Andrew Bailey takes up the post of Bank of England governor on 16 March following more than two years of speculation about who will succeed the Canadian incumbent, Mark Carney.
Bailey is a home-grown replacement, from Leicestershire, whose CV appears in stark contrast to that of Carney, the former Goldman Sachs banker. Most of Bailey’s career has been spent at the central bank’s neoclassical Threadneedle Street headquarters, most prominently as chief cashier, with his name on every banknote. He was head of the Bank’s supervisory body, the Prudential Regulation Authority, when in 2016 George Osborne, then chancellor, asked him to take over at the industry consumer watchdog, the Financial Conduct Authority.
Carney was an energetic governor and a major player on the global stage, whose job ranged from monetary policy and the setting of interest rates to designing the regulatory architecture for the banks and insurance companies. During his time as governor he has flagged the climate crisis as a major issue for the finance industry, and until recently he was head of the G20’s Financial Stability Board.
Bailey’s forthcoming eight-year tenure is likely to be equally busy. Here are five issues that will be high on his agenda.
Brexit
Already well acquainted with the nuances of Brussels-speak and the art of negotiating with EU officials, Bailey must now support the Treasury as it seeks to protect the City from a calamitous Brexit, one that leaves London accepting all the EU’s rules just to maintain basic access to EU markets.
Carney has been outspoken in his view that rule-taking without influence would be a disaster for the myriad companies that make London the most international of all financial centres. Bailey is expected to argue that “equivalence” – the right of access for non-EU countries to EU financial services markets – is more about the outcomes of policy than it is a slavish application of rules. In his favour is the distinct worry of the French and Germans that the eurozone’s main access to deep pools of investment funds will lie outside its borders. While there are some voices in mainland Europe calling for London to be brought to heel under threat of being damaged by Brexit, there are saner officials looking for a compromise that maintains something like the status quo.
Hedge fund investigation
The Bank has been embarrassed by revelations that hedge funds have eavesdropped on its press conferences with enough lead time to make millions of pounds from the information. Internal disciplinary issues will probably be cleared up before Bailey arrives and staff blamed for the mess will be sanctioned. But it will be a setback for the new governor if one of those to blame is the chief operating officer, Joanna Place. At least one former Bank official has called for her departure. If she is sacked or demoted, the Bank’s hierarchy will lose one of its few senior women at a time when the drive to promote women to top jobs is already faltering.
Bailey must also get to grips with ageing electronic systems. Back in the 1990s the Bank took over processing the bulk of the City’s financial transactions after botched attempts by the Treasury to design and build modern systems. An upgrade is now needed – but this has the potential to founder on the rocks of competing demands. Bailey will need all his technical expertise to make sure the overhaul isn’t delayed like other major infrastructure projects such as Crossrail.
Stagnating economy
Inflation at the moment is low and falling. Last month it slipped to 1.5%. Ordinarily, an inflation rate this low when wages are increasing at 3.5% would force the Bank’s monetary policy committee to increase interest rates. Yet at the MPC meeting last week, two members of the nine-strong committee called for a cut in the Bank rate from 0.75% to 0.5%.
How to push interest rates back to pre-crisis levels of around 4%-5% is the question. Clearly, very high levels of employment and inflation-busting wage growth are not enough. The British Chambers of Commerce warned Bailey after his appointment that, with the economy “stagnating”, businesses will want to see the Bank use “the levers at its disposal to support investment and growth”.
The chancellor, Sajid Javid, could come to the Bank’s rescue if he sanctions extra borrowing and spending that has the effect of boosting growth. That said, the hard Brexit envisaged in the Queen’s speech could push the UK into recession and force Bailey to unveil even more unorthodox measures to keep banks afloat and credit flowing to consumers and businesses.
Climate crisis
Sarah Breeden, Threadneedle Street’s head of international banks supervision, has said global heating could lead to a collapse in confidence akin to that during the 2008 financial crash, possibly wiping out as much as $20 trillion of assets. She said institutions and companies should act now to reduce their own carbon emissions and the impact of a broader climate crisis on their organisations.
The warning echoed previous calls for action from Carney, who made climate breakdown a core concern for the Bank. It is not clear how Bailey views the crisis and how far up his agenda it will appear, but there is momentum inside the Bank to push ahead with initiatives that put the spotlight on financial companies that fail to take action.
Communication problems
Carney arrived with a brand-new way of communicating about the course of interest rates. “Forward guidance” was a means of signalling when the cost of borrowing would rise. At the time, he said unemployment would first need to fall to 7%. This would spark a wages boom, and higher rates would be needed to calm an overheating economy.
However, unemployment is now 3.5%, inflation has failed to spike, and interest rates are still ultra low. Forward guidance didn’t quite go according to plan.
Jagjit Chadha, director of the National Institute of Economic and Social Research, has said action is needed to address confused messages when members of the MPC express different views. Chadha has called for the Bank to develop more effective policy guidance by publishing the expected paths of its base rate and explaining the implications for interest rates of the many scenarios that lie behind its inflation-report fan charts. “This could improve the Bank’s ability to influence market expectations,” he said.
