Treasury Committee
Oral evidence: Bank of England Monetary Policy Reports, HC 419
Tuesday 3 June 2025
Ordered by the House of Commons to be published on 3 June 2025.
Members present: Dame Meg Hillier (Chair); Dame Harriett Baldwin; Rachel Blake; Chris Coghlan; Bobby Dean; John Glen; John Grady; Dame Siobhain McDonagh; Lola McEvoy; Dr Jeevun Sandher; Yuan Yang.
Questions 170 - 245
Witnesses
I: Andrew Bailey, Governor, Bank of England; Sarah Breeden, Deputy Governor for Financial Stability, Bank of England; Dr Catherine L. Mann, External Member, Monetary Policy Committee, Bank of England; Dr Swati Dhingra, External Member, Monetary Policy Committee, Bank of England.
Witnesses: Andrew Bailey, Sarah Breeden, Dr Catherine L Mann and Dr Swati Dhingra.
Q170 Chair: Welcome to the Treasury Select Committee on Tuesday 3 June 2025. Today we have one of our regular sessions with the Bank of England’s Monetary Policy Committee. We are pleased to welcome Andrew Bailey, the Governor of the Bank of England, Sarah Breeden, the deputy governor for financial stability at the Bank, and Dr Swati Dhingra, an external member of the Monetary Policy Committee, who has just been reappointed, so this is, in effect, a reappointment hearing at the same time. Joining us online from the United States is Dr Catherine Mann, who is also an external member of the Monetary Policy Committee. Welcome to you all.
I want to dive straight in about your last monetary policy decision. It was a very interesting three-way split and that gave us a lot of food for thought. If I could go first to Dr Dhingra, who is in the room, do you want to explain the difference between your views and those of other members of the committee?
Dr Dhingra: To give you some background, the key backdrop against which this decision was made was that the disinflation process has continued, with the global shocks unwinding as well as with domestic demand pressures easing up, especially after the really tumultuous period we saw during the pandemic. I think that, broadly, all of us agree on that.
There are other elements where I think the risks are more towards the downside for domestic reasons. Consumption and investment have been weak. Together with that is the global situation that we are seeing. Everybody is starting to revise their forecasts downwards for the reason that the trade policy atmosphere looks very strained at the moment.
Alongside those two factors, the general view that I have had is that we do not need to weigh down on living standards as much as we have been to get price stability back on target. That was the reason I moved more towards a larger reduction in Bank rate this time.
Q171 Chair: Dr Mann, what was your thinking?
Dr Mann: In my view, you have to take the two last votes in context and in comparison. In February, when I was looking at the conjuncture for the UK economy, I was looking at prospects for the labour market to loosen in a non-linear way, associated with the accumulated effects of national living wage increases as well as broadening the base of the national insurance contribution. I was looking at the potential for the labour market to loosen quite dramatically. Associated with that would be resumption in consumption and therefore a reduction in the pricing power of firms, which would show up in more deceleration in inflation rate. At that point, I voted for a 50 basis point cut, because I thought that financial conditions at that time were not consistent with what I saw as the prospects for the conjuncture.
Moving to May is when I chose to hold Bank rate at the rate that it was. What had changed from February to May was that the labour market had not loosened as much as I expected. Consumption remained weak, but no weaker than I had thought. Importantly, inflation, although decelerating, was not decelerating consistent with achieving the target of 2% in the medium term. Particularly, for example, goods prices were rising, not falling. Services prices continued to remain well above anything consistent with the 2% objective. Most importantly, from February to May financial markets had eased quite dramatically by even more than the 50 basis points that I had voted for in February. It is that combination of conjuncture, activity, inflation and, importantly, the state of financial markets that contributed to the two votes, which need to be seen together in context.
Q172 Chair: Of course, the Governor and Ms Breeden were somewhere in the middle. Could you explain what your thinking was in voting for the cut that you voted for?
Andrew Bailey: Although the news has been dominated by events coming out of the US—and no doubt we will come on to this later—in my judgment, the key factors in our decision, or in my decision certainly, were still starting with the domestic UK situation and the UK drivers. Then I played the news coming out of the US and the world economy into that.
In light of that, picking up what Catherine has just been saying, because it is quite a good starting point, the key questions for me are: are we on course for inflation to come back to the 2% target, and are we on course for the unwinding of any persistence elements from what we saw a few years ago? The key judgment there, for me, is in the labour market.
I take a slightly different view from Catherine on this. I do not think that we have seen particular surprises in the inflation outturns relative to what we were expecting. The labour market actually, for me, has loosened somewhat. The numbers for pay are interesting: they are at a level currently in the official data that is above anything consistent with the target. They are also out of line with past relationships. On the other hand, we are actually under the path we were expecting in the February report.
More particularly, and this is the key question for me, we have a view that we will see pay coming down this year. It was a central point in the survey that our agents did at the start of the year. At the moment, I think that that path is intact. My judgment is partly based on the more immediate data that we are seeing, but it is substantially also based on a lot of trips around the country, talking to firms. My judgment is that we are seeing that, and that is what firms are telling me they are seeing. That is going to be a crucial judgment going forwards, which is why “gradual and careful” remains my guiding line, as it were.
Sarah Breeden: Like Andrew, I was focused on domestic developments as I approached this decision, with the international environment an overlay on that. Indeed, I had thought that there was a case for a cut in Bank rate, even absent the international developments, because I judged that that domestic disinflationary process that we have all talked about was progressing as I expected and I thought that it would continue.
I had two factors in mind when I approached this decision: persistence and spare capacity. On persistence, I judged the outlook for that to be very dependent upon what was happening to wages. I had no evidence to doubt the steer from our agents’ pay survey that, come the end of this year—the policy-relevant horizon—wage settlement should be around 3.7% or 3.8%, which is a good percentage point below where we are now. The DMP had the same data.
On spare capacity, it is hard to observe that but I judged that some was opening up. My focus was on the labour market. Employment growth is flat; population growth is a quarter of a percentage point; vacancies are falling and there is evidence of employees wanting to work more hours, all of which suggested to me that there was some spare capacity opening up, and that the labour market was loosening and would continue to do so as we looked ahead.
Given that monetary policy was restricted and I had no evidence to suggest that persistence would be higher than we expected, and with loosening in the labour market, I was happy to cut Bank rate and then played the international risks into that.
Q173 Chair: Dr Dhingra, you have been outvoted—you answered this in your questionnaire—at 16 out of the 21 MPC meetings that you have attended. You are an outlier, and we quite like talking to people who have different views on this. You highlighted in your questionnaire that you think that we could have contained inflationary pressures with a lower peak in rates. When we have had other members of the MPC and the Governor in front of us, they talk about a slow glidepath to 2%. You wanted to see a lower peak in rates and then a faster change. Do you want to explain that a little bit more?
Dr Dhingra: I wanted to see a lower peak and held for longer, as long as was necessary, also to reduce the risk of then falling too low where we do not have enough policy room and have to rely on unconventional policy tools. That would have been my preferred path, but of course that is not where we ended up, so I have had to adjust my vote according to the paths that actually prevailed, as opposed to what would have been my optimal, desirable path to follow.
That being said, I can give a little bit more perspective on why my view might be different from the others and why, ex ante, you might think that both things make sense from a point of view of policy setting. The consensus view coming out of the pandemic was, typically, that there was strained capacity; there was demand that was fuelling inflation. Put on top of that supply shocks and you end up in a situation where you get very high inflation. It is perfectly reasonable at that point to think that the process of disinflation would be asymmetric: inflation would rise much more quickly, and then slow on the way down. Businesses would want to start building margins, and we would expect to see real wage growth rise and then consumption also pick up, all of which would then mean a lot more inflation persistence.
I did not think that that was going to be the case at that point, largely because I was relying a lot more on data that looked at supply chains and granular price information as to how prices pass along the supply chain. You were already starting to see evidence by the time I was put on the committee that some of these supply chain pressures were starting to ease. There was also a lot of noise in the wage data, which I was, very early, getting very concerned about.
Putting those various factors together, my general view was that I did not think that the disinflation process was not going to happen. It was going to be intact. I am glad that that is actually borne out in the data.
Q174 Chair: Now, do you agree with this slow glidepath towards 2%? Is that where you think we are going?
Dr Dhingra: I think so. Keeping policy gradual is a good thing. The problem now from my point of view is that, if I think that for a long time we have held policy too tight, at some point that level and time period over which policy has been tight starts to play a role. That means that I now need to start thinking about whether I increase the decrements for which I have been voting or not. That is the key challenge that I have had to face.
Q175 Chair: You have your next meeting on 29 June. Maybe I will come to that in a moment.
Andrew Bailey: No, it is the week before that.
Q176 Chair: It is the week before that. It is 26 June, is it? Forgive me.
Dr Mann, what about you and the gradual glidepath? You have, as you explained, moved very sharply from February to May already in your opinion.
Dr Mann: I believe that we are going to get to 2% at some point in time. There are two factors that are relevant in my voting strategy. The most recent switch from 50 basis points to a hold is importantly affected by the volatility in financial markets that is coming through spillovers from what is going on in other economies. That includes macroeconomic developments as well as policy developments in other economies. Because that volatility is so great and has been great for the last couple of years, in order to make a clear statement about the stance of monetary policy appropriate for the UK, it is important to make a bolder move and then hold for longer.
If you look at my voting record on the way up, as in when inflation was rising, I was voting for larger increments to be frontloaded in order to keep inflation more at bay. That was not what the committee, as a whole, chose to do.
My votes on the way down, so to speak, as inflation has come down, are following the same strategy. That is that, in order to make a clear statement to the financial markets and economic players—for example the pricing strategies of firms or household expectations, because these are affected immediately by voting behaviour and outcomes—it is important to be very clear about what the stance of monetary policy should be for the UK. That is why I follow this so-called activist strategy, which is to make the moves larger in order to cut through the noise created by volatility in the financial markets that comes from spillovers from other large economies that surround us.
Q177 Bobby Dean: I would like to come in on the voting patterns. It is notable to me that the Bank staff have one view and the external members have another. One is about going more boldly and quickly, and then holding for longer, while the other is a much more softly-softly, gradual approach. Governor, do you feel that there is that divide in the committee? I will add as well that this time, I think, four out of five Bank staff voted the same way. The two members we have in front of us today, I think, have always voted the same way. Can you give us any views on that and on whether you think that there is a culture of voting among the Bank staff?
Andrew Bailey: Let us take the case of Huw Pill, who voted with Catherine. Huw has set out a very clear view. He takes a different view.
Bobby Dean: He is the exception this time, yes.
Andrew Bailey: We have had others. Dave Ramsden has voted different ways from me over time, and Jon Cunliffe did when he was on the committee, so it is not the case you describe. If you do not mind me saying so, you have also heard two very different views from the external members of the committee this morning, and that is fine.
We have had these discussions before about so-called groupthink on the committee. I have always said in the past that I really do not think that there is groupthink on the committee. The evidence of that, in some ways, is the votes—or it is the votes, actually. What we saw in the last meeting demonstrates that.
Q178 Bobby Dean: Sarah Breeden, maybe you would like to come in as well. I know that you have voted the same way as the majority and as the Governor every time. What is your view on the Bank staff tending to cluster together? I know that there are exceptions that the Governor has just mentioned, but there seems to be a pattern.
Sarah Breeden: Despite having voted with the majority on each occasion that I have voted on the MPC so far, my interpretation of the economy and what is driving inflation has, at times, differed. You should think of the majority as having a broad church within it. In our communications, we try to convey what that broad church includes, so that, as data come out through time, the markets and people such as you can understand where we are likely to go.
I mentioned at the start, when I described my vote on this occasion, that, had the international developments not occurred, I would probably have voted to cut rates anyway. As the minutes of our meeting make clear, that was not the case for all of them. I guess that I would underline thinking of the majority as a broad church and our communications being as important as the vote in signalling where policy is headed.
Andrew Bailey: That is an interesting point. From my perspective, I probably was not really quite at that position going in, as it were, before the international stuff. I was much more undecided and waiting to see how the UK position evolved. There are differences of views between us in that respect.
Q179 Bobby Dean: I appreciate that there will be differences of views, but the outcomes are important. Whether you go for a bolder 0.5% move at any point, as others on the panel today have suggested, is quite significant. Dr Dhingra, I do not know whether you want to come in and give your perspective on this. Do you notice any differences between the external and Bank members of the group?
Dr Dhingra: I can talk about my position as to why I was moved towards a 50 basis points cut, as opposed to what would have been the majority of a 25 basis points cut.
Q180 Bobby Dean: I think that we have heard your view. Do you feel that there is a divide? What is your view on that?
Dr Dhingra: I do not see that. I take my job very seriously. I am an external member; I have to look at the research and the evidence, and vote according to what I think is right. I am better at doing that job than figuring out what the dynamics of any committee are.
Chair: We are politicians.
Q181 Bobby Dean: Dr Mann, what is your view? Do you feel that there are any differences?
Dr Mann: My view is that each person on the committee takes their job very seriously, evaluates the research and comes to conclusions. What you are hearing from this very short introduction is the extent to which people interpret the data differently. They interpret the collection of, say, activity, inflation and financial markets and they weight those things differently.
We will probably talk about scenarios later. These are different ways of presenting possible outcomes, which do not cover everything that we have been thinking or talking about, but are a selective set of possible ways in which shocks could be different or economic relationships could have changed over time. Those explorations or scenarios are a reflection of the differences in what we bring to the analysis and to our decisions. The committee is not an “us and them” type of thing. It is very much different people approaching the data, economic relationships and weighting of these different variables in different ways.
Q182 Chair: We have had quite a lot of detail, particularly from Dr Dhingra this time around in answers in her questionnaire.
Governor, we have seen a repeated set of reductions in the interest rate and that glidepath that you have talked about before in front of this committee. Are you confident that that is going to be the way forward when coming up to your June meeting?
Andrew Bailey: I am not going to make any prediction on the outcome of the June meeting.
Chair: It was worth a try.
Andrew Bailey: Good try. I spend a lot of time, when I face the journalists, spotting those questions, which keep coming up.
Chair: That one was pretty blatant.
Andrew Bailey: Yes, they are more blatant. Yours was much more subtle, so a prize for that. It is a fair question in terms of the path. I think that the path remains downwards, but how far and how quickly is now shrouded in a lot more uncertainty. I am sure we will come on to the external situation, but it is, of course, relevant there. We have added the word “unpredictable” to “uncertain” because of the sheer nature of what we are dealing with.
Q183 Chair: Dr Mann, I hope you heard that answer clearly. What is your view about the general direction of travel and the glidepath?
Dr Mann: I agree with the view that the glidepath is downward. We will have to see what kinds of briefings we get for the next vote and how some of the data develop. Particularly, my concern is around inflationary pressures. I can say that the direction is down, but we still do not know in what sort of steps and what timeframe. We have a lot more to be looking at in terms of the outcome of policies that have not yet been fully developed in other economies. The spillovers from those will be important for decision making.
Sarah Breeden: I agree with the big picture narrative of policy loosening as the waves of disinflation continue. As others have said, there is uncertainty about how far and fast.
Q184 Chair: You still think we are going in the downward direction.
Sarah Breeden: Absolutely, yes.
Chair: And Dr Dhingra, you agree. Okay, thank you.
Q185 John Grady: Governor, since we last spoke in this Committee, the global trading system has become somewhat unpredictable, from liberation day to arguments this weekend about the exports of critical minerals and rare earths from China. There are real concerns about President Trump’s “big beautiful Bill” and warnings that the US bond market could crack, with the Treasury Secretary of the US reassuring investors, it seems, that the US will not default on its debt. Where does this leave the global trading system and the global economy more widely?
Andrew Bailey: It leaves us with a lot more uncertainty and unpredictability about it. To illustrate that, I boil this down into two judgments that we have to make. What are the policies going to be and what is the impact of those policies? On the first one—“What are the policies going to be?”—the challenge is that, whenever we take our decisions, we have to stop the music at some point and say, “Where are we?” That was very difficult.
It is now three weeks or so since we took that decision. As you were just saying, a lot more has come out in that period, frankly going both ways in terms of where this may be. As Catherine was saying, this is having a big impact on markets. Markets have moved quite a bit since we had our last meeting.
It is in some ways more important to focus on the second question: “What is the impact of all this?” At the moment, my judgment would be as follows. The impact of fragmenting the world trading system is negative for world growth and activity. It obviously increases uncertainty. This is very well established in economics, but you hear it from businesses now when you go around the country. One impact of that is that it tends to cause delays and putting off of investment decisions, because an investment decision, typically, is a once‑only, irreversible decision. If you are offered the chance in that context to say, “Should I take it now or should I wait?”, the appeal of waiting goes up.
As I think we have said before, the impact on prices is much more ambiguous, actually. For me, this is the real area of question. The first interpretations are really that it is lower world activity, which will lower world export prices, which will lower inflation. That is quite open to question, though.
I was interested this morning that the OECD has come out with its new projections, and it has actually somewhat gone the other way and said, “Yes, it is lower for activity, but it is not necessarily lower for inflation.” The reason for that—and we tried to bring this out in our scenarios—is that, if it affects the supply side of the world economy, so if it starts disrupting supply chains for instance, that could have the opposite effect. It could start disrupting supply chains and markets again, and that could put some upward force into a pressure into inflation.
At the moment, it is really too soon to tell. We are not seeing the sorts of effects on supply chains that we were seeing back in 2021, for instance, but it is a genuine concern. The best example of this is the US-China relationship. The US-China relationship is the centre of this whole thing, really. The question of where that is going and what effect that is having on supply is very important. We are going to have to keep watching this very carefully, I’m afraid.
Q186 John Grady: As a follow-up question, we have heard diverse views about how monetary policy should move forward. Does all this uncertainty lead to a serious risk that, despite the Bank’s best endeavours, monetary policy could go badly wrong, with inflation undershooting or overshooting the target?
Andrew Bailey: Let me say two things on that. I will start with more of the theory part and then come on to the practice. There is a huge amount of debate about how you respond to uncertainty. One school of thought is that it causes you to react more cautiously. That is because, in a sense, you want to wait to see how it develops. That is not an unreasonable view and one that I certainly put some weight on, but it is not a reasonable view if you think that there is a threat to the integrity of the anchor, which is the inflation target, clearly. In that case, the answer is that you should act more aggressively and more—Catherine might use the word—as an activist. I am not seeing that at the moment, but that is an important thing that we have to keep in our mind as we make these judgments: it is not always the case that you respond to uncertainty by being more cautious.
That is the first part. In terms of the second part and how you play that out into the decisions, you made the point, “Could you go badly wrong?” That was a very big question for me in this decision we took three weeks ago. This is where the scenarios came in, because we painted two scenarios. One was weaker demand; it could be domestic or international. The other was the supply side; it could be domestic or international.
These scenarios helped me to answer the question that your question really goes to, which is, “How badly wrong could you be?”, as a guide. The point I took from the scenarios was that you could be wrong, but you are not going to be so badly wrong that you are losing control at that point. That gave me greater confidence to continue to use what I might call the more careful and gradualist approach and do the 25 basis points.
Q187 John Grady: Dr Mann, how about you? Are you confident that things will not go badly wrong, faced with all this unpredictability?
Dr Mann: I would agree that we have a tremendous amount of research background coming from the staff to give us information about alternative outcomes under alternative assumptions about the relationships among economic variables and prospects for global demand or inflation. The one point where I would differ a little bit from the picture the Governor has painted is on the inflation dynamics and what we know about uncertainty about inflation dynamics from research.
We know from research by Bank staff that, in an environment of higher volatility in inflation, which we may well observe as supply chain costs change, global export prices change or whatever variability, combined with the nature of labour and product markets in the UK, which is that there is downward bias to price settings and wage settings, you end up with upward bias on inflation and prospects for inflation going forward. The proper response under that kind of scenario is for a more aggressive, activist, bold move to ensure that the anchor—the 2% objective—does not drift.
I wrote a number of speeches about this topic during the high‑inflation period of a couple of years ago. That is still something we have to be concerned about, because inflation has come in as expected, but nevertheless high, and it approaches a threshold. In the research, a 4% inflation is a threshold that may change consumer behaviour and attitudes towards an inflation process, which then could feed back to wages. It is important to think about these asymmetries in the inflation dynamics and in wage and price settings as we consider appropriate monetary policy decisions.
Q188 John Grady: This is all very interesting, but what my constituents want to know when they go to the shops is that prices are not going to get out of control again. How confident are you, Dr Dhingra, against this background, that we can reassure my constituents in Glasgow that prices over the next two, three or four years will remain within a tolerable band and not be subject to excessive inflation?
Dr Dhingra: I am somewhat encouraged by the developments that have happened globally that they are going to stay within control, for the reason that the really worst-case extreme scenarios would be where you see a real meltdown in supply chains, which is to say that the EU starts following policies similar to the ones that the US is implementing, so does China and we see the world fragmenting into these very multipolar places. Then everybody wants to go chase the same suppliers and get all their supplies from there. I do not think that we are headed in that direction.
Of course, this is all contingent—I am commenting on something that is highly unpredictable—but, given the way things have panned out, I am actually a little more reassured that it is going to be milder than not the worst-case scenarios but even some of the bad-case scenarios. I am somewhat reassured by that.
The only other threat that you can see at the moment would be that we are having this uptick in inflation and maybe that translates into something more permanent or persistent. There I am somewhat reassured by the fact that you do not see the same kinds of inflation expectations uptick that you see in household expectations show up in firms. That is somewhat encouraging. It is also something that looks more like a one-off change rather than something that has momentum on its own, so I am not terribly worried about that.
The context really helps in that case. We have had a period where there has been consumption weakness, the labour market has loosened and we have had much more restrictive interest rates. We are not in that situation that we found ourselves in in 2022, when the really large energy supply shock happened. In that sense, you can probably go to your constituents and be a lot more reassuring than you could, say, in 2022.
Q189 John Grady: Ms Breeden, if we were having a tour around the shops at Parkhead Cross in my seat, would you be in a similar boat of reassuring my constituents that prices will remain stable over the next three or four years?
Sarah Breeden: I would underline the last point that Dr Dhingra made just then. What is important is the context in which the current inflationary dynamics are occurring. With restrictive monetary policy and a looser labour market, the conditions for inflationary dynamics getting out of control are very considerably less. I would reassure your constituents.
Q190 John Grady: Good, thank you.
Andrew Bailey: I should say that I will be in Glasgow tomorrow and Thursday, so I will try to do this.
John Grady: I recommend the shops in Parkhead Cross.
Chair: We have a Committee visit there very soon. Mr Grady has been speaking up for his constituents so much we all need to visit now. Dr Dhingra, thank you. You have gone into a lot of that in detail in your questionnaire, which was very interesting reading. That is now published as well for anyone who is following today.
Q191 Chris Coghlan: Governor, we have seen a dramatic recovery in equity markets in recent weeks since the heavy sell-off following liberation day. To what extent do you support the hypothesis of the TACO trade, that the damage that President Trump does to the world economy is overstated because Trump always chickens out and he is terrified of the bond markets?
Andrew Bailey: I am not really going to get into the question of the TACO thing. That is a euphemism that people in markets have come up with. I do not think that the President particularly likes it. Obviously, you have seen a lot of volatility. Equity markets are part of that story, but they are not the whole story.
The point when I would be most concerned is when we see the constellation of rising government bond yields, falling currency and falling equity markets. We had two periods in the post-liberation day period where that became quite acute. On both occasions, the Administration responded. The first one led to the 90-day period to negotiate trade agreements. The second one concerned the position of Chair Powell. We have not seen that particular constellation since because, as you rightly say, the equity markets have not behaved in the same way.
We have to watch this very carefully because the equity markets are obviously discounting views of the future. They appear to be discounting a more optimistic view of how this will come out. We need to bear in mind that therefore their view of it is conditioned on that. If things change, they will respond. However, fortunately, we have not seen a really serious threat to financial stability coming out of this. If you look at the whole period now—of course, it is not over—that would be my assessment.
Q192 Chris Coghlan: To your point, we have seen an increase in US bond yields and a rise in US tariffs, yet a fall in the dollar, which you would not expect. Do you think that there is a chance of that being a long-term threat to the dollar’s safe haven status?
Andrew Bailey: Let me take that in two parts. It indicates that non-US investors are reassessing their view of the amount of US risk they want to take. By the way, a context to put that in, because people in the markets say this quite often to us, is that quite a few of those were probably overweight on US risk going back in time, because they had a very optimistic view of the US economy, not unreasonably, actually. They are reassessing that. They will do that. They will go on doing that, I am sure, as this story unfolds.
I have deliberately separated that off from the reserve currency point. Obviously, there is a link here in terms of how much of a particular currency risk investors choose to have. I distinguish this because reserve currency carries with it a lot more. It carries a lot more, if you like, embedded presence in world markets. It carries a lot more infrastructure with it. The dollar has had that position, well, ever since it took it over from us, actually.
That is also increasingly embedded in markets. If you think about the role that US treasuries perform as the safe asset in markets, and therefore as collateral and security, it would take a lot to change that. Also, I do not think that any of us should want to see that happen, because that would be quite a destabilising moment. I do not see that happening at the moment. We have to watch it, again, but I do not see that happening at the moment. That is a much bigger effect than markets repositioning themselves in how much particular risk they take.
Sarah Breeden: I wanted to add one point on the dollar that reflects a lot of the market intelligence that we have been getting. The Governor talked about how we had seen some changing of positions in US assets. The interesting story about the US dollar is that some of that is about foreign holdings of those US assets not being previously hedged and now being hedged, so you get a movement just in the currency and less so in the underlying asset prices. That matters for us as monetary policy makers, because what happens to the exchange rate is an important input into the inflation outlook. It also matters from a financial stability perspective as to who is bearing losses and how they might come back. That has not been an issue for UK financial stability.
Q193 Chris Coghlan: Governor, you would agree that there has not been a threat to UK financial stability from liberation day. How about the increase in long-term US debt yields that we are seeing as a result of President Trump, but also potentially the tax cuts coming through? How concerned are you about that and the flow through to the UK?
Sarah Breeden: We have seen a trend globally of long-term interest rates rising. It is a story in the US, the UK, Europe and Japan. It has not really been a UK-specific story. The good news is that markets have functioned through all of that. It does not much matter from a monetary policy perspective. The rates that matter for businesses and households are at the shorter end. From a financial stability perspective, we have seen markets function through that period.
Q194 Chris Coghlan: Is there anything you want to add, Governor?
Andrew Bailey: No, I would agree with that. I would emphasise the point that I think the biggest rises in long-term yields have been in Japan.
Sarah Breeden: Yes, that is right.
Andrew Bailey: We have to watch outside the US as well.
Q195 Rachel Blake: Governor, you have talked about the importance of trade deals. What is your assessment of the significance, in terms of growth and inflation, of the recent UK-EU trade deal?
Andrew Bailey: I am a strong supporter of open markets and free trade. I made some remarks on this last week in Dublin. Let me draw a distinction between the short term and the long term. One might put the US-UK agreement into the shorter term, in the sense that it is addressing the particular issue of the moment. I have said before that, in the circumstances—and I use those words advisedly—it is a good thing.
There are two parts to the reason that I use the words “in the circumstances”. One is that it still leaves the average tariff level higher than it was pre all this starting. That is important to bear in mind. The second thing is where I get to the other agreements. It is a sort of bridge to that. The UK is a very open economy and always has been, ever since we industrialised. What affects our economy is not just whatever trade agreements we do, but also what the rest of the world does. I could go back to this point about China, but you could make the same point about the EU. Whatever it does will also have an effect on us.
You raised, rightly, the point about what has been agreed with the EU and the India trade deal. I see these in a slightly longer context. Go back to Brexit for a moment. We have sometimes been slightly controversial for saying this. I said it again last week and I will reiterate it. I do not take a view on Brexit per se, because I am a public official, but you have asked me on this Committee many times about the economic effects of it. I said that, in the shorter run, making an economy less open will have a negative effect. In the longer run, the real economy can adjust.
Part of that adjustment is trade agreements with other parts of the world, which the previous Government were seeking and this Government are seeking. There is continuity there. The India trade agreement has been in the works for a very long time, has it not? It is good to see it. It is really good to see it materialising. The effects of those agreements tend to take quite a while to come through. It requires adjustments going on in trade patterns and real economy patterns. In the long run, that is what we need to see, in a way, because it will help the economy to adjust. It will support the development of markets, but it will take some while to come through.
Q196 Rachel Blake: Previously, the Bank has estimated that the trade and co‑operation agreement reduced UK productivity by 3.25% compared to EU membership. At what point will you be able to estimate how the new agreements compare to that?
Andrew Bailey: We will need to know a lot more about how they go, how they take effect and what economic impact there is from them. The EU agreement is quite a specific thing. It is not a trade agreement in a broad sense. It is addressing some particular areas. I genuinely hope that it is a path, on the trade side, towards more. I strongly take the view, I am afraid, that, if we can rebuild trade with the EU, because it is our largest trading partner, that is a good thing.
Q197 Rachel Blake: Dr Dhingra, I wanted to ask you about the trade agreement. In your previous hearing and your questionnaire you wrote in quite some detail about the complexity of understanding the multi‑layered impact of Brexit and the timing of Brexit in relation to the pandemic and the Russian war in Ukraine. Do you feel as though the agreement is making that position clearer going forward?
Dr Dhingra: I think so. To give a little bit of background, when I was asked in the last hearing, we had just about come out of the Ukraine war, and the latest data we had at that point was 2022. Comparing then when we did the stocktake and the MPR, to now, we have a lot more information, but we are still very limited. There is no granular trade data that is available post-2021—that is a very serious issue—other than the one that you can see on goods exports from the HMRC. I can still summarise for you what we have learned from the aggregate statistics, as well as more generally from the granular data that exists.
The first thing to note is that the Brexit referendum left us in a weaker position. That was largely driven by the sterling depreciation effects, which came through in terms of prices for intermediates as well as prices that the consumers have to pay. That set us back, so we went into the pandemic much weaker than most economies would have been at that point. Then comes the period when we were still deciding what the shape of the new TCA would be. That was a period of serious uncertainty in the economy, and that shows up in weakened business investment in the country, compared to peer countries that we could look at.
Now you come to the point when it is post-TCA and the Ukraine war has happened. The biggest challenge was how you actually tease apart these effects—which are from the Ukraine war, the pandemic and Brexit? At this point, most of the analysis that has been done has been of the type, “Can we see what happened in some of the restricted goods exports? What has happened in some of the more restricted services exports?” A lot of our work more broadly, among the people who work on international trade in the country, suggests that generally it has not opened up the kinds of new products and markets that there had been some hope might come out of the TCA as well as, more generally, other trade agreements. If anything, it has set us back quite a bit in terms of openness.
Where does that show up? The numbers out there—I am somewhere in the middle of these numbers—suggest that goods exports have fallen by 13%, In one case, if you look at the detailed HMRC data and compare with peer countries with more updated data from 2023-24, the number is going start looking much bigger, so in the order of 25% or so.
If you look at some of the newer work that we are doing on services exports, you can tease apart what the TCA impacts are, because we have codified the TCA, and where the reservations come in and where the restrictions do not come in. You see that the restrictions have led to a reduction in services exports. Even though we are such a services superpower and there has been a worldwide services export boom, we have lost market share. When you talk about these trade deals, these are the places where they really can make a difference. A lot of it is about trade costs that will come into being at some point in the future. If we can try to stem that tide, that is where productivity starts to go up.
Q198 Rachel Blake: Have you, at this point, been able to estimate the extent to which the agreement from last month has stemmed that tide?
Dr Dhingra: No, not quite, because it is far too early to talk about that. If you look at the basic numbers that, say, HMT or the Department for Business and Trade have given out, you would add a little less than half a percent of GDP for ever on in about 10 years’ time. These are fairly long periods. That being said, I should mention that, unfortunately, trade models give you very small numbers. We tend to think that these gains are actually much larger than that.
Chair: That was a devastating cut-through of government spin, Dr Dhingra.
Q199 Rachel Blake: Would it be fair to say that the reduction in productivity estimated from the trade and co-operation agreement has had an impact that is still having an effect on our economy now and that the recovery, to characterise it as such, will take longer than perhaps the initial impact?
Dr Dhingra: I think so. We can say now that we went in looking weaker, and as we have come out of the pandemic, we have not recovered as quickly as many of the other economies. That is not to say that we did not have a much bigger energy supply shock than most other countries, but there is still a contribution from the fact that we are a less open economy, and we have always been excellent at being an open economy.
Q200 Rachel Blake: I wanted to ask Ms Breeden about how the impact of the UK-EU arrangements has perhaps affected our stability in relation to the US tariffs.
Sarah Breeden: Just so I can check your question, Ms Blake, it is to understand how the developments in the UK and Europe affect our relationship with the US?
Rachel Blake: Yes.
Sarah Breeden: I am not sure that I have a terribly good answer to that question, if I am honest. How I would describe it is that the Europeans and the UK face similar challenges in their dialogues in pulling a trade deal together with the US. Obviously, the UK has been able to pull one together more quickly. It was the first one that the US signed. That has obviously been supported by being not a member of the European Union.
Q201 Rachel Blake: Dr Mann, what is your assessment of the UK-EU trade arrangements now and the impact that they might have on our stability compared to our previous relationship in relation to the US tariffs?
Dr Mann: There are a couple of different pieces of that, one regarding financial stability and one regarding a real-side effect or inflationary effect coming through the tariffs. On the tariffs, there is still uncertainty about how the policy will ultimately play out. Its implications for growth and inflation are uncertain.
I want to pick up, though, on a point that was part of a discussion earlier on how the path of inflation may be affected in the UK from global developments on tariffs. There is a view that the US-China tariff war and other tariffs that are being implemented on other countries will precipitate overall lower international prices. In principle, the UK could enjoy those lower international prices. I think of that as the effect that comes at the dock, meaning that, supposing it comes on a boat, for example, that is at the dock.
However, the prices that a consumer or household face are on the shop shelf. There are quite a few additional players, such as transportation, advertising, inventory, storage and domestic costs, between the dock and the shelf. Even though international prices maybe have a disinflationary impact on the UK, how the domestic aspects of pricing play out is very important for what kind of disinflationary effect we see at the final consumer or household end. My view is that there is less of a disinflationary impact than what we assume in our models, which do not really take account of all the channels from the global prices to the domestic shelf. That is one aspect that needs to be considered.
On the financial side, it is still premature to determine the outcomes of the tariffs on global markets. We still see a lot of volatility and I have already talked somewhat about how that volatility plays into my assessments of appropriate monetary policy.
Q202 Dr Sandher: Dr Dhingra, I want to speak about the impacts on inflation at the moment. We know that energy prices are leading to a rise in inflation, but I am particularly interested in how energy prices are impacting core inflation indirectly. Could you set out your views on that?
Dr Dhingra: A lot of what I had planned to do when I came for my first hearing here was to think about the supply chain. That is largely where my background is. I was surprised to find, which I was not aware of before I started any of that analysis, how dependent we are on energy and imports, not just directly but indirectly. To give you a sense of the numbers, 3.5% was the number that was quoted all the time, saying, “This is the energy shock,” so 3.5% of our consumption basket is reliant on energy.
Once you add in the fact that we are buying domestic bread and that bread itself has energy contained within it, you start to look at a number that is in the range of 8.5%. If you compare it with the euro area, that number is about 5%, so we are talking about much greater exposure. Once you start adding imports into the mix, so not just energy but also other imports that we buy from abroad, that number is somewhere in the range of 36%. That number that we usually look at, which is 15%, almost doubles, or a little bit more than doubles in this case.
That is really where a lot of the impact on inflation still is. The last moment when I could do this analysis, which was before the PPI series was stopped, was the end of 2024. To give you some context, in 2022, 11 percentage points of the 17 percentage point rise that had happened between 2019 and 2023 was to do with the energy and import basket. If you then fast forward to the end of 2024, that number is somewhere in the range of nine out of 24 percentage points of that rise that has happened since 2019 in the aggregate price level.
We are talking about almost a third of what you are seeing in terms of inflation where imports and energy still have a role to play. We cannot lose sight of the fact that some of these things are fairly sticky and, as they pass through the supply chain, that takes time. Last time, Dame Harriett Baldwin asked me about how long that takes. Roughly, from when it shows up in firm prices to when it shows up in consumer prices is in the range of one to two quarters. It is roughly around there.
Q203 Dr Sandher: On that clarification question, you spoke about imports and goods. Did your analysis include, for example, the impact on services, so I go to a restaurant, energy prices are higher, and therefore the sticker price is higher there? Did that also include that?
Dr Dhingra: Absolutely, yes. That is the entire basket, not just goods.
Q204 Dr Sandher: On that, for example, clearly monetary policy is really about the demand side, but here you are talking about supply shocks that are feeding through into a wider basket of goods. Do you think monetary policy can effectively constrain inflation that is being driven by energy prices?
Dr Dhingra: That is the big debate. When do you make that judgment call about when you act against a supply shock? When do you lean against a supply shock? Of course, there is always going to be a much worse trade-off when you are dealing with a supply shock with a demand management tool.
That being said, the time to lean against a supply shock would be when, like we saw in 2022, inflation is running so high that you cannot but expect that there will be second-round effects happening through relative prices and wages adjusting, which is what a market economy has to do to be able to balance demand and supply. In that sort of setting, it is appropriate to use monetary policy, even though it is much better at handling demand side, to be able to weigh against inflationary pressures that might arise in the future.
That being said, I should mention that all of this came with the backdrop that, when I came in, I thought inflation was going to peak at 13%. Those were the numbers we were seeing, but it ended up being 11%, and that was to do with the energy price gap as well. It is not as though monetary policy is the only tool that can be used. There is a role for other tools, too. They have a role to play as well.
Q205 Dr Jeevun Sandher: Now that we are through that period of high inflation, I want to ask about some of the things that you have said before. In your 2025 Dow lecture, you mentioned that monetary policy action could be counterproductive because it “could constrain investment that would enhance supply resilience”. In this case, that might mean lowering the energy price or, more accurately, I suppose, our dependence on movements in the price of natural gas. At the moment, given where we are with monetary policy, do you see that the same risk is present? Is the need for a high interest rate leading to less investment in the things that we need to do to reduce inflation in the future?
Dr Dhingra: That is definitely one of the key channels through which monetary policy works. We do not have a tool that can distinguish between demand and supply. When we use our tool, it affects demand as well as supply factors. That is really where my difference from the committee’s vote decisions has been. I place a greater weight on the supply capacity and the resilience of that supply capacity going forward. I do not want that to be dented too much either.
Q206 Dr Jeevun Sandher: If you had a say in fiscal policy, would you be encouraging the Government to do more on that side and to invest more in resilience to these shocks, which can have second-round effects that lead to higher inflation in the future, et cetera?
Dr Dhingra: That is the biggest lesson we should take from this cost of living crisis. When you have supply shocks of this virility, you have to take into account the systemic supply chain risks. You need to have those tools and to deploy them. A lot of Governments everywhere in the world do that.
Q207 Dr Jeevun Sandher: Thank you, Dr Dhingra. I will ask you the same question, Dr Mann. Given your history on the MPC, should there be a greater role for fiscal policy in reducing future price movements and price shocks?
Dr Mann: I would like to come in on an earlier point that you asked about, which was the restrictiveness of monetary policy and its implications for business investment and, therefore, for the supply side.
I do a fair amount of work on business investment with the Productivity Institute. In the research, we have found that monetary policy’s role in the cost of capital, which is the variable to which business investment does respond, is quite limited. In other words, businesses take investment decisions relatively more based on what their internal decisions are about the hurdle rate. The relationship between the hurdle rate, which is based on what managers think, and is based on some history, to discipline different parts of the firm, if it is a multinational, and the monetary policy setting is very limited.
This means that the role monetary policy can play in affecting business investment is much less than what econ 101 would suggest. It does not mean it has zero effect; it does mean it has a limited effect. In the UK, probably the more important channel is monetary policy affecting consumer demand through the channel of the cash-flow effect on mortgages.
The demand effect on driving business investment is much stronger. We have already discussed the TCA, Brexit and sluggish global demand as a consequence of the current set of trade policies. These sources of slowdowns in demand, as well as the uncertainty about demand, are far more important in driving the current state of business investment than monetary policy.
With all that as the background, thinking about strategies to enhance business investment and the role that fiscal policy can play in creating a catalytic environment that is supportive of business investment, in a standard Keynesian sense, could play a very important role.
Q208 Lola McEvoy: Thank you to the panel. It has been fascinating so far. I am an optimist. Given what we have heard about the increase in the US risk rating, which poses an opportunity for the UK economy, I would argue, and the warm welcome from businesses about the trade deals with the EU and India, Governor, are you being too pessimistic?
Andrew Bailey: I welcomed those trade deals, if you do not mind me saying so. They are important.
I am concerned about the overall picture on trade, I am afraid. The phrase that was used at the weekend in one article in the press, in response to the speech that I made last week, was, “The rules-based system is dead”. What do we mean by that? Over a long time, we built up a pattern of world trade agreements, which led to a lowering of tariffs. Post-war, it was based around the GATT, which became the World Trade Organisation. I am afraid that system has now really been blown up to a considerable degree—let us be honest—by all of this.
That has very serious consequences for the world economy. The point that I made last week was that there are genuine reasons why this has happened, which we have to be very focused on. As I said last week, we cannot just say that the US Administration is just wrong-headed. There are things that have gone on in this whole trade picture that point to the stress that the system has been under.
If we basically abandon that system and say that we are never going to get it back, that has very serious implications for the world economy. I will give you one example of this—it is really at the heart of this so‑called rules-based system—which is what is called most favoured nation. The principle of most favoured nation is that, when you do a trade agreement, you give the same terms to all your other partners. That is now gone. It just is not part of the current picture. That has very serious implications.
I do not want to be called a pessimist because my whole point is that we have to come back to the multilateral table. We have to work very hard to say, “Okay, we understand that there were problems with this system. It was not working as it should.” If we abandon it, we are in a much more difficult world.
Dr Mann: On that point, when most favoured nation is eroded, companies have to consider, “If I do business in this country, I have these rules. If I am doing business in that country, I have a different set of rules. If I do business in a third country, I have a different set of rules”. Any multinational now has three sets of rules that it has to embed into its contracts, its cost structure and its legal system.
Multinationals play a very important role in the UK. They account for 50% of business investment. They are 0.5% of firms and 50% of business investment. Making it costlier for them to do business is part of the negative outcome of this fragmentation of the trading environment. We often think about it just in terms of supply chains. This is beyond supply chains. This could be doing business in exactly the same countries as you did before, but, in my example here, you have three different cost structures, three different legal arrangements and three different contractual strategies. It becomes what my adviser from long ago called a “spaghetti bowl” of negotiations and arrangements, which clearly will add to the cost structure.
Chair: Thank you. That was a really clear description.
Q209 Lola McEvoy: I am interested in the framing of the impact of your decision on the quarter percentage point and what that means for business and consumer sentiment, which we know drives growth, and the appetite for people to invest in the UK. We want to see as many people as possible feeling better off. Wages are going up. We know that. We want to see people spending those wages in their local economies so that everybody feels like things are better in the UK.
The economy grew 0.7% in the first quarter, which is the second-fastest pace since the pandemic, but Bank staff estimate that underlying GDP growth is zero. I would like to understand a bit more about the difference in those opinions compared to what I would argue looks like a good result.
Andrew Bailey: It was a good number. I do not want to take away from that. The challenge that we are describing is about the extent to which that describes the underlying pattern. Frankly, we have had more volatile short-run GDP numbers of late. Maybe that is just a reflection of all the shocks we are having to deal with.
The challenge that we have at the moment is that the forward-looking evidence on activity in the economy, so the surveys, is nothing like as strong as that. There is a disjoint between that number and the pattern that we get from the surveys. The evidence from all the work our staff do to assess the past and what we can draw from it suggests that the surveys are, on average, a better predictor of the future than the immediately previous GDP number.
I should add that the agents and my own visits around the country somewhat support the survey evidence. That is why our staff are saying this to us. It is an encouraging number, clearly. There are probably some one-off elements in it, but the pattern that we are getting, particularly from the forward-looking surveys, is not as strong.
Q210 Lola McEvoy: You have 12 agents up and down the country, in every region.
Andrew Bailey: Yes.
Q211 Lola McEvoy: That is not that many, is it? You have one person in every region.
Andrew Bailey: It is more than one.
Q212 Lola McEvoy: How much of the business community in the UK is represented in the surveys and the work of your agents?
Andrew Bailey: There are a whole range of surveys. I have not done this, but if you add up all the various surveys—it would be quite a lot of work to do that because you would have to pick apart the double counting—they get around quite a lot of the economy. We also have our own survey, which is the decision-maker panel, but there are many surveys beyond that. You have CBI surveys, purchasing manager surveys and individual surveys run by others. Lloyds Bank runs one, for instance. If you add all those up, you are getting pretty good coverage.
Q213 Lola McEvoy: It comes down to the confidence that we all have in current public data as well. We have previously raised the productivity puzzle and the fact that productivity is looking lower than it was in Q1 2024 but 1% higher than Q4 2019. Again, it poses the question that I raise every time about the reliability of the productivity data during the pandemic and how that is impacting policy decisions. Do you have confidence in those figures or do you over-rely on your own surveys and your agents because of the lack of confidence in the data?
Andrew Bailey: There is a puzzle in the last 12 months. We had very flat growth throughout particularly the second half of last year. The productivity numbers tell us that we had negative productivity growth last year. It is possible to have negative productivity growth, obviously, but, going back in time, negative productivity growth is usually associated with quite serious recessions. We did not have that last year, so there is a puzzle. We had negative productivity growth without many of the conditions that are typically associated with it.
Yes, that does give us a puzzle over exactly what the picture is and what the data are telling us. That is why we are consumers of every bit of useful data that we can lay our hands on, frankly.
Q214 Yuan Yang: Governor, I am going to return to our favourite multi-part drama, the labour force survey.
Andrew Bailey: Talking about data.
Chair: A lot has happened on this since your Mansion House speech.
Yuan Yang: We were told by the outgoing national statistician that the improvements to the labour force survey should have fed through by May of this year. Do you feel they have fed through?
Andrew Bailey: With due respect, it is work in progress. The ONS is working very hard on this and I do not want to take anything away from that. So far, it has managed to expand the scope of the survey and, therefore, raise the number of people who participate in it. I believe it is still below where it was pre-covid, but the ONS has said—this is why there is a very severe health warning on every release that it makes, which remains there—that until it introduces what it calls the transformed labour force survey, which will now not be until next year, we should still regard the new transformed labour force survey with a great deal of caution and a big health warning on it. It remains in that situation.
Q215 Yuan Yang: I noted that you have had Bank staff estimating a new model for employment growth, as you detail in the report, which shows that it is flat or possibly decreasing compared to the ONS. The Bank and perhaps other agencies are now having to substitute your own staff resource for the lack of clear signals from the ONS.
Andrew Bailey: Yes. We are doing more on that front. We always had other models. Going back to the answer that I was giving to Ms McEvoy’s question, the official data is not forward looking. We are always consuming surveys, talking to firms and so on, and putting those through models. We are having to do more of that to compensate for the labour force survey. For instance, we are putting more weight on the HMRC data in the area of employment, which does give us a read on employment. We use other surveys. We use our own agents. Yes, we are doing more in that field.
Q216 Yuan Yang: Finally, the Cabinet Office is now conducting an inquiry into the ONS. I was wondering whether the Bank is involved in that.
Andrew Bailey: I know we have spoken to the person leading the inquiry.
Chair: That is Robert Devereux.
Andrew Bailey: Yes. We have said that we are happy to offer any assistance that we can. That was quite welcomed. If you would like an update, I can give you one. The best thing is that it goes into the inquiry and comes out at the other end, as it were. I can certainly let you know what we are doing, but it is probably better if we let the inquiry do its work in terms of the substance of—
Q217 Chair: You have put your views clearly on the record to us here before.
Andrew Bailey: Yes.
Q218 Lola McEvoy: Just following up from Ms Yang, how much does your confidence in the datasets impact your decision on the rate cut?
Andrew Bailey: It does have a bearing on it, yes.
Q219 Lola McEvoy: How heavily is it weighted?
Andrew Bailey: Let us take the LFS because it is probably the best example, and our confidence in some aspects of that, particularly those aspects where it is not so easy to substitute. Inactivity is a real problem area here. Ms Yang was asking about employment. It is easier to substitute alternative estimates in for employment and unemployment. It is much harder to do it for inactivity. There is really not much of a substitute there.
Yes, it does enter in. We have to say, “Are we confident in what the picture is?” We certainly spend more time on it. That is what we should do, given the uncertainty. Yes, it does have a bearing on it.
Q220 Lola McEvoy: A lot of people’s mortgages hinge on them getting the data right.
Sarah Breeden: If I may just add one point, that is where the other data sources really come into play. While being unable to rely on the LFS, we have data from HMRC about what is happening to employment. Speaking personally, that and the survey data have been helpful contributors to how I have thought about policy from here.
Q221 Lola McEvoy: How representative of the wider employment market is the HMRC data? You have self-employed people.
Sarah Breeden: It misses self-employed, as you say.
Q222 Dame Harriett Baldwin: After the inflation spike, the court commissioned Dr Ben Bernanke from the US Federal Reserve to review your forecasting approach. I know we do not have the deputy governor Clare Lombardelli, who is implementing that, with us today. Could I ask you, Governor, for an update on progress both on the infrastructure in terms of the computers that do the modelling and the approach that you are taking towards scenarios? You committed to implementing all 12 of those recommendations.
Andrew Bailey: Yes, let me run through it quickly. I will start with the scenarios. We set out two scenarios in the monetary policy report this time. One was designed to show where we could see things going if the demand story was weaker. That could be a product of domestic conditions. We were not specific. We were not saying, “It has to be this particular situation”. We were doing it at a more general level, which we think is useful. On the domestic side, for instance, let us say that the savings rate does not fall from its currently very high level and, therefore, we do not get a bounce-back in consumption of that sort. We could apply that demand story to the international environment as well. Let us say we get weaker demand as a result of the trade issues.
The other one was the opposite side, if you like. It was a supply story, which was producing the opposite effects. Again, we could tell that story domestically—we could tell that story about the labour market and the supply of labour, for instance—or we could tell it internationally, as we were discussing earlier about supply chains.
We set those two scenarios out. We set out a view on the inflation implications of them and the implications for the output gap as well. Speaking personally, I found them very helpful in terms of, in a sense, framing my decision. This goes back to an earlier question. “If I am wrong on this, within a plausible range, what would the consequences be? Is it an acceptable thing that we would deal with or not?”
We will go on developing those scenarios, by the way. We have introduced a number of new models. We have also re-estimated the core model and the staff are working on further models as well. We have always had a model suite, but our model suite is expanding.
You mentioned the data platform, which is the big piece of work in terms of the amount of effort going into it. That is well under way now. It is a big piece of work. We are also using this opportunity to look at much broader data questions, including AI and how we use that.
Q223 Dame Harriett Baldwin: Would you say that the recommendations have been half implemented or three-quarters implemented? How would you characterise it?
Andrew Bailey: I am not going to put a particular number on it.
Q224 Dame Harriett Baldwin: You would not say they are fully implemented.
Andrew Bailey: They are not fully implemented yet because we have not finished the data platform, certainly. They are now substantially under way and we are able to use some of the results. Again, the data work on the forecast process has quite a way to go, but we have already achieved things that are helping the team in terms of doing the forecast process.
Chair: Ms Breeden, you put your hand up?
Sarah Breeden: Yes, I had a couple of things that I wanted to share on that, Dame Harriett. One big innovation that you can see in the scenarios that we published this time is that we are not just putting different shocks through our models. We are thinking about and able to quantify how the economy might be operating in a different manner. That is a real step forward in our ability to use scenario analysis.
The second thing that I wanted to say—this is speaking personally—is that having scenarios has led to us having different debates as a policy-making committee. We are able to quantify the differences, track them through time and understand, as the Governor was saying, how wrong we might be. In addition to having the scenarios, they are driving better policy outcomes.
Q225 Dame Harriett Baldwin: Dr Dhingra, in your questionnaire response, you speak about the scenarios. I noticed that the IMF, in its article IV summary on the UK economy that was published recently, was talking about encouraging the Bank to move away from market pricing or using what the market is pricing in and to focus much more on the scenarios. Do you see that as being the same thing? How do you feel about this approach?
Dr Dhingra: It is less useful to know what the number for GDP growth is than to understand the underlying factors driving that number. The scenario analysis, playing around a lot with what kind of rate paths you should underpin, helps us understand that.
Just to reiterate the point that Deputy Governor Breeden raised, where the scenario and all of these changes have helped is that the quality of the debate is improving. We can have a discussion that is much more focused; we can challenge each other’s views in a much more quantitative way. Once the data platform is under way and staff are able to use that easily, we will be able to have much more meaningful discussion.
Q226 Dame Harriett Baldwin: Is there a date for that data platform to go live, Governor?
Andrew Bailey: It will not be fully live certainly until next year. That is because it is a very big piece of work.
Q227 Dame Harriett Baldwin: Will that be the beginning of next year or the end of next year?
Andrew Bailey: It will certainly not be before the middle of next year, I would think. Because we are looking to be pretty ambitious here—for instance, things such as AI will factor into it—we are giving ourselves quite a lot of time. We want to do something big at this point.
Q228 Dame Harriett Baldwin: Dr Mann, did you want to add anything on this question about the implementation of the Bernanke review recommendations?
Dr Mann: You were asking about the models. One of the major models that are used is the general equilibrium model, COMPASS. The re-estimation of that model was already under way. I am going to repeat what Deputy Governor Breeden said, but I am going to use different language.
Over the past couple of years, our discussions have been around the elasticity or the strength of the relationship between, say, unemployment and wages. That is a very important relationship in economic analysis. Is it a low elasticity? Is it a high elasticity? The re-estimation of the major model COMPASS allows us to vary that parameter.
This goes back to what Dr Dhingra was saying. When we used to discuss, “I think the relationship between wages and the labour market is not very strong”—a flat Phillips curve, so to speak—or, “It is very tight,” we were just talking through words. The model now allows us to go in there physically—of course, the staff do this—and change that parameter. We can see what the impact would be of my story versus your story on the slope of the key relationship that underlies inflation. This is part of the reason why we can have much more constructive debates about the underpinnings of inflationary pressure or wage pressure, which then immediately feeds into the monetary policy decision.
To me, this re-estimation also marries some of the partial equilibrium research that is done, which has been a part, in particular, of my decision making over the last couple of years, and the macroeconomic model. Having that marriage between micro and macro, in my view, strengthens the underpinnings of the decision-making process.
Dame Harriett Baldwin: Governor, you wanted to add something.
Andrew Bailey: I want to come back on the interest rate path point that you made because it is a very interesting and important one. We have a challenge here. The market curve, as with all these curves, is conditional on certain assumptions about the future. I am very sensitive, having loads of experience in this field, that everything we say is conditional gets translated into being unconditional.
With the scenarios, you cannot use the market curve because the market curve is conditioned on a view of the world that is too far away from the scenario. I am sure everybody would love us to publish interest rate paths. In a sense, that is where we should end up, if we can do it sensibly.
We have an issue there, which we will work our way through. One option would be to use so‑called policy rules. There is a greater understanding that, with some policy rules at least, while we have been using them for the last 25 years, we and other central banks are now saying, “We do not actually use them to set policy; we use them as illustrative guides.” I am very conscious that, if we stick down an interest rate path, people will say, “It was slow. That is what you are going to do, is it?” We are not saying that. We are saying, “Conditioned on this particular view of the world, that is a sensible interest rate path to attach”, which allows you then to draw out the conclusions for inflation, inactivity and so on.
Q229 Chair: Just before we move on, you mentioned AI, Governor. We were looking at AI in financial services more generally. What risks are there and what parameters are you putting around the use of AI in scenario planning?
Andrew Bailey: If you start at a more general level—Sarah might want to come in on this because she does a lot of work in this field across all our interests—we face a number of challenges. We want to use AI because it is going to improve our productivity in important ways. In areas such as coding, it is already demonstrated that it can do that.
There are two challenges that we have with AI in this area. One is general, which is that AI is far more of what I call a black box than our classic models. To flip over to our approach as a regulator, when banks use AI our approach has always been to say, “We want you to demonstrate to us that you understand how the box works.” The problem with AI, if you start using things such as LLMs, is that you cannot apply the same test. None of us knows how those things work or can know how those things work in the same way. We are feeling around for how we can get ourselves into a world where we balance the benefits of doing it with the issues that it presents.
Q230 Chair: We had some quite trenchant evidence from banks saying, “It is fine. We treat it like other risks. We have ways of doing this. It is all working jolly well.”
Andrew Bailey: I am very pleased to hear that.
Q231 Chair: That is what they were saying, but you sound a bit more cautious. What are you putting in place?
Andrew Bailey: If you got some of the people in the room who are genuine world experts on this subject, they would give you slightly different views, but they would not be that confident, frankly, on that question. There is a real set of issues in any use of that system.
We have already seen a bit of this. Our staff have tried to do, and are doing, economic modelling with AI. One of the challenges with AI is that, without being too technical, it is basically a one-step-ahead model. It sucks everything in that it can find and then it says, “I will do the assessment of what influences things and then I will tell you what the next step is”. Then it can step onwards.
The problem—Catherine was making this point a few minutes ago—is that a lot of the modelling that we do is what I would call structural. We want to understand the relationship between wages and unemployment. To do that, we typically have a more structural view of the world. When we did one of the scenarios, how we implemented it in the modelling world was to change the slope on the so-called Phillips curve, which exactly goes to what Catherine was saying about changing that relationship.
AI models do not really do that. They are not as stable, in a structural sense. They are interesting, but so far they tend to be less stable. The world will move on. The one thing that we know is that these issues will move on and new approaches will emerge.
Sarah Breeden: If I might add to that, Chair, the important thing is to be really clear about what use cases you are applying it to and how the inherent risks associated with AI manifest in that context and put guidelines and guardrails around it. There are all sorts of different things, such as coding, producing charts and presentations, and doing back office processes.
Andrew Bailey: It can shorten my draft speeches.
Sarah Breeden: Yes, that is right. It is great at shortening speeches, if you make sure the prompt is a good one and it does not just stop at 2,000 words. You have to add “retaining all the points that I have made”.
Chair: We will be listening very carefully to the Governor’s next speech to see how well it is working.
Andrew Bailey: It is very good at that.
Q232 Chair: That is very interesting. Dr Mann, do you have anything to add on AI, from your experience?
Dr Mann: No, not really. Whenever you are dealing with models, there are unstructured models that let the data speak. AI is a particular granular manifestation of letting the data speak. Structural models impose economic theory. They allow you to look at these different possible relationships and how strong they are.
The key is to have both. You do not ever put all your eggs in one basket. You have multiple models. You test them using multiple datasets. You evaluate what they are telling you. If they are all telling you the same thing, you can be pretty confident when making the decisions. When they start to tell you very different things, that is when you start to ask whether the assumptions underlying the structural model are too restrictive or not realistic of what the data are telling us. If the purely data models are giving you an outcome, you look at it. Is that just garbage in, garbage out? Looking at the set of them and whether they are either similar or different, that then guides your decision. In their differences, you understand more about what is going on in the economy. That is the beauty of having a suite of models using different technologies.
Sarah Breeden: One thing AI has been really useful for is summarising all the intelligence that we get from our many agents around the country. It has been useful to be able to ask, “What have companies been telling us about the new packaging regulations and how that has affected their costs?”
Dr Dhingra: I use AI in my research almost every day, but I would not use it to set monetary policy.
Chair: Thank you very much. That is very helpful.
Q233 Chris Coghlan: Dr Mann, I always assumed that quantitative tightening should be broadly inflation neutral and have no fiscal impact because the Bank of England base rate will largely offset the impact, but I have seen some fairly excited op-eds in the FT arguing that it does have real-world fiscal consequences of billions because of the interest rate differential and the impact on different parts of the yield curve. Would you agree that it does have a real-world fiscal impact?
Dr Mann: Quantitative tightening has been undertaken in different ways by different central banks. How it impacts the fiscal accounting differs according to that methodology. We also have to think about the overall package of quantitative tightening and quantitative easing. If we think about both of those things, the neutrality of it feeds through.
It is fiscally neutral, but, on the other hand, if we think about the monetary policy implications, I gave a speech—it is why I am in the United States right now—at the Federal Reserve indicating that, from a monetary policy perspective, quantitative tightening has to be considered along with Bank rate decisions.
Of course, we do that. It works in the background. We have a new decision for 2026 coming up in September. We need to consider as a package the implications of quantitative tightening for the long end of the curve—that is what we do; that is what we are selling—and of the Bank rate for the short end of the curve. That is against a backdrop—this was a comment that I made earlier—of foreign spillovers also affecting the overall yield curve. It is a complex decision, but we have to incorporate both Bank rate and QT.
Q234 Chris Coghlan: Governor, what is your view?
Andrew Bailey: On that point, I agree with Catherine. That is one of the reasons why we review it every year. We are about to embark on the annual process now. How it feeds through along the yield curve is important. As Sarah was saying earlier, the long end of the yield curve is less important for the monetary transmission mechanism than the bit nearer to the short end, but we have to look at the whole thing. We have a team that spends all its time working on the transmission mechanism. This will get fed through into the review.
I agree with Catherine. These are things that we always have to look at. We have had quite a lot of curve movement going on. The cause of that curve movement is not quantitative tightening in its own right, but how it interacts with the other causes, such as what is coming out of the US, is something that we will have to go over in the next month or two, yes.
Q235 Chris Coghlan: Do you agree that quantitative tightening has no fiscal impact or, if it does, it is purely an accounting thing?
Andrew Bailey: That is a really good question. I will just say a bit on this because there have been a lot of estimates and commentary around on this. Let me preface what I am about to say with a very important point. We did not do QE and we do not do quantitative tightening for fiscal reasons. If you ask us what the cost-benefit analysis of all this is, we would put it in macroeconomic terms, but, obviously, it has an impact on fiscal policy through the cost of debt.
The point that I want to make on this is that many of the calculations—the FT has had some recently—only tell part of the story in that respect. I will comment on it through that lens, which is not our normal lens but it is important to do. The starting point is that the UK is different from many countries, in that it has issued public debt with a longer term than others. The average maturity of UK gilt stock at the moment is about 14 years. When you look at the other major economies, it is about six. That is a big difference.
The reason this is important is the following. We had a long period when interest rates were near zero and QE was having the effect of flattening the yield curve out along the tenure. That has benefited the cost of debt servicing and will continue to benefit the cost of debt servicing for a lot of years to come, a long time to come. I think I am right in saying that the current weighted average cost, in terms of average coupons on our gilt stock, is around about 2.7%. It is well below the Bank rate. That is an inherited fact. The UK has issued a lot of long‑term debt in a period when interest rates were very low. If you say to me, “Okay, but you have taken a load of QE and you have transformed that into debt that carries the Bank rate as its cost. What is that 2.7%?” the answer is that it is a bit under 3.2%. It is still well below Bank rate.
Here I get to the final point, which is the point that is most relevant to the estimates that get published. Right from the start of QE, we said we wanted to be market neutral in what we did. We did not want to start skewing the market. We bought, throughout the QE period, equal buckets of short, medium and long. That means we have a lot more long stuff than the Fed or the ECB have, for instance, because of the debt stock. Yes, it is more costly to sell that stuff off once the curve goes up. That is what is reflected in these numbers for the costs of QE and QT.
The point that I would make is that those numbers do not take into consideration the benefit that the UK has got from that lower cost of debt servicing as a result of the fact that there was more long-term debt issued at the point when interest rates were low. This is how we should think about QE, QT and the debt servicing cost. Yes, you give up some of that benefit by us having to do QE and then having to do QT, but you still have an offsetting benefit that does not get brought into these calculations. I would challenge those numbers and say that you have not got to the end of the calculation.
Q236 Chris Coghlan: To be clear, from a credibility standpoint, to do QE you have to say that you are going to do QT, I would imagine.
Andrew Bailey: Yes, particularly when you have a long-term debt stock. Otherwise, you are going to have this stuff on your balance sheet for a very long time.
Q237 Chris Coghlan: Given where we are now, why not just abandon QT? Would that be the same from a credibility point of view over the long term?
Andrew Bailey: The point that I would make there—I have said this before, but it is an important point—is that, if you do not sell, the cost comes through in what we call the cost of carry. That is the interest rate that you are paying throughout the life of this stuff, relative to the Bank rate. In efficient markets, those two numbers should be the same. The cost of selling versus the cost of carrying should equalise. You can argue whether markets are always perfectly efficient, but that is broadly a working assumption.
There is one final point that I will make on that. Again, there is a bit more commentary on this. I included it in the letter that I sent to you back in April. I will only go this far because it is really for the Government. There is a difference between selling and carrying in how they feed through into the fiscal rules, particularly because at any given time one of those two rules has to be the binding or biting rule, as it were. There was an article this morning saying that, curiously—I am not advocating this, to be very clear—from the point of view of one fiscal rule, the argument would be to do more QT because it is the cost of carry that binds rather than the cost to sell.
Going back to where I started, that does not motivate us one bit, I should say, because we are not doing it for those reasons. That is one of the curiosities of the situation.
Q238 Dame Harriett Baldwin: Further to those questions on quantitative tightening, I am interested in the latest analysis that you have done. We have had this discussion before. Quantitative tightening, as it says on the tin, is having a tightening impact.
Andrew Bailey: Yes.
Q239 Dame Harriett Baldwin: That is in the title. You have previously estimated that it is about 0.25%. Is that still a good number for us to assume?
Andrew Bailey: Our staff are busy at work preparing us for the annual review, when we will go through all of this again. It goes to what Catherine was saying earlier. I am happy to come back on that question, but it would be better if we did it after we have had the staff material rather than before.
Q240 Dame Harriett Baldwin: Will the staff material also cover what you touched on in your answers to Mr Coghlan? The glide path is downward in terms of short rates, but since last July 10-year rates are up 40 basis points and 30-year rates are up 70 basis points. You are selling £100 billion.
Andrew Bailey: We are not selling £100 billion.
Dame Harriett Baldwin: No, sorry.
Andrew Bailey: We are not selling much this year.
Q241 Dame Harriett Baldwin: Maturity and some selling comes to £100 billion this year. I just wondered whether you have done any analysis deconstructing how much of that change in the long‑term yield curve is as a result of the quantitative tightening programme.
Andrew Bailey: That is another part of what the staff will be doing. Again, we have suggested—you can see this certainly in the work that our staff do regularly for the monetary policy process—that much of the move in UK long rates is caused by the move in long rates elsewhere. We have seen US long rates increase, but, as I mentioned earlier, we have also seen Japanese rates increase, as well as German rates, because Germany has changed its fiscal policy quite dramatically.
Q242 Dame Harriett Baldwin: You are saying that most of it is global.
Andrew Bailey: It is the global influences. Can I go back to an important point that I made a few minutes ago? We will have to look at the interaction term between those effects and QT. We will do that as well because it is important to do that.
Q243 Dame Harriett Baldwin: We will get a chance to see that as a Committee.
Andrew Bailey: Yes.
Dame Harriett Baldwin: Chair, can I also thank the Governor for the letter that was published today in terms of the impact of reserves for the banking sector? You have made very clear what your views on that are.
Q244 Chair: That is a very clear exposition. Thank you. It is very helpful to have it. Sometimes these things are better answered in writing.
I am aware that Dr Mann is still in the wee small hours in the US, but I did just want to pick up on one issue. Dr Dhingra, we touched on tariffs earlier. In your questionnaire, you give scenarios for what might happen if tariff impositions and retaliatory actions proceed in an orderly way. Earlier, you talked about things being better than not just the worst-case scenario but a bad-case scenario. You seem quite confident that things could proceed in an orderly way. Is that what you are saying? As a trade specialist, what do “orderly” and “disorderly” look like?
Dr Dhingra: It is easiest to say what “disorderly” looks like, which is that you get a whole bunch of local content requirements coming in and you have supply chains completely distinguishing themselves into regional blocs. You then basically have to rely on the same supplier to be able to sell here so we could supply to the US, but then we do not necessarily want to supply the same to China. Those are the issues that would keep me up at night. You could get very sharp inflation spikes.
That is not the situation that we have seen until now. In fact, I would say that we have seen something slightly better than what I had hoped for. I would have thought that there would be tariff impositions and then retaliations from different countries and possibly even some anti-dumping duties, if necessary. Instead, we are seeing a much more collaborative atmosphere, where people are trying to negotiate and avoid these tariff impositions rather than punish them with countermeasures. As long as we stay in that sort of situation, this is going to be a deliberate reconfiguration of supply chains as opposed to something that comes from nowhere that we then have to deal with.
Q245 Chair: In summary, you are confident that the world is adapting to what President Trump is saying in an orderly way, whatever comes out of the White House.
Dr Dhingra: That comes with the conditional statement “what President Trump has said up until now”.
Chair: We could discuss that at great length. Can I thank you all very much indeed for your time? Dr Catherine Mann, external member of the MPC, joining us from the US, thank you for coping with the early hour in the US and for joining us. We did want to have you here today. Dr Swati Dhingra, another external member of the Monetary Policy Committee, Sarah Breeden, deputy governor, and Andrew Bailey, the Governor, thank you very much indeed.