RUTH SUNDERLAND: Andrew Bailey may be ensconced at Bank of England until 2028 and to his detractors, that will seem like a very long time
- Bailey, with lurches from insouciance to alarmism, pins bullseye to his own back
- Bank independent since 1997, but this has recently come under question
- Its success is highly dependent on quality of governor
- Problem with regime is that governors are installed for terms of eight years
Andrew Bailey, the beleaguered Governor of the Bank of England, is in for another bruising week. Inflation and employment figures will continue to paint a troubling picture of rising prices and labour shortages.
His defenders point to similar economic woes in other developed countries, where central bankers have been even slower to act.
But Bailey, with his lurches from insouciance to alarmism, has pinned a bullseye to his own back. So much so, that Liz Truss is talking about reviewing the Bank of England’s mandate if, as looks increasingly likely, she grasps the keys to No10.
In the firing line: Andrew Bailey, with his lurches from insouciance to alarmism, has pinned a bullseye to his own back
Bailey has indicated he is open to the idea of a review of the mandate, which since the 1990s has been to deliver low inflation. After decades of doing just that, the Bank’s recent performance has been dismal.
Truss may look at changing the inflation target, or incorporating other measures, perhaps linked to nominal GDP or employment.
One positive step would be more external members of the Monetary Policy Committee that sets interest rates to reduce the risk of groupthink.
The Bank has been independent since 1997, but this has recently come under question. Central bank independence is a fine principle. It prevents cynical politicians from manipulating interest rates to suit their own electoral purposes, at the expense of the public.
But its success is highly dependent on the quality of the governor. If there is a duffer in Threadneedle Street, the country has a major problem, not least because it is so hard to get rid of him or her. Truss may look at the governor’s term of office and the circumstances under which he or she can be removed.
Outright demands for Bailey’s head are at the fringes: Unseating the central bank governor in a democratic, developed country is not to be lightly contemplated.
If Bailey were to be removed at the behest of politicians – some of whom probably couldn’t name the members of the Monetary Policy Committee, let alone run monetary policy – it would create alarm on markets. It would also make it hard to recruit a world-class replacement.
A problem with the regime is that governors are installed for terms of eight years.
During that time, they do not need renewed approval from the Government. In other words, it is very hard to defenestrate them.
The Court of the Bank and the Chancellor can in theory remove a governor, if he or she has gone AWOL for months, goes bankrupt or is unfit to function, because of, say, habitual drunkenness.
The idea is to prevent exile from Threadneedle Street simply because the Government does not like what a central banker is saying or doing. The eight-year term was introduced a decade ago. The idea is that it is enough time for a governor to make sound independent decisions, but not so much that he or she lingers past their sell-by date.
But eight years of virtually impregnable power is much longer than most prime ministers or chief executives could hope to enjoy – or perhaps endure.
The fact there is no formal mechanism to oust a governor before the end of their term does not mean it absolutely cannot be done.
Pressure can be applied behind the scenes, and ‘resignations’ can be engineered.
Equally, though, a hard-headed governor could dig in his or her heels and take the view they can outlast their political tormentors, who remain at the mercy of voters.
Bailey, who is only two years in, has said he intends to serve his term, which he sees as part of the fabric of Bank independence.
He may well be ensconced at the Old Lady until 2028 and to his detractors, that will seem like a very long time.