Bank of England Governor Andrew Bailey Talks Trade, Brexit
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So you've urged the government, basically, to strike, in your speech earlier, to strike a deeper trade deal with the European Union to improve growth and minimize negative effects of Brexit. Where would you start? Where would you go first? Well, obviously, I think the government has made some important steps, and I think that's helpful. I mean, look, as I said, I don't take a view on Brexit per se. What I do say is we should do everything we can to ensure that the trading relationship is redeveloped, if you like.

I think there's important things we can do together in financial services. And I think, by the way, look, I think the recent, obviously, market volatility of recent weeks and months illustrates why it's important that we do work closely together. And we do, by the way, we do. And that's true also in the Financial Stability Board. You know, we have many common interests. There are many things that are common to our markets that are happening. And so we can do that together.

Plus, as I say, I think there's a natural common interest between UK and Ireland and the UK and EU on these things. So I hope we can, you know, very much hope now we can take that forward. Away from financial services, are there areas that you want the, are there other areas that you think the government should focus on without overstepping any of the red lines that they've put in place? Well,

Well, I think that, as I said in the remarks I made, I start from the point that trade is an important underpinning for growth. It's an important underpinning for activity in the economy. There are lessons to learn from recent years, which we can put into effect. But there's no question that open economies are important. And let me put this into important perspective. And this is the story on growth.

I mean, you know, the UK is not alone in this respect by any means. This is not a, it's a UK story, but it's not a uniquely UK story. We have had a lower potential growth rate in the UK for the last, really since the financial crisis. By the way, I'm not sure that's causal, by the way, but it happens to coincide. So, you know, the point I was making is that if you go back before the financial crisis, the potential growth rate in the UK was probably around 2, 2.5% a year. Since then, it's been 1 to 1.5%.

And most of the difference is to do with productivity and to do with investment. And, you know, you look at the job we have with monetary policy, which is balancing supply and demand. You look at, obviously, the job that fiscal policy has. It is harder to run macroeconomic policy when you've got a lower growth rate. I mean, history tells us this. So raising the potential growth rate is critical. And I say the UK is not alone in this respect.

How much more necessary is it because of the trade war also that we're seeing? Well, I think it underlines the importance of it because the trade situation will, you know, if the world economy fragments, that will also have an impact on growth. The point I made, I mean, it impacts on things like knowledge transfer. It impacts on supply chains. So it will have an effect, yes.

Is the world fragmenting for real, or are these just jitters that then will settle? Well, I hope we can get past the sort of disruption we're going through. And it's why, as I said in my remarks, I do think it's critically important that we focus on ensuring that what I call the multilateral system is rebuilt and is robust. And I include the World Trade Organization, I include the IMF,

Because they are absolutely important fundamental parts of the system. But does the current, I guess, trade turmoil make it more necessary for the UK and the EU to get together, 100%? Well, I think it does emphasize the need to do it, because it puts all of us in a situation where we've got another risk to activity in the economy. So I think doing everything we can...

to rebuild that relationship in this situation. But of course, we also don't, by the way, look, we don't want to lose the relationship with the US. I mean, we really want to get to the issues that are underlying this and help to solve them. It's not something we want to sort of wish away. Is there more uncertainty because of the trade turmoil than there was after Brexit? Oh, that's a hard thing. I think, well, I think, look, post-Brexit, I mean, obviously, there was no question what the decision was.

The uncertainty was, of course, was around how it was going to be put into effect. And that went on for quite, you know, you think about it, that went on for quite a long time. I think the challenge we have at the moment is that we don't actually know what the outcome is here. I mean, this is one of the problems we have in, you know, obviously in monetary policy is, you know, I would say when we take our decisions on interest rates, you have to sort of stop the music, as it were, and say, OK,

We'll take this read of what's going on, what's going on in the economy and in the world economy, and then apply it into our monetary policy decision. But obviously, when I say that, however, you're making decisions on a forward basis because monetary policy has its effect looking forward. So then you've got the challenge as we had, you know, three weeks ago, um,

What exactly is going to be the end point of all of this? I mean, if we'd been having this conversation 24 hours ago, we might have had a different, you know, we'd have different facts around us for the moment. So that introduces, you know, we're sort of classic essential banks in talking about uncertainty constantly. We've also introduced the word unpredictability because I think that's a slightly different thing.

I mean, I know investment managers, you know, in Europe or really around the world are again trying to figure out the turmoil. I think someone's come up with the term, the taco trade, which is Trump always chickens out when it comes to imposing really tariffs, getting like a slightly nervous laugh. But how, you know, if you're thinking, because I know you think about trade wars, like how should investment managers think about the trade wars? Like what do we know? What do we not know? At every decision, how do you look at it? How do you look at probability?

Well, I think there's a number of things that we have to think about. Well, let me take one in the real economy and then we'll come on to markets maybe. I think the one in the real economy that we have to think about is if there is a negative effect on activity, is it going to be a demand effect or is it going to be a demand and supply side effect? And this is important because obviously we saw with COVID in Ukraine, this problem of having repeated supply side shocks going on.

I mean, I think it's quite interesting when I observe quite a lot of the commentators, and this tends to happen, that they immediately assume that it's a demand shock. And obviously that for a monetary policy, if you stop there, as it were, then you think, well, that's actually negative for inflation. But of course, if it actually turns out, and this does happen, that there is a supply shock element to it, and if that's, say, on supply chains, and if that turned out to be persistent, then that would not, the effect on inflation would be quite different.

Now, reading that is very hard at the moment, so we have to keep coming back to that. It's why we keep using, as you know, we keep using these terms, you know, gradual and careful in the approach. On markets, I think, you know, the issue is, I think, is this. We've seen very big changes in what I call the sort of structure of core financial markets in recent, you know, in the last five years, ten years. Big shift from the sort of, you know, traditional sort of bank dealer model to a non-bank model.

And before any of this happened, we were already spending a lot of time saying, well, what is the sort of pattern? What shocks can happen and how would they sort of push through and go through that system?

And of course, it's even more acute now in terms of understanding where the fragilities are in a world of volatile markets with that structure of bond markets, for instance. So it's a thing we spend a lot of time on. But how close have markets come to this financial doom loop spiral similar to what happened in the LDI crisis? Well, the good news is that I don't think – yeah, we didn't get near to that point –

And by the way, I think that's important for a number of reasons. One is that it does suggest, and this is where I do somewhat push back on the deregulation agenda, which is not because I think our rules and regulations are all perfect. They're not. But there isn't a trade-off between financial stability and growth, and there isn't a trade-off between financial stability and macroeconomic stability, and that's important.

Now, I think what we have seen so far is that the system has stood up in that sense. Now, so far, of course, we've got to keep a very careful eye on this, and we'll have to come back and, as we always do, sort of go over the entrails of what's happened and sort of look under the bonnet and say, well, what can we learn from this? And we will, no doubt, learn a lot, as we always do.

So far, I would say the system has stood up. But there has been strain in there. I mean, there's clearly been strain in markets. I mean, so far, this doesn't fill anyone with confidence. How big of a risk is it now, you think? Well, there's a lot of unpredictability and uncertainty out there, so we have to watch it very carefully.

What I would say is that I think we've, you know, all of us have now developed tools, you know, to handle that. We've got more tools to handle it. So that was one of the things that, you know, we built out of the LDI issue, for instance. It's not just about having, you know, resilience in the sense of more protection. It's also, you know, my view is, look, these are what I call sort of tail of the distribution risk events. There comes a point where...

Holding sort of permanent resilience for very, very extreme events is not the right answer. There is a world where it's actually more cost effective for the central bank to come in and deal with it. That's why we're moving towards having these non-bank emergency lending facilities, which we can trigger more easily. They're not standing facilities because that's the world of banks and money.

But because we've had this shift to the non-bank world so much in our markets, we've got to have these tools at our disposal. But I know you're paid to worry really about inflation, about growth, about everything. But do you worry more about a market event than anything else? Well, we're paid to do both. I mean, we worry about monetary policy because that's crucial to the well-being of the economy. It's crucial to the value of money, to real value of money.

And, you know, I sometimes hear people saying central banks are taking their eye off it. No, we haven't at all. But, you know, we have to do both. You know, these things don't... They can't exist in a separate universe. That's the mistake that was made before the financial crisis, certainly in the UK. So we have to spend a lot of time on financial stability. And we do, because that is equally about the resilience of markets. It's about the nominal value of money. And, you know, I say to people, look...

The last few months would have been wholly worse if we'd been dealing with a fragile financial system at the same time that we're having these shocks go on. We've had that experience. We've dealt with it. That's wholly worse. Every business starts with an idea. How can you go from daydreamer to industry leader? Amazon Business accelerates your journey.

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Governor, you have said that trade wars are bad and that imbalances in the global economy need to be managed by multinational institutions or multilateral institutions like the IMF. But actually, their scope is very limited. So is President Trump not right to try something different? Well, I think, I mean, you're right about the scope, but the scope and the effectiveness of these institutions is what we as the member countries enable them to be.

I don't think we can expect, I work for a moment and I spend a lot of time with the IMF, I don't think we can expect the IMF to go around waving a magic wand, solving every problem that comes our way. What they can do, and I think this is crucial and it's deeply embedded in the Bretton Woods system, is if you look at the articles of the IMF, trade is right up there from a macro perspective.

And we have to then, as the participant countries, as we are, as a permanent member of the board, as one of the big shareholders, we have to enable them to help us in that sense and to provide the evidence and the analysis and the framework for then saying, look, we've got to rebuild policy.

I'm not so closely involved, I'm not closely involved in the WTO, but I do see, you know, we see them a lot in the context of the IMF. I talk to Ngozi a lot. And again, I think we've got to say, look, if it isn't working, we can't just abandon it. You know, we've got to get together and say, what does it take?

to bring it back to where it can play the role that we need it to play. We can't say, sorry, that's no more. What do you think is needed to bring it back? Well, I think, as I said in my remarks, I think we've got to sort of look at the question of to what extent... Well, first of all, I think this is where the macroelement comes in. I think we've got to come to an agreed view on what is a persistent imbalance. Because it isn't any imbalance, clearly. What is a persistent imbalance? What's the meaning of a persistent imbalance?

And then what do we do about it? And then I think allied to that is this question of what you might loosely call industrial policy, which is to what extent is that being, in a sense, contributed to by industry? And then there's got to be a more robust framework in which those things can be sort of, in a sense, hammered out. Do you think the rest of the world is decoupling from America but pulling tighter somewhere else? Or is it just decoupling full stop?

I don't think, frankly, the whole process is that advanced, really. First of all, I don't really believe that... I think it's not useful or really right to talk about this sort of, you know, is the dollar going to be a reserve currency? The dollar is still the most used currency and is going to go on being the most, because there's so much infrastructure built around it that, you know, that's a long way off.

We may see some rebalancing of activity, but I don't think we're anywhere near that. I don't think we should want to be anywhere near that, frankly. I don't think really there's a great move to let's get together and fight the US together. I don't think that's the case. I think there's still a lot of...

you know, how are we going to deal with this? And I think we want to come together and we want to come together with the US and say, look, you know, we've got these multilateral forums. We've got to make these things work together to deliver, you know, sensible outcomes. I guess the question could be, you know, is there... Can it come back to what it was or is the world splintering, you know, irrevocably? Well...

Look, I think we have to put all our effort into doing that. I mean, you know, as you said earlier, I'm taking over the chair of the FSB, the Financial Stability Board. I mean, fortunately, we haven't seen those tensions in the FSB, but we have to be very acutely aware of it, and I certainly am. So it isn't fracturing. Look, I think the world economy has come under strain. I mean, let's be honest. You know, the Russia-Ukraine situation has created a lot of strain

in what I might call sort of world economic policy and world economic fora. So if you go to the G20, for instance, you know, it is having an effect on those institutions. They're not able to do the job that we need them to do.

But how much do you worry about bond markets in general when you look at financial stability? I mean, I think the IMF was saying that the gilt market has vulnerabilities, the debt management office targeting sales at the short end of the curve where the demand is, pension funds have pulled back. I mean, there's just a lot going on. Something could go wrong. Yes, I mean, obviously we're not responsible for debt management policy. It's the debt management office. I mean, I think they've said they're looking at this because the UK, of course, has had a history of actually...

issuing more at the long end. And look, there's a lot of sense to that. A lot of sense to that. But the curve has steepened a lot. And I think they're rightly now looking at, well, what does that tell us about going forwards about the market?

Governor, we have five minutes left and by popular demand I think we'll talk a little bit about UK monetary policy and wage and inflation growth. Since the May decision and some recent CPI and wage data, markets slashing their bets on rate cuts to just one this year. Does that sound about right? Well, you know... You're welcome. Yes or no, hands up. There's a lot of uncertainty here.

around at the moment. It's three weeks since, obviously, since I think we were last sitting talking to one another discussing this the day we took the decision. To be honest with you, on the UK front, I think the evidence that we've seen since really has been pretty much in line with what we were expecting to see.

And it really underlines the big decisions and the big questions that we have to keep coming back to. So we've been predicting this hump up in inflation for some time. It was basically sort of give or take under 0.1 what we expected it to be. It's not in what I call the sort of the pieces of the parts of the economy which tell you much about supply and demand. Unfortunately, it's in the sort of so-called administered prices. But the big issue for us is, is it going to cause second round effects?

In the labour market, I think the round of data that we've had since were pretty much in line with what we thought. But the big question, and I think Hugh Pillars put this very well, is, you know, have we seen some change in the sort of structure of the labour market, which is causing, for instance, you know, the pay increases to be higher than is consistent with the target? Is that going to be persisting?

Or are we seeing this very gradual sort of movement back to, you know, a position which is going to sort of bring us back to the sort of the target framework? And we have to keep coming back to that. And, you know, by the way, you know, we obviously, you know, we can vote different ways as we do. I mean, you know, if I describe the difference between probably my position and somebody who, you know, didn't vote for a cut last time, it's not because we have a really different analytical framework. I'm probably sort of...

I see slightly probably more evidence that I think we are going back, but I have to keep coming back to this judgment every time. Now, I would say, and I think we've discussed this before, that I think certainly in our case, all the news is coming out of tariffs and trade, and obviously they can have a very big impact, but I think still the fundamental drivers of what is going to influence inflation in the UK is UK issues.

Yeah, and given that you were just talking about that crucial payrolls data for April, how does it impact your thinking on where interest rates should go? Well, it was pretty much in line with what I/we were expecting. So you weren't surprised that it held up? No, I wasn't surprised. I mean, it was basically very much in line with what our staff had been telling us it would be in terms of the labour market data that we had a couple of weeks ago. I spent a lot of time talking to firms. I was in Northern Ireland yesterday talking to firms about what they're seeing.

We've essentially got a profile that brings pay increases down to somewhere like 3.7% later this year. I think we're still broadly seeing that pattern intact, but we have to keep coming back to it. It's not something we can assume will just happen. On inflation, I have two final questions. On inflation, the printover shot your projections, especially in services. Yes.

What do you think is driving that? So I think services inflation is interesting because it really has two parts to it. There's a volatile part and then sort of a non-volatile part. So the volatile part is in the sort of the transport, hotels, you know, what have you, that part. It is quite volatile. It may have got a bit more volatile. We had a stronger number in the data release we just had.

you know was it because easter had a different timing i don't know to be honest with you time time will tell we'll have another set of data before we take the final decision next time in three weeks time um the non-volatile the less volatile pass again it's sort of gradually grinding down but very slowly you look at other parts of the picture goods price inflation was a bit weaker but

Food, we're seeing some, you know, we're seeing strengthening in food inflation. But I think that's, we're not alone in that respect. I mean, I think other countries, other governors tell me they're seeing somewhat similar things. But of course, you know, the thing about food is that it does have a very big direct, you know, it's what people perceive inflation to be, can be heavily influenced particularly by food and energy.

Governor, a final question bringing it back to trade. Since the BOE's May forecast, the UK government has actually secured trade agreements with the US and the EU. So how big of a boost to growth do you think that will be? Well, look, I think it's a good thing. You know, obviously it's a good thing in the circumstances. And I say that not, you know, I'm not criticizing the UK government. Look, I think they would say the same thing. The circumstances are, of course, that

Even with this agreement, we're still going to have tariffs that are higher than they were before all of this started. So that's something that we have to bear in mind. And the second thing we have to bear in mind, and it goes back to the points I made about economies like the UK and Ireland being as open as they are, is that, of course, the UK-US trade agreement is important, but what the rest of the world does is as important to our economy because our economy is so open. So we have a very strong interest in what the rest of the world does.

The UK trade agreement doesn't sort of settle it across the board in that sense. It can't do, obviously. Maybe one final question because I get asked that a lot. How do you get briefed on the latest trade news? Are you scrolling through the Bloomberg website or do you get...

You know, hourly updates from your staff? Well, you get up in the morning and you say, oh, my God, what's happened overnight? This today? Well, I mean, you do. Obviously, look, we have staff who spend a lot of time following it. You know, obviously, I talk to other central banks. We talk to the market a lot. Obviously, we talk to U.S. authorities. And we then have to try and piece the story together, really. And particularly, obviously...

How is it... I mean, trade data also are inherently quite volatile. You know, they're not the most stable data necessarily ever to look at in that sense. That's not a criticism, that's a fact of life.

So, for instance, taking the data that had been released in the last month or so and saying, well, let's sort of spot the impact. It's not easy often to do that. I think you can probably see more of it in the U.S. data because obviously they've had quite a big, as far as I can see, quite a big, obviously, anticipation, stuff being taken into the U.S. in anticipation, which was why you've got slightly negative GDP but positive domestic demand going on. It's a negative net trade effect.

But our data, it's not yet as easy to see. Governor, thank you so much for your time. That was Andrew Bailey, everyone. Thank you.

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