Lionel Barber has an exclusive conversation with Andrew Bailey, governor of the Bank of England. In a rare interview Bailey sheds light on a difficult period for the bank: covid, the end of the furlough scheme and the brief period where Liz Truss and Kwasi Kwarteng were in charge of the country. Looking ahead, he says there will be more shocks to come.
Read Lionel Barber’s November issue cover story based on this interview here.
Below is a machine-generated transcript that has been improved by a human to accurately reflect the conversation in full. The audio has been edited slightly, for clarity.
Lionel Barber: Thank you for giving me some time.
Andrew Bailey: Pleasure.
Barber: I thought a lot about how to start this interview, and I came to the conclusion that while you’re not looking for the sympathy vote, you have been governor of the Bank of England during an extraordinarily difficult period. External shocks, war in Ukraine, pandemic, energy shock and the return of inflation, and then half flying blind on data. So, how do you see the challenges? And are we in a new period? And do you feel occasionally overwhelmed?
Bailey: Well, I do wonder about my sense of timing. I started my term, and the country went into lockdown, I think it was on the second day*. So, that was a good start. We had a financial market crisis on the third day, and we had to have an emergency Monetary Policy Committee meeting on the fourth day. So, it started with good timing. And yes, you say we’ve had very big shocks since then.
I think, first of all, look, in terms of doing the job, you have to be prepared to deal with what comes your way. You can’t say, “well, let me pick and choose the conditions.” I mean, I do think we’re in an interesting period. Christine Lagarde made a speech in Jackson Hole a couple of weeks ago where she did make the point that we have to accept, in a way, that we’re now living and operating in a world where there are bigger shocks, and we have to deal with those, and we have to be prepared to deal with them. And 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 at the moment.
Barber: The unknown unknowns.
Bailey: Yeah. Yeah, at the moment.
Barber: What do you think they might be? Is it financial stability?
Bailey: Well, I think clearly there are more shocks coming out of what is a rather loose term, the geopolitical world. And I think clearly, we’re living in a world with less stable relations. Let’s face it, if you’d asked me at the beginning of my term, “what probability do you put on there being the biggest war in Europe since the Second World War during your term?”, I’d have probably given it a pretty low probability at that point in time, but it’s happened. And so, I think the geopolitical world, that side of things, is more unstable, and clearly it has very substantial economic consequences—no question about that. And we’re seeing those unfold but, you know, it’s still something that is unfolding as we—
Barber: But it’s a conscious uncoupling, if you like, between the US and China. It’s not de-globalisation—terrible word—but clearly a greater emphasis on national sovereignty, technological superiority—
Bailey: Well, there’s greater economic fragmentation going on, I think that’s certainly true. Now, I think some of that is because one of the consequences of these shocks—starting with Covid, of course—is that we have come to realise that we were depending upon things happening in supply chains which we assumed would happen automatically, always just when we wanted them to happen, which haven’t happened. And then the second thing is there’s more, as you say, choice, in the loosest sense of the term, through geopolitical relations and though relations between countries, that is causing people to look again at patterns of trade, about to what degree they can rely on open trade. And so, yes, those things are affecting us. And then I think—I mean I’m always very careful, what responsibilities we have in the area of climate change. But I have to say that one thing that I do think is that we are seeing some aspects of it now affecting the global economy. I don’t think you can get away from the fact that there is, in food supply for instance, a sense of a greater fragility of food supply caused by climatic conditions. So, we have to, again, be prepared. Sadly, there could well be more of that.
Barber: Yeah. I’ll come back to that. Let me just ask you briefly about monetary policy. That is obviously the traditional tool for tackling inflation. Do you think we’re putting too much weight on monetary policy? Do we expect too much of it?
Bailey: Well, I think the immediate response has to come from monetary policy—that’s our job. I think we always have to look at what I call the underlying drivers of it. And it’s quite interesting, actually, looking at that debate and how it’s evolved over the last two or three years, because one of the things I do try to do, when I’m talking and when we’re working here, is to say that we—in a sense fairly obviously—we need to understand the underlying causes of this. What is it in the economy and in the global economy that is causing this to happen? That’s, to my mind, a better way of then working out how to tackle it.
I regret the fact that sometimes that gets presented as “well, he’s blaming this or blaming that”—I’m not blaming anything, actually, in that sense. I think it’s important that we get to the bottom of what the drivers are. Now, 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, in terms of the structural issues that can be driving these things. But in the first instance, we have to respond. Yeah.
Barber: I’ll come to the problem of communication a little later. But can we just revisit a quite difficult period for the Bank in late ‘21, when the Bank decided not to move, not to raise interest rates? And you’ve obviously been quite heavily criticised for that. What was the problem? Was it groupthink, or were you worried about stifling an incipient recovery, post-pandemic?
Bailey: I think the problem we had, and of course we weren’t alone at this point—
Barber: No, you were in good company.
Bailey: So, when I—and I’m always careful about not applying hindsight—when I look back on it, I can pick out, I think, three very big shocks. One of which, of course, at the end of ‘21 hadn’t happened by that stage, which was the Ukrainian war, so let’s put that to one side and let’s concentrate on the other two.
Coming out of Covid, we saw what tends to get called the global supply chain shock happen, and that was obviously by nature, global. It reflected the fact that globally there had been a shift in the mix of demand from services to goods, which had put pressure on supply chains because goods are more traded than services, and that caused an inflationary upturn.
Now, this much-abused word, “transient”. The reason we and other central banks were using that term at the time was because, you know, it looked like a supply shock; it looked like a temporary supply shock at the time—this was as the world economy readjusted and we came out of Covid. And, as we’re always told with temporary supply shocks, if you think that the thing is not going to go on beyond the transmission period of monetary policy, then, you know, the sensible thing to do is to accommodate the first-round effects and head off the second-round effects.
So, if that had been the only shock that we had experienced and looking back on it—now we can actually see the profile of the thing, because it’s wound its way through now, it’s largely done now—it actually does look transient. That wasn’t the problem. The problem, I think, was that two other shocks then came along very quickly with no sort of “air gap” between them. One was the war—let’s put that to one side for this question. But the other one was domestic. And this is the challenging one to your question, and that is the supply of labour, particularly, now in the economy.
Now, it’s worth going back to a little bit of the history of that period. I think the furlough scheme was very successful, really, in terms of the response to Covid and the need for a response to Covid that protected, particularly, I think, those in the lower-paid end of the economy who needed economic protection. During 2021—bear in mind that the furlough scheme ended at the close of September that year—up to the end of September of that year, I think around a million jobs were on the furlough scheme right up to the last day of the furlough scheme. And so, the big question for us going through that year was what was going to be the consequence in response to the end of the furlough scheme.
And it’s quite interesting, it’s quite a question people ask me, you know, I get a lot of critical remarks about our forecasting. So, in every quarterly monetary policy report, we publish an annex which compares our forecast to other people’s forecasts in the markets and outside world. And a number of times, I’ve been back and looked at the 2021 reports and particularly on the unemployment forecasts. An interesting thing is—I mean, we were forecasting an increase in unemployment—we actually present a chart which has a range of outside forecasts, and our forecasts were, in the middle of that year, 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 in terms of this question, and 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. Now, of course, we now know that didn’t happen. And I’ve said a number of times, if you look back now with the benefit of hindsight, yes, that’s the thing that we got wrong; the furlough scheme ended and the people who were on the furlough scheme got absorbed back into the labour force. And of course, we now know that the overall supply of labour reduced.
Barber: That’s the key.
Bailey: That’s the important thing. Now, if you come back to the period you’re talking about, which is around November 2021, obviously the labour market data comes out with a lag. So, it was at that point I made a speech and some remarks which were pretty much signalling that rates were going to have to go up. And we were still waiting to see the data to say, you know, what is happening. And so, yes, there was, I think, a very awkward period around November/December that year—well, October to December—when, you know, we were trying to work out what was going on, we were beginning to see the data; the data were not confirming what we thought would happen. And that was a difficult period.
Barber: Okay, so, I’m sympathetic to an awful lot of what you’ve said. I think the extra criticism, which is more one of communication and perhaps excessive caution, is that you continued to talk dovishly about the direction of monetary policy and interest rates, which may have made it therefore necessary to do even more to catch up. Do you see what I mean? It reduced the impact. You might have got your communication wrong as well. Do you accept that?
Bailey: Well, we moved ahead of pretty much every other major—well, actually every other major central bank. I remember when I said to fellow governors that we were going to move, some of them looked a bit surprised at me and said, “are you sure this is the right thing to do?”
Barber: Were they across the Atlantic?
Bailey: No, they were dispersed in quite a few places.
Barber: I can imagine one was in continental Europe, because they were very slow.
Bailey: Well, I’m not going to name names. But I mean, you know, there were a number who I remember said, you know, “interesting.”
Barber: That’s a big word in central banking terms, “interesting”.
Bailey: So, I think for us it was a period—we were quite unsure at the start as to where this was going to lead to. And maybe that had some conditioning effect on our communication. Yeah.
Barber: Did they use the word interesting because—
Bailey: Actually, they didn’t use the word interesting. I’ve sort of paraphrased slightly.
Barber: It’s an English word. But that sense, and do you think that’s right, that in a way, the UK is a bit like a cork bobbing on the sea, isn’t it?
Bailey: Well, I mean, obviously we’re an open economy in a world of global shocks at the moment. I’m not sure I’d, I’d not use the cork comparison. But 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.
Barber: But that’s why I go back to this point about monetary policy, that you’re not in the 1970s, ‘80s. We’re much more an open economy, and—which we haven’t talked about—there is a Brexit effect, isn’t there?
Bailey: Look, I’m always very careful about Brexit because I’m a public official.
Barber: Please don’t do an omertà on me.
Bailey: I’ll try not to. So, I don’t take a position on Brexit per say. What I do say, however, and I’ve said a number of times and I’ll say it again, is that 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. I’m afraid that 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. And in the longer run, you adjust for it. But in the short run there’s a misalignment, if you like, in that sense. And, you know, if people say, “well that means he’s obviously a Remainer,” I’ll say, “no, no, I take no position.” But I do feel I have a responsibility to point out the economics.
Barber: You do.
Bailey: I do.
Barber: And your predecessor pointed out those economic potential risks both before the Referendum and actually on Scotland and independence.
Bailey: Now, I, you know, 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.
Barber: Yeah. Do you think that there’s a rerating of Britain post-Brexit, post these shocks? Or do you take a more optimistic view? Because I think a lot of international people want to know the answer to this question. That actually, Britain has inherent strengths, the research base, the universities, and we can come back.
Bailey: Oh, I’m an inherent optimist on this. Let me sort of start with the parts of the world that I deal with very closely, which is the financial services world. If you go back to the period after the referendum, there were pretty dire predictions about the consequences of Brexit for the financial services world, for the City of London. And I think so far, those effects have been smaller. Now, that’s not to say that I trivialise them, discount them, and ignore them. Actually, quite the opposite. I’ve said right from the— actually, I remember saying the week after the referendum, you know, “this means we will have to work even harder to make sure we don’t become isolationist.”
But I think it 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. It’s been very important.
Barber: So, it’s not a slow puncture?
Bailey: I don’t think it is, no. I don’t think it is. But I think we have to keep working at it very hard. I mean, it’s been a very hard, very large amount of work, but it was necessary. And again, my point is I don’t take a position on Brexit. We had to respond. You know, we had to do what we had to do at that point, and that’s our job.
Barber: But as governor, obviously you have responsibility for financial stability, too. Do you not occasionally wake up at five o’clock in the morning and say, “Oh God, if we have Edinburgh reforms plus, then, you know, we’re heading into 2006/7/8”?
Bailey: Well, the good or bad news is I wake up at five o’clock every morning as a matter of course, so that one doesn’t have it. I mean, I think we have to be clear-sighted and careful about where we go in terms of where regulation and where the structure goes. We do have a responsibility, I think, internationally. I think the IMF put it very well a few years ago, in one of their reviews of UK financial stability, when they said the UK’s financial markets are a global public good. And they are, and therefore we have a responsibility, which we always have to take very seriously, to provide financial stability, to provide what’s needed to maintain financial stability. And we take that extremely seriously.
And I think the post-Brexit landscape does give us opportunities. You know, I’ve always said, not everything about EU regulation was best suited to any national circumstances. So, we do have opportunities and 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, to maintain financial stability, and particularly, therefore, to be part of international policy making and international standards setting. I spend a good part of my life involved in the work, for instance, 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 in that world.
Barber: Communication in the era of X. I almost said Twitter. I mean, big challenges for the governor. You’ve been hammered.
Bailey: Yes.
Barber: Do you think you got it wrong, or were you just quoted out of context? Is it an inevitable part of the job or is it a real problem communicating in public these days?
Bailey: I think the world is changing. I don’t use social media, I should say, deliberately.
Barber: But think about dealing with the press.
Bailey: Yeah. So, there is, you know well, there’s a traditional world in which central banks communicated through a fairly limited number of outlets, in a fairly sort of technocratic and quite stylised way. We are masters of long sentences, you know, that’s our preferred environment and habitat, with lots of qualifying statements in them. And, you know, there’s a famous—whether he actually said it or not it almost doesn’t matter now— Alan Greenspan quote, that if you think you understood what I’ve just said, you obviously didn’t. And I think for all of us, you know, we’ve had to very deliberately say—we’ve got to, in a sense, broaden and change our communication. I think it’s important that we talk more directly to the people we serve. We communicate in ways that people feel they can understand what on earth we’re talking about. I think that has presented challenges. It sometimes takes away the sort of protection of having highly nuanced, highly qualified statements and forces a more direct form of communication.
So, I tell you in the Bank, to give you an example, when we do the monetary policy reports and the financial stability report, we do various levels of communication from, you know, pictures and five words up to the old-fashioned long sentences. It’s probably in our nature that we find the old-fashioned long sentences easier to construct than the pictures, which we’re absolutely useless at, I’m sure, actually. So it is a challenge. And there are times when I do find it hard, because there are times when you want to sort of talk quite directly.
Barber: Do you think you got a bad rap, though, on wage restraint? Some serious people would say you did get a bad rap because you were right. I mean, there’s a danger of a wage-price spiral.
Bailey: Well, I think it’s easy sometimes to sit in sort of your own privacy and say, “well, I was right, wasn’t I?” I said something about food prices. I was probably a bit right about that as well. But—
Barber: So you do think you were actually right?
Bailey: Well, no, actually, I don’t, in a way, because you have to learn from these things. I mean, if we don’t learn, we don’t—
Barber: So, what’s the lesson?
Bailey: Well, you have to think very hard and say, how can I say these things in ways that, I hope, people understand, by not resorting to the old-fashioned, let me give you a sort of a sentence that goes on for, you know, a paragraph.
Barber: So, I think that your finest hour—
Bailey: Very kind of you to have one!
Barber: I think it’s, “Well, you’ve got three days to sort this out”, which was a message both to the pension funds and actually the crocodiles.
Bailey: Yeah. Yes, well, it was meant to be very direct. Let me explain two important things about that. I mean, the first thing is that our intervention was a very limited temporary intervention to ensure financial stability. That was our job. We don’t have another job. That was our job. It was a very big challenge—it was a challenge for all sorts of reasons, but one of the biggest challenges, you’ll remember at the time, was that we’d ended quantitative easing. In fact, we were about to start quantitative tightening, we actually delayed the start of quantitative tightening.
We’d ended quantitative easing, and here we were buying bonds again, buying gilts again. And we sat through, you know, several nights when we were designing, sitting in this room with a whiteboard trying to work out, what are we going to do? Knowing that we had a very tight deadline. And one of the considerations was, how can we do something and not make it look as if we’re doing more QE? Because that’s clearly running contrary to what we’re seeking to do on monetary policy.
In the end, we had to bite the bullet on that and say we’re going to have to use communications, because we didn’t have a sort of tool that we could use that didn’t involve buying government bonds. But the reason I say that is, it made it all the more pressing and important that it was time-limited and temporary in that sense, to make it clear this is a financial stability intervention. And I was very clear that we have to be able to intervene to pursue both of our core purposes, both monetary policy and financial stability. But we had to communicate very clearly. So that was obviously pressing in my mind that it had to be temporary, and we had to make it clear.
The second reason was—and here I’ve said, you know, once or twice—you do have to, in a sense, recognise that we do have quite a lot of inside information. We were following, obviously very closely, where the industry was. Our markets people were, you know, talking to the industry almost constantly about where they were.
And if you look at that week—I was in Washington, that famous week in Washington. On, I think it was the Monday or Tuesday of that week, we made some changes to the scheme and increased the scope of what we bought to include index-linked gilts. And the industry came back and said, “look, in terms of getting us to the finish line, that’s the game changer.” And the numbers that we were getting from the industry suggested we were going to be able to do it by Friday.
So, the thing that I always say that, you know, I didn’t say, but I did know, was, pretty high probability we were going to get to the line. So, I could say it. You know, it wasn’t a complete, frankly, punt in the dark at that point.
Barber: No, I don’t think it was, but I think it was a wake-up call to a lot of people.
Bailey: But it was a wake-up call, because it was a wake-up call to say, “look, I’m sorry, but you know, we’re not going to be there after that. Please do not assume that we’re just going to be there after the end of the week.”
Barber: So, you’ve been a Bank of England lifer, have you ever gone through a period like that where the government actually produces unfunded tax cuts, cuts out the independent assessment and hopes—I mean, it was kind of totally irresponsible.
Bailey: It was a—no, it was a very, it was an unusual period.
Barber: Okay. And can I just have a technical two minutes on the debt profile? We have to pay a lot more short-term debt back, as I understand, having looked at this. And from when I remember the days of Steady Eddie, sorting out the debt profile of this country, we had a lot more long-term debt. So, the easy question is, is this the legacy of QE? That our debt profile has actually deteriorated?
Bailey: Well, there’s two ways of looking at our debt profile, one of which is to take QE out of the picture and say, what is the government’s debt stock? Actually, the UK government’s debt stock is on average longer than I think most other industrialised countries. The UK government—well, UK governments, plural—over many years have actually lengthened the average debt stock. If you look at, certainly, the debt stock of the US, for instance, it’s very much shorter than our debt stock.
So, in that sense I don’t think actually that that point really holds. Now what people do say, “yes, but QE has transformed that in the sense that QE is an asset swap, and you know, you shorten the maturity of government debt for the part you bought.” And my response to that is, “well, that’s another reason why I think it’s important that we adjust the debt, you know, our stock back to what I call a sort of steady-state level.”
Barber: Okay. You were very critical of a group of parliamentarians who talked about the country being addicted to QE.
Bailey: Yes. And the Bank of England being addicted to it as well.
Barber: Yes. Again, quite sympathetic. But would you not agree that QE overall did increase asset inflation and thereby inequality during the period. It was not a one-way bet, was it?
Bailey: Well, I think it’s very interesting, actually, because we’ve done quite a bit of work on this, because we’re obviously alert to this question and it’s been raised with us over the last decade or more quite a few times. And I would say a couple of things on this. Or three things.
First of all, actually, when you look at the aggregate measures of inequality in this country, they haven’t moved in that period. Now that, however, I accept is not the end of the story… and so, two other things I would say, and they sort of slightly go each way. I think what we have seen is—and I don’t think QE is, by the way, by any means the biggest part of the story. I think if you look at intergenerational equality in this country, it has changed. And that’s not a QE story because it’s been going on longer than that, actually.
However, that’s not the end of the story, because one of the things that has also happened, and I think it’s as a consequence of the support that was given to the economy around this period, is that one of the reasons that you don’t see it in the overall measures of inequality is that the level of employment in the country has increased. So, we have had much lower unemployment during the whole of this period, since the period after the financial crisis, than we were forecasting almost throughout.
And if you look at certainly any chart on the sort of components of the change in real incomes in this country, it’s actually the growth in employment that dominates. It’s not so much the growth in per capita real income; it’s the growth in the number of people in employment receiving income. And that is A) good for the country, it seems to me, and B) obviously there’s been a counterweight in terms of the measures of inequality. So, it’s a more complicated story.
Barber: It’s a big subject. I understand that. I’m conscious of time. But you’re a Bank of England lifer.
Bailey: Yes. 38 years.
Barber: Do you have time to think about how you may want to shape this institution further—
Bailey: Oh, yes—
Barber: For this new era that we’re in? And we clearly are. We’re in—
Bailey: Yes!
Barber: We’ve got inflation. It’s going to be longer, higher.
Bailey: Yeah, I do. When I actually came into the job—so, I’m not sure it was quite before Covid started, but anyway, in those few months after I was announced and before I started, and before Covid really took hold, I spent quite a lot of time thinking about this. And, you know, people said to me, “what are your objectives for your term?” And actually, I did have and do have very clear objectives for the institution itself. And, you know, I’m a lifer, I’ve been out for a few years at the FCA obviously, as you know, although still pretty connected to the Bank, because I was on two of the main policy committees throughout. And, I did and do have very, you know, strong views on how the institution should change. I think we need to ensure that the bank culturally becomes what I might call a more open institution. I always use the word hierarchical slightly carefully, because every institution has a hierarchy.
Barber: It’s not a Polish parliament.
Bailey: But within that, you know, I wanted to break down, and am determined and am I hope breaking down, what I call some of the unnecessary, in a sense, cultural—
Barber: What’s that like? Tea with the governor?
Bailey: Well, we do that. Yes.
Barber: I mean, the special, “who gets to walk around the Bank of England garden”?
Bailey: Yeah, well, I’ve got the [key to the] door. No, seriously, I’ll give you some examples. So, on my first day, I said, “look, there is this—you’ll know this—tradition here of calling the governor, “Mr Governor”. Please do not, you know—probably the most polite thing you’ve called me during my career is Andrew. But will you please call me Andrew because, you know, it is unnecessary. My authority does not come from you calling me “Mr Governor”.
I actually do really try to spend a lot more time with all the staff. I laughed about your tea comment because I do actually every month have a coffee session with about 30 staff, and they sign up for it, we don’t choose them. You know, they sign up. I’m around the building quite a lot, I’m up in the canteen quite a lot. Probably more than I should be given, you know—and it’s important, for me it’s really important. You know, I’m not a mystical figure. Many of the staff have known me for a long time, others are new. And I think it’s very important, and it’s also important that we are an institution—and this is where you get into slightly delicate territory. I said it in parliament yesterday afternoon, actually, when I was at the Treasury Select Committee. You know, we serve the country as a whole. We need to broadly—and I emphasise broadly—resemble the country we serve.
This not me being sort of, 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. I’ve spent a lot of time going around the country, it’s probably the most enjoyable thing I do, actually, is going around the country with our agents. And that’s important. It’s important to me.
Barber: Yeah. Every organisation is working on this, diversity. It’s clearly a very important consideration, but it’s not the organising principle, is it, for an institution like the Bank of England?
Bailey: Well, it’s not. But on the other hand, let me put one of the other things: we need to have, and we are lucky we do have, extremely good staff here because we do difficult things in public policy. And I, you know, I think in this day and age—always, but certainly in this day and age—we want to recruit the best people. And I think the best people, you know, they do look carefully at the institutions that they work for, and they do want to see that it is an open institution in that sense.
So, you’re talking about the organising principle of the bank. I agree with you. I mean, our objectives are very clear in terms of monetary policy and financial stability. But in terms of, you know, getting the best out of the institution and therefore doing the best job, these things are important.
Barber: Okay. I’m conscious of time. One last question. Thinking about the future, is it time to have another look at the remit of the Bank of England regarding 2 per cent, and maybe tilting a bit more towards employment? Would you be open to that? Or do you think it’s a too dangerous time?
Bailey: I don’t think now is at all—well, it’s not just that now’s not the time, I don’t think those are really the answers. And when I look at this question about the shocks that we face and the fact that we might have more volatile inflation for a period of time if we’re in this period of shocks, I don’t think the answer to that question is 3 per cent in terms of the target or whatever number you want to pick.
I was struck, actually, I’ve just been in the US on holiday—my wife’s American—and I was just struck by how much more talk there is in the US now about this issue than I think there is here actually at the moment. But I do not think the answer is to change the target. I think for me the target—what is the target? It’s actually the representation of price stability. It’s the translation of that into an objective and a number. Price stability, to draw on something, I think again it’s Alan Greenspan who said it: what’s the definition of price stability when people do not factor future inflation into their sort of everyday economic decisions with buying things and so on. That doesn’t tell you exactly what the number is. There’s good reasons why it’s not zero, because relative prices have to change and because deflation in some ways is worse than inflation to tackle. But it is a low enough number so that you satisfy that sort of principle that Alan Greenspan set out. And I think 2 per cent has provided a very good, in a sense, quantification and practical sort of implementation of that. And I don’t at the moment see a reason to move away from that.
Barber: Last comment. Is the worst over?
Bailey: Well, I hope so. But we’re still very focused because until we’re through it, until we’ve got inflation back to target—
Barber: 2 per cent?
Bailey: 2 per cent—and got it there sustainably, we won’t be able to say that with any, you know. I want to see it there.
Barber: Mr Governor, Andrew Bailey, thank you for the time.
Bailey: It’s a great pleasure. Thanks Lionel.
*On Bailey’s first day in office, Matt Hancock told the House of Commons that unnecessary social contact should cease in response to the new pandemic.
