A certain kind of silence falls over a room when Britain’s most powerful banker says “very, very difficult.” Andrew Bailey said them in Washington, D.C., at the IMF meetings, and they hit hard. As central bankers are taught, careful language is important. Not because they were surprising, but because they felt like they were really meant.
Bailey spoke at a time when the Bank of England’s future had gone from being uncertain to being very dangerous. Eight weeks ago, when the US and Israel attacked Iran, it changed the energy picture. Before that, people quietly thought that the Bank would start cutting rates later this year. Inflation was going down. There were signs that the job market was getting weaker. It was hard for businesses to pass on price increases to customers, which was a sign that demand was falling. It all pointed in the same direction, even if slowly. When there was a conflict, everything changed.
British household bills are going up because of rising energy costs, and because the UK depends so much on gas, this effect is worse than in most similar economies. In his BBC interview, Bailey said that, but he didn’t say it with alarm. He said it with the calm honesty of someone who knows the numbers and doesn’t like what they show. His one sentence, “The real determinant here is the duration of the conflict,” probably said it all for all mortgage holders in the country.
Not only inflation is a problem. That rising energy costs can make prices go up and slow down economic growth at the same time. This is known as a “stagflationary squeeze” by economists. When that happens, the old tools can’t clean up well. If you raise rates to fight inflation, you might hurt an economy that is already weak. If you keep them the same, price pressures could get stronger. The board doesn’t have a move that is easy.
One thing Bailey hasn’t done that’s important to note is panic. When he spoke to the British banking community at Mansion House in London, he pushed back against calls for broad deregulation, saying that the system was stable because of well-thought-out rules. Even though he admitted that not all rules were perfect—the Bank did make some changes last week to ease some capital leverage requirements—his main point was that stability isn’t fun, and that’s the point. “Success is when nothing happens,” he said, which, depending on your mortgage rate, could be very comforting or a little annoying.
Bailey also used the stage at the Mansion House to call for international cooperation on AI risk, especially on testing cutting edge models before they are widely used. It was different from the rate debate but also connected in a way. It was a reminder that the Bank needs to think about systemic risks on many fronts at once, such as energy shocks and algorithmic ones.
It’s still not clear when useful data will come in to clear things up. Bailey has made it clear that the Bank is waiting for proof of how the conflict is affecting the UK economy before making any firm decisions. That patience is likely smart. Also, it doesn’t help people with variable-rate mortgages who are looking at their monthly bill and wondering when or if they will get out of debt.
The IMF has said that the conflict between the US and Israel over Iran could send the world economy into a recession. The UK is expected to be hit harder than most other advanced economies. Chancellor Reeves has spoken out against the economic effects of the war. Many things in politics are changing quickly, and Reeves may be replaced as finance minister within days.
After all of this, Bailey always picks the same word: patience. The next few months will show if that patience is wise or just a sign of doubt.
