BOE’s Bailey: Monetary Policy To Tighten When Conditions Require It

5 February 2021

By David Barwick – FRANKFURT (Econostream) – The Bank of England’s monetary policy will tighten when the situation changes so as to warrant tightening, Andrew Bailey, Governor of the BOE, said on Friday.

Speaking at the German Symposium of the LSE, Bailey said that arguments that the Bank had compromised its independence by adopting policies favourable to the government ‘are entirely without merit’.

The BOE’s large-scale purchases of government debt and lowering of the borrowing costs faced by the government reflect its counter-cyclical efforts to support demand in line with its inflation target, he said. It is thus ‘hardly surprising, and indeed consistent, that the government should be able to benefit from those financing conditions’, he said.

‘Put another way, to be independent does not mean to be disorganised’, he continued. Monetary policy is correlated with fiscal policy and there are in fact ‘mutually reinforcing effects from monetary and fiscal expansions’, he observed.

The steps taken by the BOE are more effective because of its independence, ‘and because we will reverse these actions when conditions require that’, he said.

‘Of course, the real test of this may come when we reach the point at which policy needs to be tightened’, he said. ‘Actions will speak louder than words.’

Were the Bank to fail to pursue its inflation target ‘would also be found out almost immediately by financial markets’, he said. ‘Inflation expectations would become de-anchored. And the policy, even if pursued, would risk being self-defeating.’

‘So there is both an institutional and a market discipline at work to mitigate this risk, which means that – while this risk does exist and it is encouraging that it is being scrutinised – in practice it is very unlikely to come to pass’, he said. ‘And to be clear, there is no signal on policy in what I have just said.’

‘We are not purchasing government debt to finance the government and the government is not telling us to do it’, he said. ‘Our decisions on QE…are not motivated by, “What level of money does the government need to raise in the next period?” … Far from it.’

In other comments, Bailey said that the Bank had not seen an erosion of inflation expectations and that he expected structural changes to the economy to result from the pandemic. ‘We’ve already seen a major shift in retailing’, he argued. The previous shift online of retailing of similar magnitude had taken some seven years, he noted.