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Bailey at Bank of England heats up as inflation eases

Can we REALLY bet on Bailey? Things are heating up for the Bank of England Governor as inflation eases and UK plc stakes rise

Andrew Bailey did not have the best of times as Governor of the Bank of England.

The weekend he moved to Threadneedle Street in March 2020, the world’s financial markets were on the verge of collapse as pandemic lockdowns spread across the planet.

That year he faced “crisis upon crisis” as Russia’s war against Ukraine triggered a global energy price shock.

Under pressure: Last week Bank of England Governor Andrew Bailey admitted inflation will be more than five times higher at 10.25 percent by the end of this year

Still, he hasn’t covered himself in glory as the person directly responsible for fighting inflation in Britain.

The bank is mandated by the government to keep consumer price inflation at 2 percent. Last week, Bailey admitted that inflation will be more than five times higher at 10.25 percent by the end of this year. This is an indictment of his leadership.

If Bailey – who received a paycheck of £575,538 including pension last year – worked in the private sector his job would be at risk for such a disastrous performance. Instead, he has another six-year lease on top of his eight-year tenure.

It would be a brave prime minister daring to dismiss him on the grounds that it would be a disaster for financial markets.

The pound is already crashing in the forex markets – falling below $1.23 yesterday. So how much worse could it get?

No one disputes that Bailey, endowed with a first class Cambridge degree and a PhD in economic history, has a good mind and played a crucial role in navigating Britain’s ailing banking system through the Great Financial Crisis of 2007-09.

Despite this, he was derided as a “sexy turtle” by his predecessor, matinee idol, central banker Mark Carney.

The Canadian poked fun at the sluggish pace of post-financial crisis reform at high street banks when Bailey was in charge.

Many city watchers felt he disqualified himself for governor because of his performance in his previous job as head of the Financial Conduct Authority.

Bailey was chief executive at the time of the costly collapse of London Capital & Finance and the shutdown of failed fund manager Neil Woodford’s investment empire.

Bailey’s leadership of the bank has been seriously misjudged in relation to its forecasts.

In May 2021, the bank’s former chief economist Andy Haldane warned in a Daily Mail article that “the inflationary genie is coming out of the bottle”.

In an interview with the Sunday Telegraph this weekend, Haldane said: “Unfortunately, I was right about the inflationary impulse.”

He said “revital demand” as the economy recovered from Covid “clashed against restricted supply”.

As the economy recovered, energy prices rose and there were shortages of almost everything from lumber to semiconductors, sending prices skyrocketing. These tendencies were reinforced by Russia’s relentless invasion of Ukraine.

Rather than heed Haldane’s advice, Bailey and the other eight members of the monetary policy committee that sets interest rates left interest rates at 0.1 percent, the lowest level in the bank’s 327-year history.

The bank continued to inject money into the economy through its £895 billion bond-buying program known as quantitative easing. This is tantamount to printing money.

As the city experienced a tsunami in the cost of living last fall, Bailey insisted the soaring prices were the result of temporary post-Covid supply problems and were “temporary”.

When inflation rose to 5.1 percent in November 2021, the 63-year-old governor changed his mind and signaled markets that the bank would start raising interest rates. He confused everyone by retreating from the abyss at the last moment.

Finally, in December, the bank acknowledged that inflation had become “more persistent” and began raising interest rates.

The zigzag in the cost of living and interest rates is matched only by the bank’s less-than-inspiring forecast record in the Covid-era.

As the coronavirus pandemic hit, Bailey and his team warned of a workplace Armageddon, with the unemployment rate rising to 9 percent of the workforce, leaving untold millions in unemployment benefits.

A year ago, 7.75 percent unemployment was forecast as the furlough drew to a close. In fact, the unemployment rate peaked at 5.2 percent of the labor force and is now at 3.8 percent.

Twelve months ago, Bailey and his team forecast strong UK growth in 2022 of 4.25 percent, a number that has now been lowered to 3.2 percent for the first half of this year.

The UK is expected to be flat next year versus an earlier forecast of 2.25 percent expansion made a year ago.

When the Bank of England gained independence 25 years ago, then-Chancellor Gordon Brown’s advisors felt they wanted to isolate it from politics and make it an equally respected anti-inflationary machine as the Deutsche Bundesbank.

Instead, the bank’s balance sheet has been damaged, and there are fears that the UK (along with much of the West) could be thrown straight back into the high-inflation, low-growth era of the 1970s.

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Bailey at Bank of England heats up as inflation eases

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