UK BOE Gov Bailey Speaks

I want to use my time to look behind the latest state of monetary policy, at issues that have arisen from the experience of recent years, but with some reflections on where we are now. The pandemic caused a sudden, coincident and precipitous fall in global demand and supply – one of these did not obviously lead the other. Moreover, in March 2020 we faced monetary policy and financial stability issues arising from the same source, namely the pandemic. Taken separately, the responses should be different, with a more exceptional temporary, targeted and typically maximum force intervention better suited to dealing with a financial stability problem. In contrast, a monetary policy response of the sort used in 2020 is typically undertaken over time. But when monetary policy and financial stability issues coincide, the judgement becomes more complicated. By engaging both of the core central bank objectives, the pandemic posed an unusual but not unprecedented challenge. As economies started to adjust to the consequences of the pandemic there was a substantial increase in global demand for goods rather than services, at a time when the supply of goods remained disrupted and restricted. This was an asymmetric demand shock. Global goods prices rose as a result, akin to a cost-push shock for open economies like the UK. This was the context of the so-called transitory assessment of monetary policy, namely that such shocks should be short-lived in impact because supply chains should recover and inflation expectations should remain anchored in anticipation of that recovery. That’s the theory. The evidence suggests that, taken on its own, the global supply chain shock had run its course by the end of 2022. But a key question at that time was whether and to what extent there would also be catch-up effects in wages and services prices, and over what time period? In the UK, the labour market did begin to tighten but it was hard to discern at the time by how much. In mid- to late-2021 the UK Governme post: BOE GOV. BAILEY: I AM CAUTIOUSLY OPTIMISTIC THAT INFLATION EXPECTATIONS ARE BETTER ANCHORED. post: BOE GOV. BAILEY: IT IS TOO EARLY TO DECLARE VICTORY ON INFLATION. post: BOE GOV. BAILEY: WE NEED TO CHART A STEADY COURSE ON MONETARY POLICY. post: BOE GOV. BAILEY: INFLATION IS NOT BACK AT THE TARGET ON A SUSTAINED BASIS.

post: BOE GOV. BAILEY: WE STILL FACE A QUESTION ON WHETHER A PERSISTENT COMPONENT OF INFLATION IS ON COURSE TO DECLINE TO A LEVEL CONSISTENT WITH 2% INFLATION. post: BOE GOV. BAILEY: THE FORECAST IS CONSISTENT WITH A BENIGN VIEW OF PERSISTENCE. post: BOE GOV. BAILEY: WE GIVE SOME WEIGHT TO AN ALTERNATIVE, LESS BENIGN INFLATION PERSISTENCE SCENARIO. post: BOE'S BAILEY - ASKED IF BOE RATE POLICY IS "ONE AND DONE", SAYS WILL GIVE NO VIEW ON PATH OF RATES ** BOE GOES MEETING TO MEETING, MAKING JUDGEMENT BASED ON EVIDENCE ** MPC CONTINUES TO REMAIN HIGHLY ALERT TO RISKS OF INFLATION PERSISTENCE

It is a great pleasure to be here at this event, hosted by the LSE’s Financial Markets Group in honour of Charles Goodhart. This evening, I am going to talk about central bank balance sheets and in particular the Bank of England’s balance sheet. An esoteric topic perhaps, but an important one, now more than ever. And it is a topic on which Charles has written extensively. Charles worked at the Bank for nearly two decades, of course, before his distinguished career as a professor here at the London School of Economics. His article “The importance of money”, published in the Bank’s Quarterly Bulletin in 1970 and available on the Bank of England’s website, was a milestone in the study of the predictability of money demand.footnote[1] At the time this was an important issue in debates over monetary control mechanisms and the relative merits of monetary ‘rules’ and policy ‘discretion’, a debate he masterfully summarised in his 1975 book on “Money, Information and Uncertainty”. In this and later work, Charles brought his deep understanding of the nature of financial markets, of banking and of monetary assets to bear, the historical perspective always present. In his 1988 book “On the Evolution of Central Banks” he discussed “how the role and functions of Central Banks have evolved naturally over time, and play a necessary part within the banking system”. Fast forward two more decades – acr post: BoE’s Bailey: We Think the Central Bank Balance Sheet Will Remain Larger Than Before the Financial Crisis Though Not as Large as Today post: BANK OF ENGLAND'S BAILEY: A RANGE OF 345-490 BLN STG IS NOT A BAD STARTING POINT FOR CENTRAL BANK BALANCE SHEET || BANK OF ENGLAND'S BAILEY: REPO PORTFOLIO CAN OFFER A RELIABLE AND FLEXIBLE SOURCE OF RESERVES AS LARGELY ADDITIONAL HIGH-QUALITY LIQUID ASSETS TO THE SYSTEM

post: UK BOE DEP. GOV. BROADBENT: MARKET RATE CURVE MAY BE A LITTLE HIGH, BUT IT DOESN'T MEAN IT IS UNREASONABLE.

post: BOE'S BAILEY - LIKELY WE WILL NEED TO CUT BANK RATE OVER THE COMING QUARTERS BOE'S BAILEY - POSSIBLE WE WILL NEED TO CUT RATES MORE THAN CURRENTLY PRICED INTO MARKET RATES post: BOE GOV. BAILEY: WE HAVE NO PRECONCEPTIONS ABOUT HOW FAR AND FAST WE WILL CUT RATES. post: BOE GOV. BAILEY: MARKET MOVES IN INTEREST RATE EXPECTATIONS HAVE BEEN DOMINATED BY US MOVES. post: BOE GOV. BAILEY: THERE HAS BEEN SOME DECOUPLING RECENTLY BETWEEN UK AND US MARKET RATE EXPECTATIONS. post: BOE GOV. BAILEY: ONE SMALL CUT IN THE BANK RATE WOULD STILL LEAVE US WITH RESTRICTIVE MONETARY POLICY.

post: BOE GOV. BAILEY: GLOBAL INFLATION SHOCKS ARE FADING. post: BOE GOV. BAILEY: IT IS ENCOURAGING THAT INFLATION WILL BE CLOSE TO THE TARGET IN THE COMING MONTHS. post: *BOE'S BAILEY: `NOT YET AT A POINT' TO CUT BASE RATE post: BOE GOV. BAILEY: HIGHER THAN EXPECTED WAGE AND SERVICES INFLATION SINCE FEBRUARY SHOULD GIVE US PAUSE FOR THOUGHT, BUT SHOULDN'T OVERINTERPRET. post: *BOE'S BAILEY: JUNE BANK RATE CUT IS NOT RULED OUT OR PLANNED