24
Examination of witness
Andrew Bailey.
Q1 The Chair: Welcome to the committee’s annual evidence session with the Governor of the Bank of England. We are delighted that Andrew Bailey, the governor, is with us today. Thank you so much for your time. The session is being broadcast on Parliamentlive.tv and a full transcript is going to be taken, which we will make available to you and your team shortly after the meeting to make any factual corrections.
I shall start with a general question about the current economic moment we are in, which is perhaps a bit contradictory. The current forecasts suggest modest growth and some sense of recovery, but in a context of heightened geopolitical uncertainty that looks quite ominous from one point of view. How concerned are you about the UK economic outlook, given these different trends that are happening and the different challenges that the UK faces?
Andrew Bailey: It may be most helpful to take that question in two parts and look at the shorter-run immediate context and then the longer-run context, because both are important. The shorter-run context is obviously that events in the Gulf have become in some ways the dominant influence. It is another terms-of-trade shock. In other words, we have higher energy import prices and, other things being equal, that will push inflation up relative to where we thought it would be and it will push demand down, so we have this trade-off of growth and inflation. I have to be honest with you: it is enormously frustrating because—and I think the evidence we have had subsequent to the conflict breaking out bears this out—I was expecting that when I was here this afternoon we would be at the inflation target, but we are not. The overshoot is pretty much entirely due to events in the Gulf, and I am afraid it is most likely that there will be more to come because there is naturally a delayed pass through, and then the energy price cap in the UK relative to some other countries also tends to cause some delay to the pass through. That is the world we are in. It is of course highly uncertain. Indeed, I would go further and say it is highly unpredictable as to where this is going to go.
Three things are really important in thinking through that situation. First, how long is this conflict going to go on for? Secondly, how much damage has been done to the energy supply infrastructure, and how long will that damage take to replace even once the conflict comes to an end? Thirdly, which is the question that obviously we are most focused on in what we can do with monetary policy, what are the likely second-round effects from that? We may come back to this later, but we are in what I would call a trade-off position, which, as I say, is that inflation is going to be higher than we expected it to be, and activity lower. Nearly all our simulations suggest slower growth rather than a recession, but again I caveat that with the “highly unpredictable and uncertain” point. We are having to make judgments about not only the scale and duration of the inflation but also this key question: what is the context of the economy in which it is hitting and the degree of softness that we are seeing in the economy?
That is the short run. In some ways, if you are looking at the overall economic situation, the long run is actually even more important. The UK is not unusual in this respect so I am not telling you a particularly UK-specific story, but it is highly relevant: we have had slower growth in the UK for the last 15 to 17 years. If we talk about potential growth to start with—that is, the supply side—that really shows up in lower productivity growth rather than lower labour supply growth. It is really a productivity story. That makes a very big difference. We have done some very naive calculations and said: imagine that roughly 2.5% potential growth, which we had for the period before that, had continued. Then imagine that we had exactly the same shocks—Covid, Ukraine, this one—and imagine that we had exactly the same fiscal policy. Where would we be today relative to where we are today? The answer is that we would be in a very different debate about policy—particularly fiscal policy, but it affects monetary policy as well because obviously it is a speed limit for us.
The growth story is really very important. As I say, we are not unique—the UK is in a similar situation to many countries in this respect—but it raises a lot of questions about two things that are important drivers of growth in the longer run. One is trade, the openness of the economy, and the other is technology, since technology is the ultimate driver of growth in the long run. It is quite possible, and we have seen this before in British history, that we have been between periods of what we tend to call general-purpose technology innovation. The period that I was talking about in the past was an ICT internet period. The question is: what is going to be the next one? We may come on to this later but most likely it is AI and robotics. Still, the question about the rate of growth in the economy and the impact of that is, to my mind, critical.
The Chair: Very interesting. There is lots there that we will come back to.
Q2 Lord Burns: You have just mentioned the issue of the second-round effects of an increase in oil prices. I would say that second-round effects in the past have generally been substantial and often underestimated. That has particularly been the case when the economy has been running hot and we have had an expansion of demand as well as monetary growth. The key policy judgment that you set out in your monthly report is that you think the present conditions, with weak demand and a weak labour market, may possibly lead to the second-round effects being smaller than has been the case in the past—although if it is stretched out, I think your report goes on to say, they could even be that much higher. I notice that some commentators are worried that the consequence of this approach is likely that policy tightening will be too late again, as it has often been in the past, as one waits to see the evidence unfold, and by the time the evidence unfolds it is a bit too late. Does this worry you at all?
Andrew Bailey: You are right—I agree with you. You cannot wait for the hard evidence of second-round effects to be with you, because it will be too late at that point if they are larger. It is going to have to be a judgment, as it always has to be.
I will say two things about the current situation. One is that, when going into this, we were seeing softening in the labour market and, we thought, something of an output gap. We saw softening in the labour market, for instance, in the behaviour of vacancies. We saw it in private sector wage settlements, converging back down to a point where it looks reasonably consistent with the inflation target—the latest numbers do. I make the point about private sector advisedly; it was very deliberate to say that because there is a gap—a widening gap, if anything—between the private and public sectors. We tend to look at private sector settlements more because obviously they feed more directly through into pricing. There is that body of evidence. Certainly in going around the country—and this was in commentary on things that happened last year, such as the national insurance change—I heard firms saying that they were having to take more of it in on their margins rather than on prices.
The second thing I will say on this depends a bit on where you start. Different members of the MPC will have different views on this, but in my view we have already tightened, for the reason that we were expected to cut rates this year pre the conflict. I think that was reasonable; I was thinking one or two cuts this year, and the market was pricing that in. That is now off the table as a result of the inflation consequence of the outbreak of the conflict. The most obvious illustration of this is mortgage rates—two-year and five-year mortgage rates are up pretty much 1%—so there has been a tightening of financial conditions. I put those two things together to, I hope, help with answering your question, which is that I fully agree with you: you cannot wait for the second-round effects. There is evidence of softening but we actually have a bit of time, not least because we have, in effect, tightened policy.
Lord Burns: In the report you also set out where the risks lie of doing too little and too much. People are very interested in this question of the degree of flexibility that is built into the current remit. I have got a broad question: do you think the amount of flexibility you have within the remit is just right for the kinds of circumstances that we face, and the judgment about how rapidly one seeks to bring inflation rate back down to target?
Andrew Bailey: It is important to have that flexibility. I made some remarks on this in a speech in Reykjavík last Friday. Oversimplifying a bit, there are two forms of remit that exist in this world. One is what we call the dual mandate, the sort of thing the Federal Reserve has, where there is a price stability part to it and an employment part to it, and they sit on the same level. They are not weighted explicitly—that is a matter of judgment. We of course only have the former at the top level. Then, as you rightly say, we have what we tend to call the trade-off language, which is the speed at which we can bring inflation back to target when we face the sort of situation we face today.
It may be because I am more used to it, but I think our version has merit. It is not of course completely prescriptive—it leaves judgment—but it creates more of a framework for the decision-making than the dual mandate structure, which leaves very open what the weights are on those two things. It has the benefit of causing us to need to be much more considered and explicit, in a sense, in terms of saying how we are actually using that language and that part of the remit. This is clearly a moment to do so.
At the moment, if it is the case that the second-round effects are going to be muted, then this part of the remit will be critical to the response.
Lord Burns: I was looking at the three forecasts you make. The end result is going to be that for almost the whole of the 2020s, we are going to have had an inflation rate above—
Andrew Bailey: Yes—and I am trying not to take this personally.
Lord Burns: I am not being at all personal, but in fact for quite a large part of the time, we have turned out to have been above 3%. Do you think that this in any way throws any doubts on this set of arrangements that we have?
Andrew Bailey: I will take that in two parts. It illustrates that we obviously had a period from the very early days of this regime in the pre-financial crisis period of very good conditions. It was the NICE period, as Mervyn King called it—and it has not been like that recently. Indeed, arguably since the financial crisis, but certainly recently, we have had a whole series of shocks, some of them global, one or two of them not. They have been mostly negative supply shocks which have pushed inflation up, which are the harder ones to deal with in a monetary policy framework.
The general answer to your question is that any framework has to deal with the more difficult conditions. It is no good if it can deal with times when life is easy, but it cannot deal with the harder conditions. That has to be true. I do not think it is an argument for saying if you just raise the inflation target to 3%, everything would be okay. That is not the answer to that question—it would be too simplistic an answer to it. But it comes back to that it puts us in a position where we have to focus more on how we manage the path back to target, and of course, ultimately get there, because we have got to give the public confidence that the target is for real.
Q3 Baroness Wheatcroft: You talked about the fact you are already effectively tightening by not bringing down rates, and mortgages have responded, as have property prices to a certain extent. But other asset prices really have not come down very much at all. I just wonder whether you were surprised—I do not suppose you were—by the remarks of the deputy governor in April, when she was really quite outspoken about the concerns over asset prices.
Andrew Bailey: Well, I was not surprised at all.
Baroness Wheatcroft: That would have been a surprise.
Andrew Bailey: Yes—not at all. There are really two stories going on in the world economy at the moment. We have talked about the impact of the conflict in the Gulf and the effect on energy prices—that is the first story. The second story is the AI and tech story. It is a much bigger story in the US, but it is having repercussions for the rest of us.
Baroness Wheatcroft: And our institutions are investing in these things.
Andrew Bailey: Yes. This is the way to square what otherwise appears to be the paradox that we are seeing in financial markets. What we are seeing is that, if you look across the major markets—taking it in three parts—the impact of the Gulf and the energy shock is almost entirely focused on particularly debt markets, government bond markets and yields. Exchange rate is actually relatively little affected. That is not illogical if this is a global shock. The third is risk markets, equity markets and credit spreads. If you spent your life only looking at those, you would not realise there was any event going on in the Gulf. As I say, the way to square those two—because you otherwise think this is very strange—is that you have those two developments going on.
Sarah’s comments were really addressing the question of asset values in equity markets and credit spreads, and what are the risks around those and how worried should we be that they seem to be in a sense ignoring everything else that is going on around them. There are risks there. You may say it was a set of risks from the Gulf, because this thing could become big enough to dominate the AI story. I am actually quite a believer in the AI story as an economics proposition, so I am not saying this to undermine AI—it is actually very important.
The job of equity markets, for instance, is to value the future stream of earnings—so the future productivity gains from this thing. They could get it wrong in a number of ways; I can think of three. First, they could just overvalue the whole thing. We could still have a very positive benefit from AI, but they could get it wrong in terms of the degree. Secondly, everybody is currently priced to be a winner. If you look back at history, everybody usually is not a winner, actually—that is a fairly unusual state of affairs.
Baroness Wheatcroft: So are you predicting the equivalent of the dotcom crash?
Andrew Bailey: It is not quite that, because in the dotcom bubble, you had people with no earnings and no prospect of earnings. I am making a slightly more modest point, that if you look at something like the internet, for instance—looking back at the original big pioneering names in the internet—they are not necessarily the ones who are here today. Pricing everybody today to be a long-run winner is not really consistent with history.
The third way, which is as important, drawing on history and going to back to what I was saying earlier about technology, is that these general-purpose technology innovations, like electricity and internet, tend to take longer to come through into the productivity and economic growth stories than people predict. There is a famous comment by Bob Solow, that “You can see the computer age everywhere but in the productivity statistics”.
There is a famous story that the time from Edison first doing a power station to its effect on US productivity was about 50 years. It was eight decades between James Watt inventing the steam engine and it coming through in what we think was UK productivity. That is because it usually involves a lot of other innovations to go with the initial thing. I think AI will be a lot quicker and that the world is moving a lot faster than that, as we have seen with AI at the moment, but it could well be that the markets are too optimistic about that speed of pass-through.
Baroness Wheatcroft: Is it factoring in sufficiently the scale of the investment by companies like Anthropic or even SpaceX?
Andrew Bailey: Yes, it requires very substantial scale investment, and that is taking place. To put that into the context of what Sarah said, there are substantial risks there.
Baroness Wheatcroft: Is enough being done to regulate the alternative loan markets?
Andrew Bailey: The private credit or alternative loan market is supporting a lot of the investment in the tech sector. That is a good thing, by the way. There is quite a lively debate as to whether we have this because we have overregulated the banking system. My response to that is in good part that we want these two things to co-exist because the liabilities of banks are deposits of people’s money, and people want assured nominal value for their deposits, but we also need an investment sector that does not have assured value, which makes money but may occasionally lose money, where risk is taken. We want those two things but we do not want them regulated in the same way.
What is the worry in the private asset world? Generically, there are two things. First, do we fully understand the linkages between the two? They are not living on separate islands; they are connected. That is why, in our second system-wide exploratory scenario, we are trying to understand the interconnections. Secondly, do the investors—particularly now that it is going into retail investment—understand what they have? If they do, the odds of it being a smooth transition and the bumps being smoothed over are much higher. If they do not—
Baroness Wheatcroft: Do they?
Andrew Bailey: The jury is out on that one at the moment, frankly. I will give you an example from this country. You may remember that some years ago we had the so-called property funds, which blew up after the Brexit referendum. Those things were weirdly structured, in the sense that they were what is called daily dealing in an asset that you not only could not deal daily but could not value daily because it is commercial property. The escape clause was to suspend redemptions, which we did. In the end, it sort of passed off, and I ended up concluding that most of the investors, even though what was on the can was completely weird and nonsensical, probably knew what they had got. But you cannot tell that in advance.
Q4 Lord Petitgas: Sorry to leave this fascinating subject, Governor. Let us go back to energy. If Hormuz carries on and energy costs were to rise more, and if the Government were tempted to put in some form of support package, as we saw in Ukraine in the first round in 2022-23, in your mind, what would be the most desirable way, from a monetary standpoint, for the Government to structure that? The context for this is that in 2022-23 the package cost about 2% of GDP—call it £50 billion to £55 billion—and there have been a lot of admonitions or some form of statements from the IMF suggesting that the Government should resist any kind of support, given the cost of capital already in the economy and the level at which gilts are trading.
Andrew Bailey: Well, it is not for us to advocate fiscal policy so I will be careful in what I say. First, so far at least, this is nowhere near as big an energy shock as 2022, and of course 2022 had two legs to it: you will remember that energy prices went up when the conflict broke out in February, and then there was another big leg up in the summer of 2022.
I would put a bit of a frame on what the IMF said. It was really supporting the phrase “temporary and targeted” for the set of measures. In other words, it was saying, “If you’re thinking about it, be careful about big, all-embracing packages. Do something that is temporary and targeted”—targeted in the sense of the recipients and temporary in the sense of the length of it. In the context of the overall fiscal policy and fiscal position, I think that is sensible advice.
Lord Petitgas: I am looking at the notes here. I had not realised that, because of the energy cap, prices were due to rise—even if nothing had happened at Hormuz and even if we had some more resolution—quite dramatically. Do you think that is in the price? Do you think that is in the market?
Andrew Bailey: The July reset? Yes, I think it is. In a way, you can work it out pretty exactly. The so-called observation window is over now. Our staff always do it in advance and they get it pretty close, actually, and I know that outsiders do as well. Once you have got through the observation window, you can get it pretty accurately.
Q5 Lord Young of Cookham: In the Mais Lecture, the Chancellor promised a road map for future fiscal devolution, and she went on to say that this would be a permanent transfer of power and resources from central government to local government. Are there any implications for monetary policy if you have a country with increased regional fiscal autonomy?
Andrew Bailey: Our convention is that we take the Government’s fiscal policy as announced and use that to form our views of the future impact on the economy and therefore on monetary policy, and we use that in our forecasting. If, as you said, that came to pass, we would do the same thing. From the top-down perspective, we would obviously have to do some more adding up because it would be a more devolved structure, but we would still do the same thing—we would add up the set of components of fiscal policy to get the overall position of fiscal policy. Then we would have to do the conditioning, looking forwards at what the stated policy was for each component of it. That would make our life a bit more complicated but I do not think it is undoable.
Then we would look at it on a second level, which is what I call bottom up, and here our regional agents would have a particular role to play. We would ask: is the consequence of that devolution of fiscal policy going to have impacts on the pattern of activity across the economy that would be different to what we are seeing at the moment? We would do that as well.
Lord Young of Cookham: Do you see any problems if, for example, a regional authority tried to develop a countercyclical policy, to borrow and inflate, to deal with local unemployment? Would that pose any problems or implications for national monetary policy? Could you cope with that?
Andrew Bailey: I suppose there are two issues. First, it would depend on how substantial that was and on what sort of weight that would have in overall fiscal policy. Secondly, we would again have to take it as what it is and then set monetary policy taking it into account. I am sure you could construct scenarios in which it could cause monetary policy to look different, although that would be quite extreme as an end of the distribution. Most of the probable sets of what I would imagine regional fiscal policy to be would not get into that territory, but it is possible. But our framework means that we can deal with. Whether we like it or not, we can deal with it.
Q6 Lord Razzall: We have had a number of witnesses over the months querying the quality of ONS statistics. Do you feel that policymakers are flying blind, or has there been progress on data quality issues?
Andrew Bailey: We are not flying blind.
Lord Razzall: You are not, but other people may be.
Andrew Bailey: I will come on to that. I do think there has been progress. Just to go back, the cause célèbre in this is the Labour Force Survey. That did cause us problems—it is on the record and I have said it a number of times, including in Parliament—because it is crucial to our work. Moreover, it coincided with a point in time where one of the most important elements of that was the so-called inactivity element of people who are not in the labour force.
Whereas for many other aspects of the Labour Force Survey—particularly unemployment, for instance—we can use other means of assessing it, we are very dependent on the Labour Force Survey for assessing inactivity: it is a particular feature. So that was problematic, and our staff worked very hard to develop alternatives, which they did. The ONS has been working on the LFS for some time now. I think it is fair to say that the participation rate in the survey is now back to where it was pre-Covid, but there is still further work to do. The launch date for the transformed LFS has been put back. Our chief economist, Huw Pill, sits on the committee that acts as its advisory body, and I know that Huw’s view was that that was a sensible decision. He felt that it had not solved enough of the underlying issues to get to the point where it could be confident in launching it, so that work is still going on. It is a tough nut to crack. I think the ONS is doing the right things and we strongly encourage it to keep going.
I will give a more recent example, which I think is a very positive story. There have been question marks around the seasonality of the GDP numbers, particularly first quarter and fourth quarter. It appears that there has been some shift in the pattern of activity. It may be related to going to one fiscal event a year. There was an ONS blog publication a few weeks ago, which I thought was excellent, because it basically said, “Look, we get it; we can observe it; here’s what it is; it’s real; this is what we are doing about it. We have captured about 80% of it”. You need evidence, you obviously cannot make it up, so there is about 20% to go where we have not got enough evidence yet. And by the way, obviously if you combine the first quarter and the fourth quarter together and average the two out, you are probably going to end up with a reasonable number.
I thought that, from a point of view of national statistics, it was really very helpful to say, look, things happen in national statistics. The world is messy and noisy, as it were, and I thought that was a very good example of the ONS dealing with it, and we worked very closely with the ONS. I think we are getting back to that place, but we will continue to work very closely with it, because it is very important.
Lord Razzall: A recent example, of course, was the flash forecast for April of a 100,000 reduction in payroll numbers. Normally, we would assume that that would flow through into increased unemployment figures, but if the ONS has got that wrong, then policymakers should not assume that that would be the conclusion.
Andrew Bailey: We put very little weight on the flash numbers, and the ONS also, if I remember rightly, puts a health warning on those numbers.
Lord Razzall: It does, and it has got it wrong the last two years.
Andrew Bailey: Well, they get revised a lot. I think you can have a theoretical argument, or even a philosophical argument, to ask if you should publish those numbers if they are so unreliable. It is the same with monthly GDP. There was a rash of, “We really need to have monthly GDP”, and I think people are now beginning to say, “Yeah, but it is not that reliable”. What is the better argument? We actually put very little weight on the flash number, because it gets revised a lot.
Q7 Lord Reid of Cardowan: Thank you for being with us. I want to raise a couple of issues which are current but also continually controversial. The first is immigration. We have recently seen a fairly dramatic fall in net immigration. What is your view on the impact of a fall of this magnitude, whatever the political discussion is saying, on the economy?
Andrew Bailey: First, let me say that I hope you understand that I do not get involved in discussions about the pros and cons of immigration, because that is not for the Bank of England, but I will answer your question from an economic point of view, because it is an important question. It obviously is important, because it is an important part of the labour supply question, so it is relevant.
I would encourage putting it into the broader perspective of labour supply, because there are several very big moving parts in this story, of which this is one, and it is an important one. The others, I think, are the fact that we have an ageing population, on average, and will continue to have—this is set in in the future, because it is due to a falling birth rate.
The third is one that was obviously very much in the news last week, which is the question of young people’s participation in the labour force. The fourth is one that probably was in the news some years ago but does not get much coverage now, but it has offset some of the negative numbers on participation, which is that we have been going through a period of increasing female participation, because of the equalisation of the retirement ages. You can do that only once, obviously, and that is coming to the conclusion. The fifth is obviously looking forwards, and it is what is going to be the effect of artificial intelligence, AI, on employment. I say that because it is important to tell the economic side of the story around each of these, including immigration. It is important to put them all into context together to see the overall picture, which I do not think often gets done, if you do not mind me saying so.
Lord Reid of Cardowan: Thank you for tiptoeing through a minefield.
Andrew Bailey: Yes, if I am still alive. I am not sure.
Lord Reid of Cardowan: Let me throw in another couple of hand grenades then. What you are basically saying is that it is all very complicated, which I think we all understand, and you identified five dimensions. Taking them in aggregate, does that mean that the labour market is still a source of serious uncertainty in terms of policy formulation, given the unpredictability of some of these things, or is it no more difficult than it has ever been?
Andrew Bailey: Well, looking forwards, it is an important issue because, going back to what I said on the Chair’s first question, this lower growth story over the last 15 years has not been a story about labour supply so much. Part of the story was that, prior to this latest immigration number, immigration was higher than it had been presumed it would be. Going forwards, and going back to this question about how we get growth, including growth in the potential capacity of the economy, maintaining labour supply is obviously an important part of that story. We have to set that against the context of an ageing population, particularly.
I am not going to say that the answer therefore must be that immigration must be higher, because that is not my territory, frankly, and it would be wrong for me to go into that territory. But I think that this whole debate needs to be set in the context that we need to maintain the labour supply in the economy. What is the most effective and best way to do that, taking all these things into account, of which immigration is one?
Lord Reid of Cardowan: You mentioned wrong assumptions about the level of immigration. Are there lessons that we can learn from previous periods where that has been the case as well? I recall that, 25 years ago, it was predicted by learned academics that the number of Polish immigrants, if we opened up, would be 18,000. I think that was about 850,000 short of the figure. There must be lessons from that.
Andrew Bailey: Yes, I am sure there are. It is certainly the case that, if you go back only a few years, we had to revise our forecasts very substantially because, in fact, the immigration numbers turned out to be very different. We do not do our own immigration projection, we largely use the ones that the ONS and the OBR come up with, and it turned out that the actuals were very different to the forecasts.
Lord Reid of Cardowan: I have a final question about something you referred to among the five factors that you outlined. I hate the acronym NEETs, but we are left with it—the young people who are not in employment and so on. Will you say something on the long-term economic impact of that?
Andrew Bailey: Again, it is not our area but we have to take it into consideration. I think it is very substantial, particularly when you set it in the context of an ageing population. If you combine an ageing population and lower levels of participation in the labour force by young people, you become more worried at that point.
Lord Reid of Cardowan: And a lower birth rate.
Andrew Bailey: Yes, the ageing population is reflecting a lower birth rate. There is obviously an increase in longevity as well, but it is principally reflecting a lower birth rate, as you rightly say. If you combine those two things, I think it is a very important and serious issue.
The Chair: I have one quick follow up. You made very interesting remarks at the beginning about the UK productivity problem over the past 15 years, and of course it is not as simple as just rectifying what the relative problems were in order to boost productivity in the future, as you also said. What is the best account, in your view, of the major drivers of that disappointing productivity growth over the past 15 years?
Andrew Bailey: I think it is principally a technology story. There are long cycles of technology in that sense, because there are these things called general-purpose technologies, the whole point of which is that they spawn innovation across the whole economy, so it is not limited in that sense. The internet and ICT is a good example—and the original case is the steam engine. But there are pauses in those periods—we had one in the late 19th century as well, actually—and I think it is quite possible that we will have pauses. People say to me, “Yeah, but the internet is everywhere, surely?” But here we are talking about the contribution to growth. Eventually, you do saturate the economy with an innovation, and I think that probably did take place, broadly, with the internet and ICT, for instance. The question then becomes, “What is the next one?” I think that is part of the story. It is not that anybody failed; the next big question is about how quickly we will see a leg-up in productivity from further innovation.
Lord Petitgas: I have a follow-up question on this, going back to inflation. In a way, all these indicators, except potentially AI, point to a reduction in labour supply and, ultimately, a reduction in output. Is this fundamentally inflationary? You talk about long term and short term. There are moves in the short term, but what about the long term? We have a strike now, and people want to work only four days a week, rather than five. I would say that most people, to some degree, in the economy, tend maybe not to work for five days.
Andrew Bailey: If it restricts the supply capacity of the economy, then yes, it does have an effect, and we have to take that into consideration in setting policy.
Q8 Lord Newby: Can we move on to reserves? I have two questions. The first concerns the fact that the Bank pays interest on commercial banks’ reserves with you, which is a very considerable sum. Some people think that it would be a good thing if you did not do so, because the banks could be required to have a certain level of reserves anyway, and the interest is money that, in the nicest possible way, they do not need, in an economic sense. That may or may not be the case—it probably is questionable, actually, but you can question it.
The second thing, which we had a lot of debate about in the aftermath of the financial crisis, concerns the appropriate level of reserves. We went round the houses as to how you decided that. We have decided something. Do you think that that level should be revisited in current circumstances, or do you think it is doing what it is supposed to do?
Andrew Bailey: Those are very good questions, so let me have a go. I will take them in turn. Paying interest on reserves is not free money, as it sometimes gets portrayed. Let me do a bit of the accounting to start with, if you do not mind. When banks hold reserves with us, which is what these are, those reserves are an asset on their balance sheet. They have to fund that asset, and so they have to pay the cost of funds to raise those reserves. You have an interest rate on either side of that—this is not free money, in that sense. I will come back to the question of what they earn in a moment.
When you look at our balance sheet, it is therefore a liability on our balance sheet, which we then invest. We are moving, over time, to what we call a repo-funded balance sheet, which means there will be no interest rate risk on our balance sheet. I know that that is a second, slightly different question, but equally it gets in the news. Again, the aim is a balanced system. It is an equilibrium in that sense, and if you disturb it by saying, “Don’t pay interest on reserves”, then you will disturb the system.
On the question of whether banks need the earnings, I would argue that they actually do, because they have to earn their cost of capital, at least, and this is reflected in their market valuations. We went through a period of about 15 years, post the financial crisis, where they were not earning their cost of capital and their so-called price to book—in other words, their market value was below their book value. That is now not the case. That has not been the case for the past year or two. But that is important: banks do have to earn their cost of capital in that sense, because that is the basis on which the shareholders are prepared to provide the funding.
I recognise that one of the challenges in that is that it is easy for me to say, in a slightly clinical way, “Earn the cost of capital”. Because of the size of banks and the size of their capital, that is a lot of money: when you look at the pounds and pence earnings of banks, to earn your cost of capital, you do have to earn a lot of money. I recognise that, but that is the economics of it. So if you said, “Don’t pay interest on reserves” and require them to maintain their current level of reserves, that would knock a big hole in their earnings and their earning of cost of capital, because an important part of their earnings is what is called the net interest margin, which is the balance between what they earn on their assets and what they pay on their deposits. They would have to do one of two things. They would either seek to shrink the level of reserves—and that will bring us on to the second part of the question—or they will pass it on to customers. In other words, mortgages will cost more and payments on deposits will be less.
Let us come on to the second part of the question, the level of reserves. We do not target a level of reserves. Some central banks do; we do not. Our system at the moment is that we will meet the system’s demand for reserves. The stock of reserves at the moment is actually higher than the steady state demand, because of the fact that we have done quantitative easing in the past and it is coming down. It is currently, I think, at about £640 billion. At peak, it was about £980 billion.
The next question is: where is the equilibrium? We do not know exactly—and it will not be constant over time, by the way. It is below where we are today, but I would not be surprised if we have got 100 or 200 to go to hit that equilibrium. The question then is: is that too high or too low? It is what it is what they think they need.
Let me say two things on that. First, reserves are the highest-quality form of liquidity in the system, because it is cash at the Bank of England. You can use them immediately. If your deposit has started to run, that is immediate. You do not have to do anything for that money to be available. You can pay out. So it is important, and it smooths the operation of the payment system.
The broader point is interesting; it partly goes back to Baroness Wheatcroft’s question. That liquidity in the banking system also supports the rest of the whole financial system. I made the point, to Baroness Wheatcroft’s question, about the interlinkages between private credit and the banking system. The banking system is still the ultimate source of liquidity for all this activity. It also supports a much bigger government bond market, including the liquidity needs of that and the fact that we have a transformed government bond market, as do quite a few other countries, with a much bigger leveraged hedge fund position in it—the liquidity for which comes, ultimately, from the banking system and from us, if you like, through the reserve operation.
So the fact that the demand for reserves is now higher than it would have been 20 years ago does not surprise me. If you ask, “Yes, but do you not want it to be lower?”, you get into some deep questions about the whole financial system at that point and what financial system we want, because those reserves are, as I say, the ultimate high-quality liquidity in the system.
Lord Newby: I want to ask you about the definition of equilibrium. You say that it would probably be lower in the longer term than it is now. I am not quite sure what the equilibrium is a balance between. I can see that the banks have a view about how much reserve they would wish to maintain, but that is not an equilibrium.
Andrew Bailey: Well, it is, because it is how much they think they need to run their operations smoothly and meet the running demand for liquidity, both in normal times and in times of stress. That is the way in which the equilibrium emerges. If you reduced the rate that we pay on reserves, all other things being equal, it would reduce the level of reserves that banks hold. The question is: where would be the level at which we would be concerned that it was too low to support the financial system without creating the risk of stress?
Lord Newby: Do you have a view on that? At the moment, do you think—presumably you do, or else you would do something about it—that the current level of reserves is adequate to meet the likely events that the banks are going to see?
Andrew Bailey: Currently, as I said, it is more than adequate because we still have legacy quantitative easing in there. So we are on a glide path to the equilibrium. I cannot tell you with any precision what the equilibrium is. It will emerge when we get to that point. We may get there in a year or two—we will see—but I cannot tell you at the moment what that equilibrium will be. However, the theory is all there to support us hitting that equilibrium.
Lord Reid of Cardowan: Just so that the non-bankers among us have an idea of the answer to Lord Newby’s question about equilibrium, is it wrong to characterise the equilibrium as the satisfactory balance of resources versus risk?
Andrew Bailey: You can look at it like that. By the way, I should have said that it also performs another function: it sets the price of money, which is the interest rate, which implements monetary policy. That is the first or second part of this—but, yes, that is a good way of characterising it.
Lord Reid of Cardowan: We like it simple.
Baroness Wheatcroft: When you are talking about the safety of the banks, how nervous do you get when Rachel Reeves starts talking about deregulation being the key to growth?
Andrew Bailey: Financial stability is important. We will not get growth if we do not have financial stability. Does this mean that every one of our regulations is perfectly formed? No, of course not. They are not—and they never will be, by the way; that would be a strange thing for anybody to say and should not be believed.
So I am very supportive of looking at regulations, but I feel that I have to keep saying that financial stability is critical to the performance and growth of the economy. There will be points in time where I have to say, “Hang on, that’s not where I would go to”, but there will also be other times when I say, “We should certainly overhaul this or that”.
Q9 Baroness Penn: There has been a thread through this evidence session of the impact of general-purpose technologies, specifically AI and robotics. What work is the Bank doing explicitly on their significance? What are you looking out for, currently and in future, in terms of their impact? You said that we can see impact in the equity markets. We do not yet see it in productivity because there is a lag. I do not know whether you think that we can see it in the labour market. What explicit work are you doing around this? What signs do you see of its impact?
Andrew Bailey: Let me divide that into two parts; it is a very good question.
First, like all organisations, we are trying to work out how to use it ourselves, and we are increasingly using it. In the economy, you are right that, obviously, we do this through our agents, through surveys and through talking to firms. I go round talking to firms about this a lot. I ask: how are you using it? How do you envisage using it? Are you seeing it come through, particularly in the labour market? At the moment, we are in a world where hiring is low, so we are not in a world of firing. We are talking about the labour market softening. It is not so much a firing world but a low-hiring world.
By the way, that is part of the youth unemployment story. It is not all people sitting at home because they want to do so. A lot of people who want to get jobs cannot get them. Are we seeing an AI effect there? AI is a technology that is going to affect early career jobs. Think about lawyers and accountants, for instance. It will affect that sort of professional services-type world, but not just that. The message we are getting at the moment from firms is that they are beginning to use it but are not sure whether it is discernibly affecting hiring; they expect that it will, though.
In terms of the economics, yes, we are actively looking at it. By the way, in terms of employment, I gave a speech in Sheffield last week on this. I tend to look at a four-part framework with AI. To what extent is it destroying jobs? To what extent is it creating jobs? To what extent is it causing productivity increases that increase the demand for existing jobs? An example that people might give for that one is: if AI enables you to process medical scanning much more quickly, you need more doctors to deal with the consequences of that. The fourth part is the opposite: where we are getting productivity increases but they do not increase the demand for labour. Running data centres, for instance, would be a case in point of very low employment activity. That is the economics of it.
The second big thing at the moment is cyber. It kicked off about six weeks ago with the Anthropic announcement; that has now been matched by Open AI and will be matched by others. This is a very big thing because we have suddenly seen what I think the experts would call the exponential part of the development curve—in other words, it has been going along the curve, but the curve in terms of what these models can do has turned up. People who know a lot more about this than I do say that we are now on an exponential curve, so this is not over by any means.
The power of what these models can do in terms of, for instance, finding existing flaws in IT systems is—
Lord Reid of Cardowan: This is zero day.
Andrew Bailey: Yes, if you have seen the film, then yes. Its ability to find flaws in things we have been using for years has accelerated very rapidly. We are all facing a very large amount of patching at the moment, and then adapting to a world where this is the norm. That is a big thing.
Baroness Penn: I will follow up on those paths. I read your speech, in which you asked, “Can AI make cutlery?” I think the answer was not yet—it can help you, but it cannot make it yet. Do you have a view on the four potential paths—they are not mutually exclusive; they may emerge in different sectors—of destroying jobs, creating jobs, productivity increases that increase demand and productivity increases that do not increase demand? From what we know about AI and robotics at the moment, and recognising that these are the early stages, do you have a view? The chair of the Federal Reserve has, I think, a particular view of its impact on demand and growth.
Andrew Bailey: I did a bit in that speech—but could have done more—to look back at history and say that the pattern from previous general-purpose technologies does not give you a single story. If you look at those boxes, particularly the first two, and ask which one dominates, the history does not give you a clear answer. However, it does set out the framework to use to think about it and to come up with the answer. I do not think we have a definitive answer to that question.
The second point—I made this at the end of the speech, and it is highly relevant—is that we have choices. This is not cast in stone. In particular, there are choices in the whole area of education and skills. We should not regard ourselves as passive victims. We have choices here about how AI is used and how we adapt to AI. Ultimately, I am not an expert in this field, but I think it is still about people working with AI.
Baroness Penn: Coming back to the financial stability question, what work is being done in the UK, as well as in co-ordination internationally, on cyber security?
Andrew Bailey: First of all, the UK has the world-leading AI Security Institute. We should recognise that is a world-leading organisation. It was set up after Bletchley Park, and some Members here are probably involved in it. It has done the assessment of these models and we benefit from that.
We work very closely on this with the banks and insurers that we supervise—particularly the banks—because they are most exposed through payment systems and so on. We are working very actively with them. We talk to the CEOs regularly. There has been some reporting of the fact that we have been working to enable them to get access.
International co-ordination is fast moving. Since I left the Bank of England to come here, I see that there has been another announcement that Anthropic is opening up more. I am not criticising Anthropic for that—I think it wants to be very open; it has got somewhat tangled in US developments.
It is critical that this is done internationally. I can put on my other hat as chair of the Financial Stability Board for a moment, because there are very big spillovers. No country can believe that it can solve this problem within its borders and cut itself off from the rest of the world. It is absolutely critical that this is done internationally—and of course it has to be done at pace. This is a very big issue.
Q10 Lord Carrington of Fulham: Coming on to government debt and public sector net debt, we have historically very high levels for peacetime. Interest rates are also pretty high on a historic basis. Is there a limit to how much a Government can borrow? How would you arrive at what that limit is?
Andrew Bailey: Theory would say that there is no limit, but practically there is. What drives it is that the larger the outstanding debts, not only the larger the cost of debt servicing—the interest cost, in other words—but the more vulnerable it becomes to shocks, such as interest rate shocks. You can argue that some of what we have been seeing in recent years is that, as the cost of servicing the debt goes up at high levels of debt, it becomes much more of an issue for fiscal policy. In any system where there is a fiscal rule involved, that will constrain the operation of the fiscal rule. I think that that is what we are seeing.
In practice, the answer is: yes, there is a limit. It is not easy to write down a number, but the framework tells you that there is such a limit. That is why it is important to stabilise that position.
Lord Carrington of Fulham: Stabilising is not enough, is it? You say you cannot put a number on it—that is perfectly understandable; of course you cannot do so—but perhaps you can put a range of percentage of GDP on it. You can say that you do not really want to go above a range of, say, 30% to 60% of GDP, or that you are perfectly happy to have that range at 70% to 120% of GDP.
Andrew Bailey: The reason I said “stabilise” is because, in today’s situation, the first step is to stabilise. If the last Autumn Budget were followed through as it was put, it would do that. That was one of the reasons why the gilt market reacted as positively as it did.
Then we get back to the growth question that I mentioned at the beginning. As I said, we did a naive simulation and asked, “Let’s imagine that we’d had the higher growth level and the same fiscal policy. Where would we be today?” The answer is that we would be in a different place today. We would not be back to where we were in some of the low periods, because we have had shocks, including Covid and Ukraine. My conclusion from looking at that analysis was that we would be having a very different debate. That is another way of saying: once the thing is stabilised, then the debate about growth is critical. That is a better way to get to where you want to go to.
Lord Carrington of Fulham: If you are going to go for growth, though, presumably there is a relationship between growth and taxation rates—or the tax take, at any rate—in the various sectors. But if your tax take is being taken to fund very large and potentially increasing interest rates payments—including those that are disproportionate on an international level—that will presumably be a brake on growth.
Andrew Bailey: Yes, I agree with you. That is why stabilising, first of all, is critical. But then walking the channel through to achieve both of those objectives—to get the growth and to reduce the interest burden—is important.
As I said, this comes back to the debate about technology, because that is an external driver of growth. There are obviously questions about investments and so on, but the actual origin of the technology will not be dependent on this so much. These things are really important.
Lord Carrington of Fulham: I am just a bit concerned about your word “stabilisation”, which suggests that where we are is where we want to be—or where we can tolerate being; that is perhaps a better way of putting it—in the sense that we are at a level at which our monetary and fiscal policy can cope. However, there has to be a level above that, and stabilising at a level above where you can manage monetary and fiscal policy to cope with it will be bad for the rest of the economy. That is really what I am trying to get at.
Andrew Bailey: That is a fair point. I was actually using “stabilisation” in the sense of asking, “Can we stop going up, please, and then consider how best we get down?”
Lord Carrington of Fulham: Absolutely, but not as a steady state.
The Chair: Some colleagues may have some final follow-up questions—I have one myself—but we will go to Lord Liddle first, then Lord Burns.
Q11 Lord Liddle: Can I return to the question of financial stability? I worry about financial stability; I do not think that I understand it very well because it is not my field. I worry that unwise deregulation might result in another 2008 and I wonder whether we could afford the massive bailouts that occurred then, in terms of our debt-to-GDP position, which Lord Carrington just talked about. I also worry about the asset price boom that Baroness Wheatcroft talked about. If there were a stock market shock, would that create conditions in which there might be financial crisis?
I also worry—although I do not think that this is going to happen, by the way—that, if we had a Government who thought that they could just spend their way to economic growth, we would end up in a financial crisis, as Liz Truss did. Do you think that I am being irrational?
Andrew Bailey: No. First of all, it is an important question. We have gone through a whole series of economic shocks, and we are going through one at the moment. We have a resilient financial system. We have not had a financial stability crisis recently, although, let us face it, as you say, we have done in the past. The situation we are in at the moment would be a whole lot worse if we did not have financial stability.
One of the ironies I find I have to live with is that, of course, the fact that we are in that situation immediately seems to cause some people to conclude that we are overregulating. We have to respond to that. One of the challenges of financial stability is that successive financial stability is when nothing bad happens—when nothing happens, in that sense. We think, “Thank goodness, we’ve survived that one”. However, it does engender other responses.
Part of the answer to this is that we have to keep making the case. I will not keep referring to other speeches I have made but, around six weeks ago, I made a speech at Columbia University in New York. I made the point that financial stability is a lot less well understood in this sense than monetary policy. The meaning of independence is a lot less well understood. It is a challenge.
I made that speech deliberately because this is a challenge that does not get talked about a lot. We talk about it privately, but it does not get said a lot in public, because it is a challenge. As I said in reply to an earlier question, I do not believe that everything is perfect in the world of regulation—that is not the case—but this fundamental point about the need for financial stability is critical. Part of the thing we have to do is keep on articulating the case for financial stability.
Q12 Lord Burns: I have another cheeky question, Governor. Last time we had large government borrowing when facing a crisis, the Bank of England came to the Government’s help with QE in quite large doses. Could we see that again if it was felt that we needed another large fiscal support package in a current crisis?
Andrew Bailey: I recoil at the idea that we jumped in and supported fiscal policy.
The Chair: He did say that it was a cheeky question.
Andrew Bailey: Yes—nice try. If we had to step in, it would be for either financial stability or monetary policy reasons, or both. As I said, going back to Lord Liddle’s question, we are not facing that situation today, so there is no case for us doing that.
Moreover, I would go further than that and go back to the LDI problem in 2022. I am not popular in all quarters for the fact that we stopped our support, but that was critical for the independence of the institution. There was a very precise financial stability problem in the LDI pension sector. We knew what it would take to solve it; once it blew up, we had a pretty good idea of what it would take to solve it. For me, it was critical that we did not go beyond that. As I say, that has not made me a greatly popular figure in some quarters, but, for me, it is critical that our operations are strictly limited to both of our objectives.
Lord Burns: You have raised the issue of relaxing the degree of regulation a number of times. I myself am on the record as having argued that, immediately after the financial crisis, the regulation was too tight. That went on for a number of years, and bank lending fell sharply in some critical areas.
On the other hand, we have now seen a degree of relaxation in that regime. As you said earlier, looking at the Bank’s balance sheets and the cost of capital, things are now back to a more sustainable position. At some point, though, it is going to be necessary, is it not, to say to people, “So far but no further”?
Andrew Bailey: Yes.
Lord Burns: There comes a point when, just as you can overtighten at the wrong moment or in a particular moment, this can go too far when one tries to respond. I just get slightly nervous that this is somehow beginning to become one-way traffic.
Andrew Bailey: That is a very good point. You are right. I do think that we have got a stable banking system, in the best sense of the word. It is more than earning its cost of capital, as it should, and it can compete.
Let me illustrate this with one point. I recoil when I read comments from banks saying, “We cannot afford to lend to people”. I am sorry but that just cannot be true, economically speaking, because they are earning more than their cost of capital. If they make that point, they are telling me that their shareholders do not want them to use the earnings that go above their capital requirements to support the lending, even though they are earning more than their cost of capital. Is that what they are telling us? I do not think so. I recoil from that, although it is a way of illustrating this very important point; I understand that this point is contested, of course, but it is a critical point.
Q13 Lord Reid of Cardowan: On this question of regulation, I take it to mean that, up to now, you have been referring to banking regulation. Do you take a view on wider regulation in industry and commerce? I recall you saying that, if there were something on the banking side that you thought was deleterious to the economy, you would make your views known, whether privately or publicly. What about the quantity of regulation in industry and commerce in general? If that reached a level where you felt that it was not only nugatory but a hindrance to economic growth, would you make your views known in a similar fashion?
Andrew Bailey: Obviously, we are responsible for regulating banks and insurers specifically, but also the financial system in terms of our overall financial stability. You are right. I go around the country talking to businesses a lot, so I pick up a lot of stories. They are not our direct responsibility, but I do pass things back.
We need to take this very seriously because it has taken longer to do things. Let me give you an example; it is not a particularly specific story, but it is a good story. A couple of years ago, I went to Orkney on an industrial visit. I went to the oil terminal in Flotta, which is still operating, although it is not as big as it was. I went round it, and I was shown a plaque on the wall saying that the terminal was built in the early 1970s and took, from start to finish—I am trying to remember exactly—somewhere between 18 months and two years. They said, “You couldn’t do that now”. So I do think that there are questions to be answered, and I do hear those stories quite a bit.
Q14 Baroness Wheatcroft: Very quickly, if I may, do you think that there are issues in the economy that the country as a whole has been ducking for a while? For instance, given the demographics about which we have talked this afternoon, I am thinking in particular of unfunded pensions—public sector pensions, that is—and the student loan book, most of which is still treated as an asset. Do these cause you any concern?
Andrew Bailey: It is easy for me to say this, I know, but I go back to the big challenges, particularly in the fiscal area. Let us take three of them: explaining the consequences of an ageing population is one; explaining the consequences of what appears to be the end of the post-Cold War defence dividend is the second; and explaining the consequences of adapting to climate change would be the third.
I am getting old, I know, and that is a fact of life, but we need to focus on explaining these things. They are not easy to explain—I do not pretend that for a moment—but they are very important. If we had any one of those things at a given moment in time, we would feel that we have a big issue on our hands, but we actually have a number of them.
Lord Burns: Can I pick up on something that you raised? I have been lobbied by various people, as no doubt have others, on the extent to which the Bank is looking at the potential impacts of climate change on our long-term economic position and stability, if we are to have a lot of serious unforeseen events. I welcome any thoughts that you have or any explanation of the work that the Bank is doing in that area. We have talked about an ageing population and AI, which are big challenges, but energy requirements is a big challenge, as well.
Andrew Bailey: I would be happy to do that, if it would help. I would also be happy to write in, because we had a few MPs in recently who asked us the same question and we gave them an account of what we are doing. We are continuing to do quite a lot of work in this area, but it is important to put it in the context of what we are seeing from the consequences of the Gulf crisis. I am not an expert in this field, but I think that it strengthens the economic case for renewables. The UK actually has renewables supply, but we are still dependent on a marginal source of balancing energy, which at the moment is gas. That drives much of the overall price of energy in this country, and resolving the balance of those two things is very important, going forward. It is not for us to do, but we look at it a lot because it has an effect, obviously, on energy pricing and inflation. Resolving those two is important.
Baroness Penn: It would be useful if that written response also addressed the work that the Bank is explicitly doing on nature degradation, as well as climate, as a potential source of shock. The report on adaptation from the Climate Change Committee this week showed that it is not a question of whether certain scenarios will happen, as there is an element of knowing that shocks will come from our current path, regardless of the different choices that we make about future mitigation.
Andrew Bailey: We can pick that up, yes.
Q15 Lord Petitgas: I have one observation and one question. The observation is that we around this table have been worried about asset inflation or an asset bubble. Am I right in thinking that that is an American question and not a UK question? I read that house prices are going down and that our stock market has gone up, but not by the same levels as in the US. Do we really have an asset bubble in the UK? That is my first question.
My second question is on the level of interest rates. Obviously, the gilt market is very stretched compared to those of other countries in Europe. Should we be very worried, in the sense that we are in this circle in which rates are at 5% to 5.5% and growth is below 1%? We are compounding and inevitably increasing debt. Even if we did not have deficits, the debt would increase every year, by definition. Should we really worry about this? To me, this is ultimately the proof.
Andrew Bailey: On the first one, you are right: far more of it is a US issue, because they have had more growth and more productivity growth. But, actually, that market is so big that we would not be immune from the consequences of it going the wrong way.
The gilt rate point that you are making goes back to Lord Carrington’s question. In the worst of all worlds, you could imagine this sort of reinforcing cycle where, because the cost of debt servicing goes up, it strains the fiscal rule. The consequences of that strain cause more loss in fiscal policy, which puts the cost of debt up, and we are into a vicious circle at that point. That is another reason to support the argument that stabilisation is important.
Q16 The Chair: I have one last question of the governor. At the beginning, you mentioned the two ways out of the low productivity position that Britain is in. You mentioned technology, which we have discussed quite a lot, but also trade. Could you say something about your and the Bank’s view of the trade scenario in the world at the moment? Are we now in a protectionist world and are we likely to be in that world for a long time? Should any hope that trade liberalisation might give a boost to growth and productivity be dampened? How would you express it?
Andrew Bailey: I hope not, because that is not a world that we want to be in globally, and I recognise that we have a lot to do to address that question. We are doing a lot of work with others around the world to put this question about external imbalances properly on the table and to reinforce the work of the IMF on this, in particular, because they are the people who have to speak truth to power on that. We want to keep the WTO going—please do not abandon it. Okay, it has not had a good run, but please do not lose it.
That involves really getting under the lid of what is driving these imbalances—the imbalance in China and the imbalance in the US. What are the causes of them and what are the answers? We have to do that, because we have to get to what steady-state trade regime we want in the world. I hope it is not one that has protectionism in it.
I do not think that tariffs are the answer to the underlying issue here. The underlying issue in many ways goes back to some of the discussion about technology and some of the issues that we have seen in history. Some of the big impacts, particularly of China’s entry into the world trading system, left scarring effects on communities. You do not see that just in the US, but it has obviously become a big political issue in the US. Yes, those questions have to be dealt with, but tariffs are not the answers to those questions. We need to keep working to try to get a world trade system that survives and comes through with freer trade, because it is very important.
I am going to Kirkcaldy on Friday to talk about 250 years of the Wealth of Nations by Adam Smith, so this is very appropriate at the moment. It is something that we have to preserve and keep going, but it is a lot of work.
The Chair: I used to work for a Chancellor from Kirkcaldy, in fact.
Andrew Bailey: He is organising it.
The Chair: Governor, thank you so much for your time and for covering a wide range of questions. We are really grateful. The meeting is now concluded.
