By Andy Silvester
The Bank of England and Andrew Bailey have botched their messaging, their forecasts and their decisions too often – and Britain, an inflation outlier, is now paying the price
Per Mervyn King, the former Governor of the Bank of England, markets – and indeed Britain – reacted somewhat hysterically to Liz Truss and Kwasi Kwarteng’s mini-budget last year. Certainly gilt markets went tonto, and Sky News was running a live ticker of sterling’s decline against the dollar. Whether right or wrong, King’s remarks to LBC bring to mind the famous bankruptcy quote: slowly, then all at once.
Individual events – like a mini budget – are naturally easy to see as triggers to certain events. It appears a simple case of cause and effect. But in truth most events are more slow-burning than can be explained by a single ignition.
Take the Bank of England’s gross mishandling of this inflation cycle. It is not all their fault – the Bank could not have foreseen a full-scale invasion of Ukraine by Vladimir Putin and nor should it be blamed for the absurd energy price cap, which has managed to ensure that Britain still somehow has sky-high energy prices months after the wholesale price has sunk. But from the off, the Governor and other high-ranking figures at Threadneedle Street have botched both their communication and their decisions.
We are now paying the price. Inflation is embedded in the UK economy in a way not seen elsewhere in Europe nor in the States. Far from starting early to dampen inflation – or, better, hiking interest rates in the good times in the mid-2010s back to historically normal levels – the Bank of England’s Monetary Policy Committee sat on their hands for months whilst every economist in Britain was forecasting a supply shock and sky-high inflation.
Having not done so, wage spirals took hold, with the Bank’s response limited to higher for longer rates in the long-term choking off economic growth and some tin-eared remarks by the Governor. He now bemoans ‘the labour market‘ as public enemy number one.
There is no individual trigger here; it is a series of errors that have got us here. Britain as a whole may have over-reacted to Liz Truss’ government and the spike in gilt yields it created. We might be under-reacting to the fact the picture is now worse; and the role that Bailey et al have played in getting us there.
