(Bloomberg) — In the midst of Britain’s worst inflation crisis in four decades, Bank of England Governor Andrew Bailey found himself at the center of a growing political storm.
After just over two years in office, Bailey is under attack from members of the ruling Conservative Party and the press. It’s a dramatic change from 2019, when newspapers hailed him as the last safe pair of hands and the government called him the “outstanding candidate” for the job.
Bailey has recently found himself a political punching bag in the race to replace Boris Johnson as prime minister. He is absorbing the blame for what the BOE predicted this week will be a long recession, the highest rate of inflation in more than four decades and rising unemployment.
That led to some of the most outspoken attacks on the bank by government ministers since the Treasury gave the BOE the authority to set interest rates in 1997. After granting the biggest increase in 27 years, Bailey was rated as the “banker who is running out of credit”. in the Daily Mail.
The central charge is that the BOE, and thus Bailey himself, have failed in their key objective of controlling inflation, missed the signs of a price explosion, and then acted too slowly once they began to emerge.
On that front, the facts suggest the attacks carry some weight. Inflation in the UK currently stands at 9.4%, almost five times the 2% target. The latest BOE forecasts now see gains peaking at 13.3% in October, the highest since 1980.
And while the BOE was the first major central bank to start tightening post-pandemic last December, that advantage has apparently been squandered with the US Federal Reserve leading to steeper increases in borrowing costs. While economists began calling for BOE action in the middle of last year, officials were still adding stimulus measures to their December measures.
Bailey has emphasized that acting earlier, in the face of Covid uncertainty, would have led to a worse recession. He also, correctly, pointed out that much of the current bout of inflation stems from a spike in energy prices following Russia’s invasion of Ukraine, something the BOE could neither prevent nor predict.
But while his critics have given few details about when and how the BOE should have acted, and what the consequences would be, his defensive response and lack of acknowledgment of mistakes have won him few friends.
Questions about political interference and accusations of being asleep at the wheel dominated Bailey’s news conference Thursday and in subsequent interviews. Those debates are beginning to raise questions about the legal framework that underpins the bank’s authority.
“A combination of ‘sleeping at the wheel’ and ‘the Bank of England has created higher inflation’ will erode confidence in the BOE and its operational independence,” said James Smith, director of research at the Resolution Foundation, who believes the attacks they are unfair
Bailey has tried to avoid the politics of the battle for the Conservative leadership. But when asked, he dismissed the idea that the BOE should have anticipated rising inflation and acted sooner.
“I would dare anybody to sit here a year, two years ago, say there is going to be a war in Ukraine and it will have this effect on inflation,” Bailey said on BBC Radio’s Today program on Friday.
“Given the situation that we were facing in the context of Covid, in the context of the labor market, the idea that at that time we would have tightened monetary policy, I don’t remember a lot of people saying that at the time.”
The problems for Bailey, who has also pledged to serve out his full eight-year term as governor no matter who takes office at Downing Street, also go beyond inflation.
In recent months, a series of high-profile blunders have made him a regular on the front pages of newspapers. The most notable came in February, when he said workers facing the highest inflation in decades should hold back on asking for wage increases. While he has since tried to retract the comments, they cut off the usual economic audience and are mentioned in almost every public appearance of Bailey.
There is also a growing ideological difference. Bailey’s dire forecasts are at odds with the economic drive that swept through the Conservative Party under Johnson and now forms a key pillar in the speech of his likely successor, Liz Truss.
Bailey is the second governor to find himself at loggerheads with much of the Tory party. His predecessor, Mark Carney, became the target of his pro-Brexit wing, which repeatedly attacked him for being too pessimistic about his outlook on life outside the European Union.
While that was mostly limited to MPs (Jacob Rees-Mogg mocked Carney as a “second-tier Canadian politician” who didn’t understand his role), the attacks on Bailey come from sitting cabinet ministers.
Truss, the foreign secretary, has said she wants to review the BOE’s mandate and explore how to ensure that policymakers meet their goal of keeping inflation low. Her allies have been more aggressive.
“Interest rates should have been raised a long time ago and the Bank of England has been too slow on this,” Suella Braverman, the attorney general and a Truss supporter, told Sky News.
Business Secretary Kwasi Kwarteng joined the attack and gave a series of interviews saying the BOE should have acted sooner.
“The bank’s job was to deal with inflation,” Kwarteng told Sky News. “They have an inflation target of 2%, that is actually their mandate. And now inflation is reaching double digits. Clearly, something went wrong.”