RUTH SUNDERLAND: Andrew Bailey could stay with the Bank of England until 2028 and to his opponents that will seem like a very long time
- Bailey, swinging from indifference to alarmism, pins the rose on his own back
- Bank independent since 1997, but this has recently come under discussion
- Success is highly dependent on the quality of the governor
- Problem with regime is that governors are installed for eight years
Andrew Bailey, the beleaguered governor of the Bank of England, awaits another week. Inflation and employment data will continue to paint a disturbing picture of rising prices and labor shortages.
Its defenders point to similar economic problems in other developed countries, where central bankers have acted even more slowly.
But Bailey, with his leaps from indifference to alarmism, has pinned a bull’s eye on his own back. So much so that Liz Truss is talking about revising the Bank of England’s mandate if, as is increasingly likely, she grabs the keys to No. 10.
In the firing line: Andrew Bailey, with his leaps from indifference to alarmism, has pinned a rose on his own back
Bailey has indicated that he is open to the idea of a revision of the mandate, which has focused on low inflation since the 1990s. 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, possibly linked to nominal GDP or employment.
A positive move would be for more outside members of the Monetary Policy Committee to set interest rates to reduce the risk of groupthink.
The Bank has been independent since 1997, but this has recently been called into question. Independence from the central bank is a nice principle. It prevents cynical politicians from manipulating interest rates for their own electoral ends, at the expense of the public.
But its success is highly dependent on the quality of the governor. If there’s a duffer on Threadneedle Street, the country is in big trouble, not least because it’s so hard to get rid of him or her. Truss can look into the governor’s term of office and the circumstances under which he or she can be impeached.
Open demands for Bailey’s head are on the fringe: The eviction of the central bank governor in a democratic, developed country should not be taken lightly.
If Bailey were to be removed at the behest of politicians — some of whom probably can’t name members of the Monetary Policy Committee, let alone conduct monetary policy — it would cause turmoil in the markets. It would also make it difficult to recruit a world-class replacement.
One problem with the regime is that governors are installed for eight years.
During that time, they do not require renewed government approval. In other words, it is very difficult to defenestrate them.
The Bank’s court and the Chancellor can theoretically fire a governor if he or she is on the run for months, goes bankrupt or is unfit to function, for example through habitual drunkenness.
The idea is to avoid being banned from Threadneedle Street simply because the government doesn’t like what a central banker says or does. The eight-year term was introduced ten years ago. The idea is that it’s 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 that there is no formal mechanism to impeach a governor before the end of his term does not mean that it is absolutely impossible.
Behind the scenes, pressure can be applied and ‘dismissal’ manipulated.
Likewise, a stubborn governor may pin his or her heels and believe they can survive longer than their political tormentors, who remain at the mercy of the voters.
Bailey, who is only two years old, has said he plans to serve out his term in office, which he sees as part of the bank’s independence.
He may hide with the Old Lady until 2028 and to his opponents that will seem like a very long time.