—his history doctorate at Cambridge discussed the impact of the Napoleonic Wars on the Lancashire cotton industry—he wears it lightly.

The grammar school boy from Leicester (Wyggeston Boys School) is determined to introduce a less formal, more open culture at the Bank. Wary of hierarchy, conscious that deference has long since fled the UK, he has chosen to play the role of “The People’s Governor” (my label, not his).

If you reduce the openness of an economy, in the short run it will have negative effects

On day one in the job, Bailey reveals, he told Bank staff to drop the traditional title of “Mr Governor” and stick with plain “Andrew”. After all, many had known him for decades in his various Bank roles, including head of the Prudential Regulation Authority supervising the banks; protecting investors during a somewhat troubled stint at the Financial Conduct Authority; and chief cashier, the Bank official whose signature appears on English and Welsh banknotes.

“For me it’s really important,” he says, with disarming candour. “You know, I’m not a mystical figure.” 

Bailey believes he has a duty to explain the Bank’s thinking directly to the public, but he’s prone to making comments that sound politically tone deaf. In February 2022, he was accused of overstepping his brief when calling for wage restraint in the middle of a BBC Radio interview: “I’m not saying nobody gets a pay rise, don’t get me wrong,” he said, “but I think what I am saying is, we do need to see restraint in pay bargaining otherwise it will get out of control.”

In May 2022, Bailey said repeatedly that food price inflation was a major concern for the Bank. He then apologised for sounding “apocalyptic”—not a word normally associated with central bankers. Much to his discomfort, he was later accused of fearmongering.

In fairness, food price inflation is still a risk, especially for the developing world. The danger of a wage-price spiral should be well understood in the UK, given the experience of the 1970s. Does the governor feel that he’s had a bad rap? “I think it’s easy sometimes to sit in sort of your own privacy and say, ‘Well, I was right, wasn’t I?’” Bailey admits. “I said something about food prices. I was probably a bit right about that as well.”

I ask him whether it would have been wiser to follow legendary US central banker Alan Greenspan, former chair of the Federal Reserve, who turned obfuscation into an art form. “I know you believe you understand what you think I said,” the Fed chairman is reported to have once observed, “but I’m not sure you realise that what you heard is not what I meant.”

The problem is that Bailey’s experiment in straight talking is high risk: it strips away the protection of highly nuanced, highly qualified language employed to great effect by the likes of Greenspan, his successor at the Fed, Ben Bernanke, and former European Central Bank (ECB) chief Mario Draghi.

“It’s a challenge,” Bailey concludes. “There are times when I do find it hard, because there are times when you want to… talk quite directly.”

Better than the pack? Bailey (R) knows the Bank must protect its reputation and strengthen its forecasting Better than the pack? Bailey (R) knows the Bank must protect its reputation and strengthen its forecasting

These verbal lapses are minor offences compared to the capital charge that the Bank of England misjudged the inflation threat and was slow to raise interest rates in response. Tackling inflation is, after all, the Bank’s prime responsibility. Bailey and his colleagues on the Bank’s MPC stand accused of complacency, sticking to a base rate of 0.1 per cent as late as December 2021. 

Even after belatedly raising rates that month to 0.25 per cent, Bailey and Bank colleagues continued to sound dovish. The return of inflation was deemed to be transient rather than permanent. This choice of language not only reduced the impact of monetary tightening on inflation; arguably, it increased pressure on the Bank to later raise rates more sharply for a longer period in order to regain credibility in the financial markets, further depressing economic growth.

In August, the Bank hiked interest rates for the 14th successive time, lifting them to 5.25 per cent. GDP growth is still anaemic. Although Bailey subsequently hinted that rates were close to their peak—and the MPC held them level in September—consumer price inflation in the UK is running at 6.7 per cent, well above the US (3.7 per cent) and the Eurozone (5.2 per cent). Core inflation (excluding food and energy) in the UK is 6.2 per cent, compared to 4.3 per cent and 5.5 per cent respectively. Yet all three economies have the same medium-term inflation target of 2 per cent. What went wrong?

Bailey rejects the accusation that the Bank took its eye off the ball. Nor does he agree that he and his colleagues were victims of groupthink. He points out, fairly, that all central banks, including the Federal Reserve and the ECB, misread the impact of the Covid pandemic on global supply chains and, crucially, labour markets. All assumed that the supply chain shock was temporary, like a dose of salts passing through the system.

Tightening monetary policy at the very moment the economy was recovering from Covid would have been counterproductive. Indeed, when the Bank finally did move to raise rates, the response of fellow central bank governors at the time was to call the move “interesting”. (Frustratingly, Bailey won’t identify members of the go-slow brigade, latter-day versions of Yes Minister’s Sir Humphrey Appleby, whose reaction to new policy ideas was to call them either “very bold” or, even more damning, “courageous”.)

The failure of imagination in late 2021 was twofold. Almost nobody, including the historian Bailey, predicted Vladimir Putin’s invasion of Ukraine and the consequent upsurge in energy prices. (Bailey’s summer reading incidentally included several books on Russian and Ukrainian history, including Jade McGlynn’s Memory Makers: The Politics of the Past in Putin’s Russia, and he has read three books by historian Timothy Snyder in the past 18 months.)

The second failure concerned the phasing out of the UK government’s furlough scheme. Designed to support firms and vulnerable workers during pandemic lockdowns, the scheme was the brainchild of the Treasury and chancellor Rishi Sunak. The cost ended up at a staggering £70bn, with more than one million people still on the scheme when it ended in September 2021. 

Bailey considers the money well spent. But he does admit that the finest economic minds at the Bank and the Treasury failed to forecast how the UK labour market would respond when the scheme finally ceased. Most economists predicted unemployment would surge. The opposite was the case. Not only were the furloughed workers reabsorbed, but the labour market actually tightened. Some people decided not to go back to work, a portion of migrants failed to return to the UK and others chose to work part-time only.

“It wasn’t unreasonable to think at the time and to be concerned that there was going to be a quite substantial increase in unemployment and negative reaction to the end of the furlough scheme,” says Bailey, sounding a tad defensive.

Nevertheless, Bailey has found time to look back at the totality of economic forecasts inside and outside the Bank during that key transition period in 2021. On unemployment, “our forecasts were... below the whole of the range of outside forecasts, and we were always below the average level of the average forecast. So, you know, I conclude from that, look, we were all in it.”

Bailey knows that the excuse of a collective cock-up won’t impress anyone, least of all his critics in Westminster. The Bank prides itself on being better than the pack. Plainly, orthodox economic forecasting failed to understand the correlation between the labour market, inflation and post-Covid growth. In light of the failures, Bailey has invited ex-Fed chairman Bernanke to conduct a review. It looks like a smart move, not just to learn valuable lessons but also to protect the Bank’s responsibilities for economic forecasting. 

“It was an unusual period”—the Bank had to take decisive action in the aftermath of Liz Truss and Kwasi Kwarteng’s mini-budget “It was an unusual period”—the Bank had to take decisive action in the aftermath of Liz Truss and Kwasi Kwarteng’s mini-budget. Photo: Tolga Akmen/EPA-EFE/Shutterstock

Flawed forecasts sap the Bank’s credibility. If the public can’t trust the Bank’s numbers or its ability to interpret statistical data wisely, they risk losing confidence in the institution. Politicians will start asking questions about the independence the Bank was granted by the Blair–Brown government in 1998, which has allowed it to set monetary policy free from party-political influence. 

I ask Bailey whether we expect too much of monetary policy to cure our economic ills. He treads carefully: “In the short run, the response has to come from monetary policy. But in the medium to long term, it often involves a broader set of issues in terms of choices and policies that go beyond the Bank of England’s responsibility.”

Stripped of the Greenspanese, Bailey is referring to issues such as Britain’s weak productivity, the lopsided balance of taxation and the pressing need for broader supply-side reforms. In the post-Covid world, where inflation is persistent and interest rates remain higher for longer, monetary policy will have to work more closely with fiscal policy. This goes to the heart of the extraordinary events of September 2022 that led to the resignations of Kwasi Kwarteng, chancellor of the Exchequer, followed by Liz Truss, prime minister, after 44 days in office.

To recap: Truss and Kwarteng unveiled a mini-budget that included £45bn of unfunded tax cuts to kickstart economic growth. Having fired Tom Scholar, the most experienced and most senior civil servant at the Treasury, Truss and her sidekick Kwarteng declined to allow the independent Office for Budget Responsibility to assess the impact of the tax-cutting package. The reaction in financial markets was panic, triggering a crisis in the pension sector where firms struggled to match assets and liabilities.

The Bank’s dilemma was that it was duty-bound to supply liquidity to stricken pension funds in the interest of financial stability. But resuming, however briefly, unlimited purchases of government bonds via the unconventional practice known as quantitative easing ran counter to its commitment to “normalise” monetary policy. In sum, the credibility of the Bank’s monetary policy was at stake.

In mid-October, Bailey served notice to the pension funds and the government that its emergency bond-buying programme would be over by the end of that week. The ultimatum worked. When I suggest that the Bank’s response to the crisis was Bailey’s finest hour, the governor expresses surprise.

“Yes, well, it was meant to be very direct,” he says, with mild satisfaction: “It was an unusual period.” 

This is as far as the governor will go in passing judgement on Trussonomics. His chief economist Huw Pill was more colourful, telling a panel at South Africa’s central bank that the experience was like swimming with crocodiles (an apt insider joke, given that President Emmerson Mnangagwa of hyper-inflationary neighbouring Zimbabwe enjoys the nickname “The Crocodile”).

On unemployment, ‘We were always below the average level of the average forecast,’ says Bailey. ‘Look, we were all in it’

Overall, the Truss–Kwarteng episode showed how an open economy like the UK is vulnerable to external shocks in the age of populism and political instability. Bailey steers a wide berth when presented with my own metaphor of the UK economy being like “a cork bobbing on the sea”. But he admits: “We are a more open economy than a number of others and so we are hit by these shocks. Plus, we’ve had this domestic labour market story, which actually has been quite a bit more pronounced than anybody else has had.”

Which brings us to Brexit and the UK economy’s fairly feeble economic performance since voting to leave the EU in 2016. Surely labour shortages are in part due to the UK no longer being in a single market with a ready supply of workers—not just Polish plumbers but Italian waiters, Latvian builders and Slovak au pairs, among others. Bailey, forewarned and forearmed, won’t take the bait.

“I will be very clear. The Bank of England is not a Remainer organisation. It’s not a Brexiteer organisation. Our job is to be neutral.”

Having got that off his chest, the governor makes clear that the short-term consequences of the UK leaving the EU are indeed negative. “If you reduce the openness of an economy, in the short run it will have negative effects. It will have a negative effect on productivity, it will have a negative effect on growth... you don’t need to take my word for it, you can go back to Adam Smith and David Ricardo. You know, that’s the point about openness.

“In the longer run, you know, those trading relationships adjust in the real economy and we build new trading relationships… But in the short run there’s a misalignment.”

Leaving aside this “misalignment”, Bailey says he is an inherent optimist about the UK’s post-Brexit prospects. Financial services, for example, offer a bright spot. Despite “pretty dire” predictions about damage to the City of London, much has remained intact. While he does not want to trivialise or ignore the fact that there has been some damage, it’s not a slow puncture. 

Brexit “has actually created opportunities. I think we have protected, and in a sense ensured, that much of the market and much of the industry remains here. And that’s been important.” But it does mean “we will have to work even harder to make sure we don’t become isolationist.”

Asked whether he wakes up early in the morning worrying about diehard Brexiteers pushing for a return to super-light-touch regulation to sharpen London’s competitive edge, Bailey sounds pretty relaxed.

The People’s Governor? Bailey represents something very different from the “masters of the universe” who led major central banks in the past The People’s Governor? Bailey represents something very different from the “masters of the universe” who led major central banks in the past

“The good or bad news is I wake up at five o’clock every morning as a matter of course... We have to be clear-sighted and careful about where we go in terms of [regulation]”, he says, adding, “the UK’s financial markets are a global public good and therefore we have a responsibility, which we always have to take very seriously, to provide financial stability.”

Covering his Brexit flank, Bailey points out that not everything about EU regulation was best suited to national circumstances. (The EU’s comprehensive—and expensive—Markets in Financial Instruments Directive 2 act from 2014 covering asset management, insurance and trading springs to mind.) There are opportunities for regulatory arbitrage or innovation. But the overriding message is self-restraint in the interest of stability.

“I support what the government is doing to think through how to make best use of those opportunities. That’s the right thing to do. But we also have a responsibility to maintain this global public good... I spend a good part of my life involved in the work at the global Financial Stability Board. I chair one of its major standing committees, because we have a big responsibility on that front. The Bank of England has to pull its weight.”

Throughout our 50-minute conversation, Bailey comes across as decent and thoroughly reasonable. His down-to-earth approach is a world apart from the generation of central bankers who in the popular imagination were considered masters of the universe. These men (and, until recently, they were all men) were credited with near-supernatural powers. In the era of easy money, where inflation appeared banished, they found themselves pronouncing on all manner of public policy issues, including climate change.

The cult of personality began in the early 1980s with Paul Volcker, the towering, cigar-touting inflation killer at the Federal Reserve in the US. His successor Greenspan spent 19 years as Fed chair, earning the title “Maestro” in Bob Woodward’s 2000 biography-cum-hagiography. Bernanke, the next Fed chair, masterminded the response to the 2008 global financial crisis with a combination of ultra-low interest rates and massive bond-buying operations. In Europe, Draghi will go down in history with his “whatever it takes” pledge, widely credited with saving the euro.

Somewhere between the first and second tier of the central banking hall of fame stand Mervyn King and Mark Carney, Bailey’s two immediate predecessors. King played a key role alongside Gordon Brown in coordinating the international response to the financial meltdown between 2008 and 2009. Carney led the Bank’s response to the Brexit shock and the emerging coronavirus pandemic. Throughout this period, monetary policy was centre stage.

Bailey is a different cut of cloth from King, a cerebral sports fan who could occasionally be prickly. Nor is he flashy like Carney, the Canadian with the Hollywood looks known as “King Carney” inside the Bank. Unlike Bailey, both men pursued careers outside central banking before taking the top job at the Bank of England. Arguably, this experience helped the two of them to master the art of communication, which is vital in terms of managing market expectations and avoiding political minefields. By his own admission, this is a work in progress for Bailey.

Bailey says he wants to change the Bank’s culture, making it more open and accessible. All institutions contain hierarchies, he notes. (Memo to the governor: especially those institutions which go back 329 years.) 

Overall, he remains an unabashed champion of modernisation and diversity. “This is not me being, you know, in any sense dictatorial, in any sense woke, whatever that word means. It’s about saying we’re a public institution serving the country. We need to resemble the country we serve.”

Driving this cultural change at the same time as meeting the (still remote) inflation target of 2 per cent is quite a challenge. Bailey is adamant that this remains his goal, that it is eminently achievable and that there should be no change in the Bank’s mandate to accommodate, for example, employment. Reform, evidently, has its limits. 

The governor is careful to avoid any direct comment on political instability in the UK, which has already seen three prime ministers during his tenure. He quotes approvingly a speech by the ECB president, Christine Lagarde, at the annual gathering of central bankers in Jackson Hole, Wyoming. She described a world of economic fragmentation, where geopolitics is becoming more transactional and the risk of external shocks is commensurately higher. 

“I think she’s right on that point at the moment, sadly, of course. And so this is important, because we have seen these shocks and I think we have to be prepared for whatever comes next. That there could be further large shocks that we don’t know about.”

As the clock ticks toward 3pm on the then-hottest day of the year in the UK, Bailey looks at his watch. Surely, the worst is over, I suggest.

“I hope so,” says the governor.