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It should have been a terrible week for the governor of the Bank of England. But Liz Truss saved him — and it’s not the first time.
It wasn’t Truss’ intention. The ex-prime minister this week called for Andrew Bailey’s head and demanded a “proper investigation” into the central bank’s response to her mini-budget in 2022 — which roiled the markets and led to her departure from No. 10.
That kind of criticism from a former head of government would normally pile pressure on any central bank governor — particularly one facing a tough week of sticky economic figures and a report slamming the central bank’s forecasting prowess.
But the Truss attacks may actually burnish Bailey’s credentials.
“If you’re thought of in a bad way by an idiot, then that’s a good thing,” said Tony Yates, an economist and former BoE official.
Truss, the U.K.’s shortest-serving PM who lasted just 49 days in office, described the Bank’s efforts to calm markets in September 2022 as a “smear” and blamed Bailey and other members of the “economic establishment” for her downfall.
But no one seems to have taken any notice. It’s reminiscent of the market turmoil witnessed in Sept. 2022, which turned Bailey’s reputation around from someone who couldn’t handle soaring inflation to the grown-up in the room in contrast to a flailing government.
And the latest ax-grinding still isn’t hitting home.
“We have absolute confidence in our independent Bank of England, the governor, I think they’re doing a great job under very difficult circumstances,” Gareth Davies, the Exchequer Secretary to the Treasury, told Bloomberg this week.
Economic dilemma
Truss’ interventions may in fact be a helpful distraction for the governor, who does have real problems to grapple with.
Bailey has just endured a scathing review by former Federal Reserve chief Ben Bernanke of the Bank’s economic forecasting, for failing to predict the surge in inflation after the pandemic.
And the Bank faces a pivotal decision this summer.
After initially struggling to get surging prices under control following Russia’s invasion of Ukraine, the BoE has hiked interest rates up to 5.25 percent.
Now, it faces the opposite problem: should it start cutting rates as inflation is falling, or wait for surer signs of a healthy economy?
The picture was further complicated this week when the International Monetary Fund revised down its growth predictions for the U.K. economy. Plus, the U.K.’s statistics agency published challenging job numbers and higher-than-expected inflation figures.
It’s a perilous moment, because moving too quickly on cutting rates could actually end up keeping inflation high.
“The BoE will need to continue navigating the delicate balance between supporting economic recovery while managing inflationary pressures,” said David McCreadie, chief executive of Secure Trust Bank.
Track record
Yet amid that dicey backdrop, it’s Truss’ criticism that has sucked up all the oxygen.
“The economic establishment used its huge and unrivalled influence over the markets to undermine confidence in the elected government, stir up political resistance and force it to change course,” Truss writes in her new book. (“Of course we didn’t depose Liz Truss. I would never do something like that,” Bailey said at the time.)
Truss slammed the Bank for not informing her or taking action to tackle the problems at pension funds — which became stuck in a loop of forced selling of government bonds — before her mini-budget.
“It was our misfortune to be the ones who entered a room full of petrol carrying a candle,” she wrote.
But Yates, the former BoE official, said she hadn’t grasped the problem because the bond market sell-off was driven by Truss’ unfunded tax cuts and surpassed expectations.
“The sort of more substantive technical points about what happened aren’t really developed or even fair,” he said.
That makes them easy for Bailey to shrug off or ignore — even though his handling of the economy and his communication skills haven’t always got top marks.
The Sun newspaper took to calling him the “plank of England” amid the soaring cost-of-living and painful mortgage rates for U.K. households, as the BoE raised rates to the highest level in over a decade.
And, while the Bank calmed markets after Truss’ mini-budget in 2022, Bailey came under fire for crashing the pound by setting a hard deadline for pension funds to tap the Bank for funding during a talk in Washington.
Yet Bailey’s handling of Truss’ time in government also generated more support in the City of London, which doesn’t want instability to affect its reputation.
It also left MPs and other policymakers looking to the BoE for answers on how to handle the volatile economic situation, rather than the Chancellor at the time — Kwasi Kwarteng, Truss’ right-hand man behind the mini-budget — who lasted even less time in his role than Truss.
The drama also gave some respite from the bigger questions about the Bank’s core mission to keep prices stable.
As Bailey returned to Washington for the same event this week, this time the pound stayed steady. And so too has his role — despite Truss’ best efforts.
