Bank of England's new governor faces battles on several fronts

Markets expect an institution with little room to manoeuvre on interest rates to soon start a new period of quantitative easing

FILE PHOTO: A man, wearing a protective face mask, walks in front of the Bank of England, following an outbreak of the coronavirus, in London, Britain March 11, 2020. REUTERS/Henry Nicholls/File Photo
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Andrew Bailey moved straight back into crisis mode when he returned to the Bank of England as its new governor on Monday, this time facing the threat of a global recession caused by the coronavirus pandemic.

Mr Bailey was central to Britain's prevention of a meltdown in its banking system during the global financial crisis of 2007-09, when he was a top BoE official.

A few years later, he was a key player in Britain's response to the Greek debt crisis which threatened to plunge the City of London back into chaos.

Now the 60 year-old, who spent 30 years at the BoE before leaving to run a finance regulator in 2016, is set to be tested again.

Last week, in Mark Carney's parting shot as governor, the BoE launched emergency credit measures to prevent a wave of corporate bankruptcies, and it cut interest rates to 0.25 per cent.

The move was part of a twin-tracked stimulus push announced alongside the UK Treasury, which unveiled Britain's biggest public spending budget since 1992.

But investors expect Mr Bailey will have to lead the BoE into further action right at the start of his eight-year term.

Challenged by British MPs earlier this month about whether he was nimble enough for the job at such a critical time, Mr Bailey recalled the drama of a decade ago.

"We had to do things in short order during that period which were pretty unprecedented, absolutely unprecedented in the history of certainly the Bank, and we had to do them at short notice," he said.

At one point last week, investors were fully pricing in another rate cut to an all-time low of just above zero on March 26, at the end of the BoE's first monetary policy meeting under its new governor.

Those bets faded on Friday but the BoE is expected to scale up its £435 billion (dh1.96 trillion) bond-buying programme, possibly as soon as this month.

That could help the government sell even more debt to increase its already giant spending plans.

"Looser fiscal policy and coordination with monetary policy is likely here to stay and will increase the effectiveness of both sets of tools," Benjamin Nabarro, an economist with US bank Citi, said in a note to clients.

"However, significant easing will also likely increase the dependence on the 'kindness of strangers' of an economy with large and persistent current account deficits."

So far, record-low borrowing costs suggest few concerns among investors about buying British debt.

Philip Shaw, an economist with Investec, said the joint policy action between the government and the BoE contrasted with a less coherent response by policymakers in the euro zone.

But deeper coordination with the government might raise questions about the BoE's independence.

Prime Minister Boris Johnson has stamped his mark on Britain's political institutions since his big election win in December. Sajid Javid, who appointed Mr Bailey in December, quit as finance minister last month after a row with his boss.

But any attempt to put political pressure on the central bank – as tried by US President Donald Trump with the Federal Reserve – could put the BoE's credibility at risk.

"Policy co-ordination is good when the various parties concur on what needs to be done," Mr Shaw said. "It's when policy disagreements occur that issues such as central bank independence come into play. But we are not there at the moment."

The main criticism of Mr Bailey's time as chief executive of the Financial Conduct Authority is that he was not tough enough on wrong-doing by bankers.

He came under fire from MPs in 2018 for fining Barclays chief executive Jes Staley £1.1 million rather than taking tougher action after Mr Staley tried to identify a whistleblower.

"The fact that he came out with a miniscule fine tells me that he was under a lot of pressure from the government not to chase away the banks or seen to be too hard on them," a person who worked with Mr Bailey said, speaking on condition of anonymity.

MPs this month stated their disapproval of the FCA's track record even as they backed Mr Bailey as governor.

But another former colleague denied he had been too timid.

"You can't achieve the goals of the FCA unless, to a degree, you carry the main body of the industry with you, and listen to their concerns," the person said, also speaking on condition of anonymity. "You can listen without being captured."

An FCA spokesperson did not provide a comment last week when asked about the decision on Mr Staley's fine.

While the coronavirus is the most immediate challenge for Mr Bailey, others are forming. Chief among them is the risk that Britain could be hit by the economic shock of trade barriers going up with the European Union at the end of this year if it does not strike a post-Brexit trade deal by then.

Mr Bailey must also maintain the BoE's independence in managing risks in Britain's huge finance sector at a time when the government wants to keep banks in London.

Bankers speak of Mr Bailey's affability and pragmatism, even if he lacks Mr Carney's "rockstar" central banker status, and they say his experience and track record mean the BoE is in safe hands.

"You're not looking for excitement in central bankers," said former British finance minister Alistair Darling, who worked closely with Mr Bailey during the financial crisis a decade ago.

"You're looking for someone who knows what they are doing."