Andrew Bailey, governor of the Bank of England, joins OMFIF chairman David Marsh to discuss the evolving role of central bank independence amid persistent economic shocks, heightened geopolitical uncertainty and growing financial stability risks. They consider how central banks can preserve credibility and public trust while navigating an increasingly complex policy environment.
The discussion examines the relationship between monetary policy and financial stability, the challenges of maintaining operational independence beyond inflation targeting, and the implications of political scrutiny, technological changes and market fragmentation for the future of central banking. It also considers how central banks should respond as their mandates increasingly intersect with wider public policy objectives.
Read the edited transcript here.
Speakers include
Andrew Bailey, Governor, Bank of England
David Marsh, Chairman, OMFIF
Key extracts from the conversation
1. Independence and accountability
The Bank of England is independent, in effect, of government. We’re not independent of parliament in the sense that parliament can legislate. And we’re not independent of the people of the country. Of course, we’re not. Nobody ever should ever think that we are, nor should we be. We serve the people of the country. We serve their representatives and parliament. We’re accountable to them. I take that very seriously. I think this is how democracies work. It is a very well structured form of independence. It must be, otherwise we really lose our legitimacy. An important part of that is accountability. Accountability to parliament, accountability to the public, accountability to the public through parliament. I have appeared in parliament more times than I care to remember. I regard it as among the most important things I do. We take it extremely seriously, and I know my fellow governors in other countries do as well.
2. Institutional structures
No central bank can create world peace. We can’t predict, we can’t forecast when these conflicts are going to start, and we can’t solve them with monetary policy. In the sense that monetary policy doesn’t bring peace in the Middle East, our job is to return inflation to target, and the test of the effectiveness of central bank independence and the monetary policy framework is how we do that. In a sense, central bank independence is more important in conditions like these than in the past for holding inflation at 2%. It’s not because my predecessors had it easy; they were operating in very different circumstances. These are times when we need the institutional structure more than ever.
3. Are you willing to be unpopular by taking monetary policy decisions that the political scene and the public might find is the wrong thing to do?
Yes, because otherwise we’re not doing our job.
4. Monetary-fiscal coordination
I don’t think there are many cases where independence is interpreted as meaning you don’t discuss the economy [with the Chancellor of the Exchequer]. We discuss the economy regularly, and we exchange views on it. We exchange what we’ve learnt on the economy, and that’s very important. What we don’t do is say, ‘well, if you do this, I’ll do that’. But both policies are operating within frameworks.
5. Have the barriers to possibly repeating QE at the lower bound now become greater?
I can tell you from personal experience, it’s very easy to agree with you and end it there. But you may remember, we had a debate in 2020 about negative interest rates. Of course, other central banks did it. I don’t think it’s an easy tool. I really don’t. I was very, frankly, cautious about it at the time. I’m still cautious about it. Its effectiveness also has to be called into question. There are real limits on how much you can do because of the alternatives, instruments that are available that avoid it.
6. Publication of Treasury indemnity over QE losses
I was worried that there was a degree of conspiracy theory around this indemnity. I’m afraid that, when you read it, it wasn’t a particularly exciting document. It wasn’t intended to be particularly exciting. It’s not for me to talk on behalf of the Treasury. The Bank of England’s point of view was: look, we do not want conspiracy theories. There’s enough stuff going on without having a conspiracy theory around the indemnity. But it was the Treasury’s decision, because they have to look more broadly across the whole of government.
7. Is the Bank now more vulnerable to criticism because of responsibility for banking supervision and macroprudential policy ?
The answer, of course, is ‘Yes’. But I would take you back to the financial crisis, and the consequences out of which these changes come. I was quite centrally involved in the Bank’s work during the crisis. I’m afraid that the arrangements that were put in place – going back 30 years now, which took took regular bank supervision out of the Bank – did not set up an effective financial stability framework in the sense that we have it now. It left us very badly exposed in the context of the financial crisis.
8. Criticism of Jerome Powell by President Donald Trump
The point at which, as other governors, we decided to go public on this was when it became an attack on him as a person. Not because of what I would say is Fed policy. I know him very well. We know each other as I know other governors very well. I count Jay as a friend. I know Kevin Warsh very well, as well, but I count Jay as a friend. He’s a man of the utmost integrity. I think it was the right reaction in that time to say, ‘I’m sorry, we are going to stand by our friend.’ I would do the same again, frankly.
9. What combination of signals would make you act on interest rates before the second-round effects are clearly observable?
In any situation like this, if we were to wait for the picture of second-round effects to be fully emerged – I’m not saying anything new here – it’s most likely we would have waited too long. That’s a fact because of the way in which the transmission mechanism works. That is why inflation expectations are important because obviously they’re a forward view.
10. François Villeroy de Galhau, the departing Banque de France governor, put it very well, in a London School of Economics lecture a few weeks ago: he said, ‘If you were to cut short-term rates, or not put them up, this will probably put up long-term interest rates because people would be worried.’ So, in other words, it’s totally the obverse of what a well-known person sitting in the White House might think he wants.
I think François put it very well because I think that if you don’t respond – or if you don’t do what you need to do – to get inflation back to a point of price stability, whatever that is in your regime, then the risk , as you rightly put it, is that you will actually cause long rates to go up because people will lose confidence in the regime. So I think that is a very clear point, and I think François was absolutely right to make it.
11. What are the top qualities needed for the next governor of the Bank ?
You have to have a very clear sense of the importance of public policy. In the central banking world, you do have to have a very clear sense of how the pieces fit together. I regard one of my jobs here as how do these pieces fit together: financial policy, monetary policy, financial regulation, payments.
12. Could the digital gilt now under preparation be a good way of linking up to the euro area, where they will have a tokenised asset for the Bund market? Could these technological developments in payments have some political repercussions?
I know we’ll set all sorts of conspiracy hares running, but work we’re doing on payments is not a secret plot to go back into the EU. But, of course, you’re right. The technology is common to all. It’s all the same digital technology for all of us. So we’re all basically doing somewhat similar things.