ALEX BRUMMER: Truss gives Andrew Bailey the thumbs-up

Were the new incumbents on Downing Street anything like as ruthless as Todd Boehly, the proprietor of Chelsea FC, then among Liz Truss’s and her Chancellor Kwasi Kwarteng’s first moves would have been to rid themselves of the governor of the Bank of England.

Ukraine war or not, after 25 years of steady-as-you-go on inflation, Andrew Bailey has been at the helm as consumer prices year-on-year climbed to 10.1 per cent ,with a jump to 13.3 per cent projected for the fourth quarter.

The current inflation rate is more than ten times the Bank’s target, the highest among the G7, and in spite of insouciant comments (for much of 2021) about inflation being transitory, it turns out to have been anything but. 

It is at their peril that Western governments dispense with the services of independent central bank chiefs.

My main recollection of such a thing happening was when Jimmy Carter’s energy malaise became an acute dollar crisis in 1979 and G William Miller was displaced by the legendary Paul Volcker.

With the new Truss government moving the dials on fiscal policy – today will see a £100billion-plus rescue for household and some business power bills – the Bank of England’s task of bearing down on surging prices will become ever more critical. 

And with the pound falling to its lowest level since 1985 against the dollar, the risks of removing the governor could be horrendous.

So it should not be that surprising that when the Chancellor met with City grandees, he was unequivocal in supporting ‘the independent Bank of England’s mission to get inflation down quickly’.

All the early hustings talk of changing the Bank’s mandate has gone up in smoke as the realities of office dawned. 

Nevertheless, at some point, as Bailey himself says, a review of the Bank’s mandate may be necessary. 

The make-up of an interest rate setting Monetary Policy Committee, which bears no diversity resemblance to the top tier of the Truss team, might be appropriate.

Bailey made clear before the Commons in his latest testimony that the Bank has to hit the inflation target, ‘hard as this may be in terms of consequences’.

His words, those of Kwarteng and a looser fiscal policy means that borrowing costs may have to rise faster and more sharply than most consumers would like.

Today it is widely expected that a previously reluctant European Central Bank will take the bold step of raising its key interest rate by as much as three-quarters of a percentage point. 

Given the weakness of sterling and looser budgetary policy, the Bank might be advised to do the same next week and lift rates from 1.75 per cent to 2.5 per cent.

Certainly the housing market looks as if it could take the pain, with Halifax reporting a 0.4 per cent rise in prices in August and an annual rate of increase of 11.4 per cent. 

The Bank’s independence and Bailey’s leadership looks secure. But now it must deliver.

Cast list

The Kwarteng coffee with the Square Mile’s big hitters shows how little has changed since the financial crisis of 2007-09.

All the aspirations of creating a new class of challenger banks, armed with new technology, have been gravely disappointed. Several of the most innovative digital lenders have encountered problems.

Greensill has exploded. Losses at buy-now-pay-later pioneer Klarna soared to £500million last year as Apple and several of the High Street banks cannibalised its model. 

Wise came to the London market profitable but has been beset by the lax tax arrangements of founder Kristo Kaarmann and governance issues. 

And the FT reports that the £29billion Revolut is engaged in cost-cutting review amid fears of a downturn.

It is not surprising that they were missing in action with the Chancellor. More concerning is the absence of a seat for Debbie Crosbie, the boss of leading mutual lender Nationwide. Next time perhaps?

Lounge lizards

Say it quietly, but WH Smith, the newsagent and bookseller with an independent history dating back to 1792, is proving a handsome winner from the chaos at British and international airports.

The delays which have kept passengers hanging around for hours (and in some cases days), saw sales of everything from snacks to headphones and neck cushions soar. 

Its travel arm reports a 29 per cent jump in sales over the last six months ahead of pre-pandemic levels. Whoopee.