Bank of England blindsided by ‘extraordinary’ mini-budget, Andrew Bailey says

Governor of the Bank of England Andrew Bailey attends the Monetary Policy Report News Conference at The Bank of England, in London, Britain November 3, 2022. REUTERS/Toby Melville/Pool
Governor of the Bank of England Andrew Bailey said quantitative easing 'works best in periods of extreme crisis'. Photo: Toby Melville/Pool via Reuters

The governor of the Bank of England said the mini-budget was a “most extraordinary process” given the lack of clarity around the measures pushed by Liz Truss and Kwasi Kwarteng.

Andrew Bailey said that he believed that not even Treasury officials knew what was happening during the wild 44-days of Liz Truss’s premiership. "I don't think Treasury officials were clear what was going to be in it," he said.

He told the Economic Affairs Committee: “The lack of clarity between the prime minister and the chancellor about what was going to be in the statement, I think, illustrates the problem.

“It was just not known. It was not clear what was going to be in this statement.”

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He said it was an “extraordinary” process and there was no formal communication of the sort that would normally be had before a fiscal statement.

“I didn’t say to the chancellor, ‘you have to tell me what’s in this fiscal statement’, because, frankly, I would never say that to a chancellor,” he added.

“But, then, in normal circumstances, we have channels of communication. It wasn’t happening in this case.”

Bailey added that Kwasi Kwarteng’s failure to involve the Office for Budget Responsibility (OBR) removed much of the substance which the BoE relies on.

“By not involving the OBR in the process, that took away a good deal of the substance that we rely upon go with a budget, from the point of view of forecasting and understanding the measures that were in it.

“That was just not there. There was nothing.”

He reiterated that he, and the Bank of England, did not know what was going to be in the fiscal statement, which triggered a period of turmoil in the UK’s financial markets.

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Former governor Mervyn King highlighted that the BoE’s monetary policy committee got a briefing from the Treasury the day before the mini-budget , when they met to set interest rates.

Bailey said many investors were concerned that the government disregarded the OBR’s forecasts, meaning they were “flying blind”.

The governor also said he believed the central bank should not lower the rate of interest it pays on reserves held by commercial banks.

It came after the bank’s chief economist Huw Pill rebuffed suggestions it could offer tiered rates on reserves held at the Bank by commercial lenders as a way to stem losses.

Lord Bridges of Headley asked Bailey if he shared Pill’s view that “he is not a fan of the proposal” at the Lords economic affairs committee.

Bailey responded: “I would agree.

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“It is a fiscal decision in that there is no monetary reason for rates to vary in this instance.”

Asked in the Lords how far the Bank would reduce its portfolio built up through years of quantitative easing, Bailey said it depends on what is the new "equilibrium level the banking system needs to meet its financial stability and liquidity needs".

The Bank of England aims to have reduced its portfolio this year to £830bn in gilts and £15bn in corporate bonds as part of its quantitative tightening programme, designed to reduce inflation.

This excludes its £19bn intervention to stabilise the bond market following the mini-budget.

The BoE governor also said the Bank has learned that QE “works most effectively in a crisis” – by lowering long-term rates, it can helps households and businesses.

The Bank of England said it had sold £346.4m of the long-dated and index-linked gilts it had bought earlier this year to help stabilise financial markets.

Watch: Bank of England governor says the UK's reputation was damaged by Truss's mini-budget