It was do or die for Andrew Bailey and the Bank of England – in the end, there was no choice

When it came down to it, there was no choice.

Inflation stuck at just below nine per cent. Unforgiving buried price pressures. Businesses rebuilding profits. Workers with no choice but to demand more money.

These are the characteristics of an economy stuck in stagflation. The Bank of England had to take drastic measures.

Yesterday’s interest rate decision was billed as governor Andrew Bailey’s make-or-break moment.

He of all the experts at Threadneedle Street has suffered the greatest amount of critical column inches and slanders across the radio waves. It is his performance that will be remembered in the years to come.

Top of the list of things in which Bailey has been left wanting is creating a workable relationship with financial markets, mainly caused by his inconsistent and, at times, knee-jerk remarks on the judgements of the Monetary Policy Committee (MPC).

The poor communications began in November 2021 when Bailey sent a pretty explicit signal that he and the rest of the MPC would lift interest rates for the first time in years. They opted instead to keep them unchanged before jolting them at the next meeting, a pointless exercise that did no one any favours.

Next, asking workers to trim pay demands in February 2022 backfired badly, forcing him to re-shape his future public comments to ensure he also slammed companies hiking prices sharply.

This is the point he has now arrived at, claiming yesterday both the rates of pay growth and profit rebuilding are “unsustainable”. It shouldn’t have taken Britain’s inflation problem to crystallise as the worst in the rich world for him to arrive at such a conclusion.

Any central bank Governor would struggle in Britain’s current dire economic malaise. At its core lies no economic strategy

Once credibility is lost, it’s hard to regain, in any field. 

The Bank wasn’t at that point before yesterday’s 50 basis point rise to five per cent, but it was getting very, very close. 

Bailey and his gang called it right. His communications were more assured. A larger increase was needed and commitment to further such rises if needed gives markets clear direction. Now the Bank has demonstrated it’s prepared to stomp on the brake if necessary, the City will be more inclined to believe the MPC.

Markets think inflation will eventually fall, although that’s conditioned on rates continuing to rise. The Bank fulfilled those expectations yesterday by lifting rates more aggressively than was priced in.

But the Bank has to be clearer than simply saying it’ll be data dependent – otherwise markets can legitimately justify selling off UK assets after every batch of bad economic numbers.

Some have held Bailey up as some totemic cause of the UK’s inflation problem exceeding the US’s and Europe’s. He has been treated as some sort of punching bag by angry consumers and commentators.

Any central bank governor would struggle in Britain’s current dire economic malaise. At its core lies no economic strategy. The country has been suspended in a sort of feedback loop of depressed investment, fraying infrastructure, skill mismatches and stifling work – and all of these factors are inflationary.

So Bailey, muddling through this chaos, has regained some credibility by showing he will do the only thing he can in such circumstances: attempt to wrestle down prices by jacking up borrowing costs.

But another risk lies ahead.

Has the Bank gone too hard? Will the mortgage market turmoil force the UK into a recession?

His job may depend on answering both those questions correctly.