This is particularly outrageous given that central banks typically lower interest rates during times of economic downturn to help consumers and businesses bounce back with easy money. However, in the current recession, with inflation heading for 13 percent and the economy barely growing, the first duty of a money-holder is to restore price stability – even at the expense of a recession. .
However, such harsh behavior does not make friends. Especially not with prospective politicians who want to become prime minister and have promised the party members massive tax cuts in return. The Bank of England is “leading Britain into recession,” ranted Conservative Liz Truss, announcing that it would review the central bank’s mandate if the Tories elect her party leader, on September 5. is elected the new head of government. Although the government still sets inflation targets today, the Bank of England has been operationally independent since 1997.
Fed Chair Bailey isn’t just waging a multi-front economic war against inflation and recession. But he is still in the political pillar and must fear for the political independence of the Bank of England. So the 63-year-old had to do what the central bankers disliked the most: engage in a public debate.
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Liz Truss attacks the Bank of England
British Foreign Secretary and Conservative Party leader Liz Truss during a televised debate last Thursday.
“If we don’t do something now, we’re only going to make things worse,” Bailey said in a lengthy interview with the BBC, defending the rate hike. At the same time, he dismissed allegations by Truss and other conservatives that the BoE should have acted much sooner: “I would challenge anyone who sat here two years ago and said there was going to be a war in Ukraine.”
However, he doesn’t feel very comfortable in his own skin. After all, he knows that if the central bank is to keep inflation at 2 percent when prices rise by more than 13 percent in the near future, it will have trouble convincing itself. Bailey suspects that the economic pain he is inflicting on his compatriots is enough to remedy the situation: British household real income is expected to fall by 3.7 percent by the end of 2023 – the steepest rise in prosperity in 60 years. great loss.
Not considered the best communicator, Bailey is an easy target in the political arena. When he said in the spring that the BoE was “powerless” against high energy prices and supply shortages, he gave the impression that the old lady had already capitulated to inflation. Soon after, the central bank governor further angered his countrymen by calling high food prices an “apocalypse.” The fact that he was also advising workers struggling with the high cost of living not to overdo their wage demands only made matters worse.
Technocrats in political hand-to-hand combat
Like most of his peers, Bailey prefers to see himself as an independent technocrat doing his best to keep prices stable. In a crash course, the historian, who was trained at the elite university of Cambridge, is now learning that his work is inherently political if he is to defend the independence of the Bank of England.
So far, the fraternity has only spoken vaguely about testing the BoE’s mandate. However, it is not advisable for his supporters to make the central bank and its governor the scapegoat for a looming recession.
As a precaution, Bailey has signaled that he does not want to give up his independence without a fight: It is part of the independence of the Bank of England that it cannot be affected by a change of government. The governor also confirmed that he intends to fulfill his contract, which runs until 2028. Great Britain is therefore facing difficult and volatile times.
More: High interest rates, big concerns: Bank of England admits recession