Bank of England governor Andrew Bailey was sure-footed at the start of the pandemic. Photograph: Reuters
Tearing at the Tory party’s fabric is the thought of spiralling government debt. The subject triggers a cold sweat in some of the most emotionally resilient Conservative backbench MPs, such is the distress it generates.
Much as the German centre-right parties have spent the past 90 years fearing a return of hyperinflation, their UK counterparts worry about paying the national mortgage bill, and the possibility it will one day engulf and sink the ship of state.
Since the budget, there is a sense that the costs of the pandemic, of levelling up, of going green and of social care – to name just four candidates for extra spending – are scarily high.
Plenty of economists say these costs can be managed with higher borrowing. Even the experts who warned against rising debts back in 2009 have changed their minds. The International Monetary Fund and the Organisation for Economic Cooperation and Development say that after 30 years of falling interest rates, this is the moment to stick extra spending on a buy now, pay later tab.
Yet, gnawing away at the Tory soul is the prospect of an increase in interest rates by a fragile Bank of England, an institution that owns more than a third of UK government debt. This week, Threadneedle Street’s monetary policy committee meets to discuss the state of the economy and whether it needs to adjust its current 0.1% base rate.
Last year the committee was concerned that the economic situation was so bad it might need to lower interest rates even further, pushing them into negative territory. In recent weeks, though, the success of the vaccine programme, some additional spending by Rishi Sunak in his spring budget and Joe Biden’s monster stimulus package – which has made its way unscathed through the US Congress – have turned a few heads.
Now there are warnings of a rebound in growth so strong that it will force central banks to calm things down with the much-dreaded increase in interest rates.
At Thursday’s meeting, Andrew Bailey will mark a year as governor, and will be forgiven for wanting to draw breath. Within weeks of the handover from Mark Carney, he was plunged into the pandemic and – like his counterpart in the Treasury, Sunak – forced to plot a way through the crisis.
Bailey should set aside his in-tray and do the nation a favour by making explicit what, in a post-pandemic world, the Bank’s mandate means. And what he should say is neither outlandish nor controversial.
It should not differ wildly from what Jerome Powell, the head of the US central bank, said last week. Bailey should explain that the Bank’s focus is on generating a path for growth that has momentum and is sustainable. Only when the Bank can verify that jobs are being created – and, more importantly, that pay rises of at least 4% a year are being awarded – will it begin to consider tightening monetary policy.
This means interest rates cannot increase until the government has two things working in its favour. First, that there are enough jobs and pay increases to generate the level of tax receipts that can pay for higher debt bills. Second, that there is a level of growth which means the debt-to-GDP ratio, expected to hit about 110% during this parliament, starts coming down, even as the government spends more.
If Bailey says this like he means it, those who worry about rising interest rates can switch to worrying about something else, such as the climate emergency, Britain’s spectacular loss of biodiversity and rising levels of child poverty.
Bailey’s record over his first year in charge does not augur well. While he was sure-footed at the outset of the pandemic, dusting off the 2008 crisis playbook and printing a huge sum of money to restore confidence, things soon started to go awry.
He has flip-flopped from optimist to pessimist on the economy while throwing incendiary devices on the fears of those who worry about debt. In an interview last June, for example, he claimed the bond markets brought Britain close to insolvency when the bank launched its first pandemic rescue operation. It was an exaggeration that matched the hyperbole of his recent support for the idea that consumers are ready to “binge” once lockdown eases.
If the past 10 years has taught us anything, it is that the Bank has consistently done too little to help the economy and not too much. Bailey could ask Sunak to overhaul the MPC remit, increasing the inflation target from the current 2% to 3% or 4%, or bolting on a growth target that would force the Bank to keep rates where they are until growth reaches 3% or 3.5% a year.
That could be Bailey’s legacy, for which the nation would thank him.
Tearing at the Tory party’s fabric is the thought of spiralling government debt. The subject triggers a cold sweat in some of the most emotionally resilient Conservative backbench MPs, such is the distress it generates.
Much as the German centre-right parties have spent the past 90 years fearing a return of hyperinflation, their UK counterparts worry about paying the national mortgage bill, and the possibility it will one day engulf and sink the ship of state.
Since the budget, there is a sense that the costs of the pandemic, of levelling up, of going green and of social care – to name just four candidates for extra spending – are scarily high.
Plenty of economists say these costs can be managed with higher borrowing. Even the experts who warned against rising debts back in 2009 have changed their minds. The International Monetary Fund and the Organisation for Economic Cooperation and Development say that after 30 years of falling interest rates, this is the moment to stick extra spending on a buy now, pay later tab.
Yet, gnawing away at the Tory soul is the prospect of an increase in interest rates by a fragile Bank of England, an institution that owns more than a third of UK government debt. This week, Threadneedle Street’s monetary policy committee meets to discuss the state of the economy and whether it needs to adjust its current 0.1% base rate.
Last year the committee was concerned that the economic situation was so bad it might need to lower interest rates even further, pushing them into negative territory. In recent weeks, though, the success of the vaccine programme, some additional spending by Rishi Sunak in his spring budget and Joe Biden’s monster stimulus package – which has made its way unscathed through the US Congress – have turned a few heads.
Now there are warnings of a rebound in growth so strong that it will force central banks to calm things down with the much-dreaded increase in interest rates.
At Thursday’s meeting, Andrew Bailey will mark a year as governor, and will be forgiven for wanting to draw breath. Within weeks of the handover from Mark Carney, he was plunged into the pandemic and – like his counterpart in the Treasury, Sunak – forced to plot a way through the crisis.
Bailey should set aside his in-tray and do the nation a favour by making explicit what, in a post-pandemic world, the Bank’s mandate means. And what he should say is neither outlandish nor controversial.
It should not differ wildly from what Jerome Powell, the head of the US central bank, said last week. Bailey should explain that the Bank’s focus is on generating a path for growth that has momentum and is sustainable. Only when the Bank can verify that jobs are being created – and, more importantly, that pay rises of at least 4% a year are being awarded – will it begin to consider tightening monetary policy.
This means interest rates cannot increase until the government has two things working in its favour. First, that there are enough jobs and pay increases to generate the level of tax receipts that can pay for higher debt bills. Second, that there is a level of growth which means the debt-to-GDP ratio, expected to hit about 110% during this parliament, starts coming down, even as the government spends more.
If Bailey says this like he means it, those who worry about rising interest rates can switch to worrying about something else, such as the climate emergency, Britain’s spectacular loss of biodiversity and rising levels of child poverty.
Bailey’s record over his first year in charge does not augur well. While he was sure-footed at the outset of the pandemic, dusting off the 2008 crisis playbook and printing a huge sum of money to restore confidence, things soon started to go awry.
He has flip-flopped from optimist to pessimist on the economy while throwing incendiary devices on the fears of those who worry about debt. In an interview last June, for example, he claimed the bond markets brought Britain close to insolvency when the bank launched its first pandemic rescue operation. It was an exaggeration that matched the hyperbole of his recent support for the idea that consumers are ready to “binge” once lockdown eases.
If the past 10 years has taught us anything, it is that the Bank has consistently done too little to help the economy and not too much. Bailey could ask Sunak to overhaul the MPC remit, increasing the inflation target from the current 2% to 3% or 4%, or bolting on a growth target that would force the Bank to keep rates where they are until growth reaches 3% or 3.5% a year.
That could be Bailey’s legacy, for which the nation would thank him.
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