With Bailey at the Bank a safety-first policy seems on the cards

Britain faces tricky waters ahead, but with its choice of Governor, the Government has opted for an insider who can offer a steady hand on the monetary rudder

The next Bank of England Governor Andrew Bailey is widely seen as the ultimate safe pair of hands. A Bank insider for decades, he oversaw key liquidity operations to keep money flowing during the 2008-09 financial crisis before becoming head of the then-troubled Financial Conduct Authority in 2016 – with some, if not total, success in taking it out of the headlines.

As an expert in financial regulation, banking liquidity and capital operations, we should expect Mr Bailey to bring such insights to his role chairing the Bank’s Monetary Policy Committee (MPC).

His academic training is as an economic historian rather than a purer monetary or macroeconomist. And he is known to anticipate that Brexit will lead to divergence between UK and EU financial regulation.

These three factors make him difficult to pigeonhole as a rate-hiking hawk or more cautious dove on monetary policy. It is plausible that they mean in some periods he will be one, and in others the opposite.

For example, many monetary policymakers around the world trained and served in a pre-2008 paradigm in which the banking sector and financial regulation were, while perhaps not quite irrelevant, certainly abstracted away into their own analytical silo.

Highly mathematical theories focused monetary policy analysis onto a few key issues of importance – inflation relative to target, inflation expectations, the output gap, unemployment, perhaps at a stretch pay growth, maybe if one were radical the money supply.

In practice, monetary policy-setters never totally bought into this framework. Other factors such as house prices or the level of the pound were often decisive, whether this was admitted openly or not. And since 2008, banks and banking stability in the face of the Eurozone crisis have frequently come to the fore.

In the past decade, this combination has often meant looser policy than purer monetary analysis might have implied.

When Mark Carney was appointed governor, the political significance of the banking crisis and the interplay between Quantitative Easing and monetary policy meant the period of a highly independent Bank of England, setting rates in marble halls far away from grubby politics, was over.

Mr Carney was widely seen as having been appointed politically precisely so as to explain why monetary policy wasn’t going to be tightened, and to take to his task with relish.

Part of the reason Mr Carney could succeed in this was that monetary policymakers whose grasp of the banking sector was a bit sketchy were easily intimidated away from raising rates by rather vague threats that doing so would undermine banking stability.

Mr Bailey will presumably bring a much more robust grip of that issue to bear. If banks are not really at risk his MPC may look more hawkish than Mr Carney’s; if they are, more dovish.

He may also bring a more concrete sense of what divergence of financial regulation postbrexit might mean, both in terms of upside and downside.

That may mean his MPC is less inclined to emotional over-reactions to Brexit-related events (such as the widely-criticised rate cut of August 2016).

He certainly faces a key period. The UK’S departure from the European Union may create some increased import costs, as trade barriers with the EU rise and reductions in barriers with the rest of the world (for example, if there is a new trade deal with the US) take a while to filter through.

On the other hand, the achieving of a Withdrawal Agreement with the EU and finality over a departure date will remove uncertainty and may trigger a mini catch-up investment boom, as well as strengthening the pound. Moreover, private sector pay growth already appears to be recovering, the Government’s first Budget is widely expected to loosen fiscal policy, and with unemployment already below 4pc there seems limited scope for employment growth.

The natural conclusion from the above would probably be that we shall see some tightening of UK monetary policy over the next couple of years. Yet financial markets have seen a large downward movement in long-term bond rates, internationally, over the past year. That might herald a global downturn or a patchwork of local crises flaring up again (such as a new Eurozone crisis).

These are tricky waters to navigate. It might have been that a bolder, riskier strategy could have yielded dividends, but in choosing Andrew Bailey as our monetary skipper the Government has opted for a steady hand on the rudder. We must all wish him well.

‘He is known to anticipate that Brexit will lead to divergence between UK and EU financial regulation’

‘Finality over a departure date will remove uncertainty and may trigger a mini catchup boom’