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Bank of England Governor Andrew Bailey
Photo:
Drew Angerer/Getty Images
When the history of Britain’s recent Trussonomics fiasco is written, make sure Bank of England Governor
Andrew Bailey
gets the chapter he deserves. The palaver about Prime Minister
Liz Truss’s
failed tax-cut plan has obscured the way Mr. Bailey politicized the British central bank.
Mr. Bailey’s credibility was already in question before Ms. Truss and former Chancellor
Kwasi Kwarteng
announced their fiscal plan on Sept. 23. The BOE has been late and slow fighting inflation, and on Sept. 22 it surprised investors with a 50-basis-point interest-rate increase after markets had come to believe 75 points (in tandem with the U.S. Federal Reserve) would be more appropriate.
Mr. Bailey’s actions in the past month have also politicized the central bank in a new and worrying way. Markets reacted badly to the tax-cut proposal, with the pound falling and yields on government bonds rising. Mr. Bailey initially said the BOE wouldn’t intervene, although in a loquacious statement that coyly suggested the fiscal plan would be inflationary—something Mr. Kwarteng would have disputed.
Two days later, Mr. Bailey changed his mind as stress mounted on improperly hedged pension funds. The BOE announced a temporary bond-buying operation. The measure calmed some frayed nerves. Crucially, however, Mr. Bailey insisted purchases would end on Friday, Oct. 14. This all but guaranteed markets would remain agitated as investors bet on whether he was serious about this deadline. The press then treated this agitation as evidence markets couldn’t endure the tax-cut plan.
The deadline also created a cliff-edge after which Ms. Truss would have to worry about worsening market turmoil unless she acceded to markets’ perceived demand to backtrack on the fiscal plan. Meanwhile, members of the BOE’s policy-setting committee fanned out to imply markets might be right to worry about the tax cuts.
If this was part of a strategy to influence fiscal policy, it worked. Ms. Truss on Friday fired Mr. Kwarteng and installed
Jeremy Hunt
as Chancellor with the assignment to ditch the tax-cut plan. Mr. Bailey had got his man: There was an “immediate meeting of minds on the importance of stability and sustainability,” Mr. Bailey publicly crowed after his first conversation with Mr. Hunt. This was a notable, and inappropriate, endorsement of a fiscal policy choice, after Mr. Bailey had been so obviously cool on Mr. Hunt’s predecessor.
Mr. Bailey may have been taking revenge against Ms. Truss, who had criticized the BOE for its slow response to inflation as she ran to be the Conservative Party leader this summer. Her proposed response was to consider revisiting the central bank’s legal mandate. The BOE’s behavior the past month has proven her right beyond what she imagined.
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