Treasury Committee 

Oral evidence: Bank of England Monetary Policy Reports, HC 7

Tuesday 8 September 2026

Ordered by the House of Commons to be published on 8 September 2026.

Watch the meeting 

Members present: Dame Meg Hillier (Chair); Dame Harriett Baldwin; Chris Coghlan; Bobby Dean; John Glen; Dame Siobhain McDonagh; Ms Julie Minns.

Questions 450 - 510

Witnesses

I: Andrew Bailey, Governor, Bank of England; Sir Dave Ramsden, Deputy Governor for Markets and Banking, Bank of England; Megan Greene, External Member, Monetary Policy Committee; Professor Alan Taylor, External Member, Monetary Policy Committee.

Written evidence from witnesses:

– Professor Alan Taylor (BoEMPR0015)

Examination of witnesses

Witnesses: Andrew Bailey, Sir Dave Ramsden, Megan Greene and Professor Alan Taylor.

Chair: Welcome to the Treasury Select Committee on Tuesday 8 September 2026. We are pleased today to have the Monetary Policy Committee and the Governor of the Bank of England in front of us to discuss the recent rate setting and what is going on in the world that is having an impact on the economy.

I am pleased to welcome Professor Alan Taylor, who is an external member of the Monetary Policy Committee; the Governor of the Bank of England, Andrew Bailey; the deputy governor for markets and banking at the Bank of England, Sir Dave Ramsden; and Megan Greene, who is also an external member of the Monetary Policy Committee.

We are going to talk about the rate‑setting meeting, but I want to touch on the stuff going on in the world. Talking of the world, we are really pleased to welcome special guests from Queensland today to see us in action, and Mr Bobby Dean has some guests as well.

Bobby Dean: Yes, we have some work experience students in my office coming to observe. They will be writing up your performance.

Q450       Chair: We will let you know your score out of 10 later. I should just say that we are slightly light on numbers because a number of our colleagues have been promoted into Government roles or PPS roles. The pace of elections is not fast here, so we have some of that. It is no comment on our witnesses. We are just a bit light on our numbers today.

I want to start with you, Governor. Last time you were in front of us, we talked quite a lot about the strait of Hormuz and the economic repercussions of what is going on there. We are now well embedded. This war in Iran is not stopping. I really want to see whether you can explain how that has had an impact on your thinking and, specifically, the difference between crude going through the strait and refined products, and the impact that has, particularly the second-order effects.

Andrew Bailey: Yes, that is probably one of the developments since we were last here, so I will certainly touch on that. First of all, to state the obvious, the conflict is still going on, and it is causing a high level of energy prices and quite a bit of volatility in energy prices. That volatility is feeding through into the financial markets. Nearly all that volatility you can trace back to events in the Gulf.

It is fair to say that we have higher energy prices. They could be higher still. A number of things have gone on. The strait remains largely closed, we think. Some is getting through but not huge amounts. As I understand particularly from talking to my opposite numbers—I have just been in Basel this weekend, so I have had conversations with them—more use is being made of pipelines in the area to ship it, but, as you saw this weekend, even that is a problem in some ways because the Houthis have attacked the Red sea area, which is where the Saudi pipeline goes.

There have been quite big emergency stock releases and they have helped. That cannot go on. The current ones run until about November. There has probably been some increase in production of oil in some other parts of the world.

As you say, the other development has been the so-called crack spread. That is the refined products pricing. I always say to people—I am speaking for myself—that we do not consume barrels of oil; we consume the products of barrels of oil. The crack spread is really the wedge between the crude price and the refined products prices. That spread has increased. It is high at the moment.

One of the reasons for that—I am going to be very clear: I am not in any sense saying this as a criticism—is that the Ukrainians have been successful in their attacks on Russian refining capacity. Russia does have quite a concentration of refining capacity. They are always estimates with Russia, but Russia’s capacity may be about 60% under its normal capacity. That is having some effect, therefore, on the crack spread. There are probably some other things going on, but you are right.

Quite a bit of the crack spread is not to do with the strait of Hormuz. It is important that we recognise here that there are other things. Even if there was suddenly some settlement in the strait, you would probably still have the crack spread issue.

Q451       Chair: One of the other aspects of this is that certain refineries are having to take on more work. They are running hot. Do you have anyone looking into the impact or the potential challenge if maintenance is not able to be kept up?

Andrew Bailey: Yes, that is a concern, particularly for US refineries. They are working at high levels. There has also been the closure of one or two refineries in the US, which was planned beforehand. That is another factor in this, which could cause a sustained elevation of the crack spread.

Sir Dave Ramsden: The maintenance point is really interesting. If you made the assumption that the conflict was going to go on for a certain amount of time, you might postpone maintenance, but you get to a point where you cannot postpone. There are also attacks on installations. The Houthi attack hit a Saudi refinery. You are seeing those problems. The longer the conflict goes on, the more complicated it gets for both the original crude and then the spreads.

Just to give you a fact, crude is up about 51% compared with pre-conflict, but diesel is up 118% and jet fuel is up 105%. That gives you an idea of crude and then the crack spread on top of that. We talked a lot about this in the July MPR. Chart 1.7 really draws attention to this.

Q452       Chair: That was really my next question. How much did that affect each of you in your decisions when you were setting the rate at the last meeting? I will start with Professor Taylor.

Professor Taylor: It is a very uncertain environment. When I was last here after the February vote, we had had both core and headline inflation coming down, and there was a sense that we were coming back to target. If you just mechanically asked what April CPI would have been without the energy effects, it would have been at target. Those were reasonable expectations.

Since then we have seen the energy price moving in a higher corridor. Oil was at $60 to $70; it has been between $70 and $100. As the Governor said, it could have been much worse. Some experts in March were saying, “Well, $150 could be within the range of possibility”. The market was a bit more relaxed about that and the curve did not go that high. We had the hostilities calming down in June and a possible ceasefire, so we went to the bottom end of the $70 to $100 range. Now we are edging back up. It is very difficult to know what the future of geopolitical events will be.

In addition, we are transitioning from that early phase, where the release of reserves and certain temporary measures can mitigate price increases. That cannot go on for ever. At the same time, we are seeing a shift around the world with firms and households adjusting demand and other supply responses coming in. That is a race between temporary measures wearing off and the supply and demand responses kicking in. Which one will win? We do not know.

It is very different for the refined products and then for gas, which is maybe something else we will come on to, which is so central to the UK electricity price. It is a very fragile situation for all kinds of reasons. That is what we have to watch especially carefully going into the winter. Especially for gas, it is going to be a very delicate situation. We have seen that price edging up in recent weeks.

Q453       Chair: Megan Greene, you voted to increase rates. Was all this having an impact on your thinking?

Megan Greene: It certainly was. Commodity and energy costs have been up and down, largely off the back of headlines, over the past six months. We can continue to expect them to be incredibly volatile. It has been six months now. That worries me in terms of the potential second-round effects down the line. In the meantime, I cannot pretend to have an edge in knowing exactly how this war will play out or exactly how energy prices will evolve accordingly. In my view, we face such incredible uncertainty that it is appropriate to take a risk management strategy when devising the appropriate monetary policy response.

You are then looking at how to minimise your losses. We have done an exercise. Let’s say you think energy prices are going to be higher and there will be second-round effects, but it turns out that energy prices fall and there are no significant second-round effects. What are the implications for inflation if you course-correct versus the inverse of that? It turns out that, if you think that you might be in a situation with higher energy costs and more second-round effects, and you act accordingly and determine that that is not the case, you can course-correct. You will stay on top of inflation and the cost in terms of the output gap is relatively small. If you assume the inverse and you end up with more second-round effects and higher energy costs, it is hard to get on top of inflation.

Q454       Chair: On the second-round effects, there is a challenge because often businesses particularly will have to lock into a price at a certain time. Over what timescale are you looking at the secondary impacts of this crisis? For some people, the energy price will have a bigger or quicker impact on their business. In other cases, it will be a very slow turnaround.

Megan Greene: That’s right. Ultimately, we will not have definitive evidence on second-round effects for quite some time. I would not be surprised if we do not have conclusive evidence until next year at some point. Ultimately, we have to set monetary policy looking into the future, given the lags with which monetary policy hits the real economy. We have to make a judgment now, in my view, rather than waiting for actual concrete evidence of second-round effects.

Q455       Chair: I will bring in Sir Dave Ramsden. When you answer, Sir Dave, one of the other things that we have discussed is fuel. You mentioned the high cost of air fuel compared with crude. It does not seem to have impacted on holidays for British consumers this summer, partly because of hedging. Could you give us a flavour of how much impact there could be on flights?

Sir Dave Ramsden: Yes. Back in July, I voted to leave rates unchanged. My assessment was really that I saw risks pulling in two different directions. Let us not forget that the market curve is significantly above where it was expected to be before the conflict. I was certainly expecting to cut Bank rate over the spring. I think of unchanged Bank rate as still being consistent with a restrictive policy.

I was balancing two sets of risks. This comes directly to the discussion you were just having with Megan. When I look at the domestic position, that is relatively benign. Megan is right that we are always going to have to make a judgment on second-round effects. Particularly in the labour market, I take quite a lot of assurance from the fact that—this is something we talked about when I was last in front of you in December—our assessment of the labour market over the short term and over wages has turned out to be not only relatively accurate, but we have been over-forecasting wages. In Q2, our preferred measure, private sector regular wages, came in at 2.8%. Pre conflict, we were expecting 3.2%.

You have a relatively benign picture, which I am sanguine about. I am not saying that will not change. Overlaid on that—this was something that I emphasised in July—you have this increasingly complex global picture with a prolonged conflict in the middle east and other things that we have talked about impacting on the products that consumers buy, such as petrol.

As I emphasised in my minutes paragraph, you have other shocks coming along, such as extreme weather events. We talked about El Niño in the MPR, but we, like a lot of northern Europe, have had a drought. We know that has impacted on yields. You then have other factors, such as AI, which are global, that are increasingly having a bearing. I see the global inflationary picture as much more of an upside risk relative to that benign domestic picture.

It then comes back to the interaction. If the global picture is going to continue to be a worry, is that going to start to impact on the persistence of domestic pressures? My judgment—this was why I differed from Megan in policy in July—was that I am comfortable with the current position on policy, but I am very conscious of that risk picture.

You are right. We have not seen the demand effects on travel that you might have expected yet, but that is probably because—we got a lot of reports on that—airfares have not gone up yet.

Q456       Chair: Is that mainly hedging or is it that companies have absorbed the cost increase?

Sir Dave Ramsden: I would imagine that it is a bit of both. Again, that cannot go on. You have seen talk of some companies saying, “We are going to have to reduce the number of flights in the autumn”. That in itself creates scarcity and may put the price up. We are seeing economies adjust to this sustained shock.

There was one thing that I wanted to add. In terms of second-round effects, we put in the July MPR our thinking around a monitoring framework. Yes, it is going to be a judgment, but we are trying to see what signal we can take from the indicators that we have and what they might tell us about the degree of second-round effects.

Chair: It is certainly a turbulent time with the weather, as well as the war.

Q457       Bobby Dean: We are getting into the discussion around the judgment of second-round effects, and I want to go into a bit more detail. You started to allude to this, but I was going to ask you what indicators would start to convince you. I am keen to pick up Ms Greene’s comments. She made the case that acting sooner and course-correcting is the better option. It feels like, with the indicators, we might not know until it is already too late. What would be the other committee members’ reaction to Ms Greene’s point? Professor Taylor, I do not know whether you want to start. Is acting sooner and course-correcting better than waiting for these indicators to emerge and then suddenly feeling like we are caught out too late?

Professor Taylor: I feel like I have course-corrected, even though it may look like we have done nothing in terms of changing Bank rate. I am sort of on the same page as Dave. As of February, when I was last here, we were expecting, and the market was expecting, two or maybe three cuts this year. That was not an unrealistic prospect based on the domestic components of inflation that we have talked about. They have been coming in for 12 to 18 months below forecast. That suggests that there is this dichotomy between the domestically generated inflation, which is relatively benign, and the external shocks, which are very much not.

By voting to hold with the majority unanimously in March and staying with that position since then, I view that as an active decision to maintain the restrictiveness that Dave spoke about. It is there. We can see that the braking has been quite substantial partly because we have seen the forecast coming in below where we expected. There is evidence that we are further above neutral compared to the Fed, the ECB and other central banks because we reduced rates more slowly from their peak.

For me, that is putting in some insurance. For the moment, my judgment is that that is sufficient. The monitoring by the Bank staff is going to focus on things such as wages and spillovers from direct and indirect energy effects into other sectors. Compared to historical evidence, is the response bigger or smaller than we have seen with prior energy shocks? That will be very informative for me.

Andrew Bailey: I will just give you one fact. Mortgage rates are a good illustration of this. UK mortgage rates are now typically about 75 basis points, three-quarters of a percent, higher than they were at the point when the conflict broke out. With the possible exception of Japan, although that is a little hard to map, that is the largest increase in mortgage rates in the G7. That bears out Alan’s point that we have seen a tightening of financial conditions. Again, you have to relate this point about course-correcting to where you thought you were going, as it were.

Sir Dave Ramsden: On the monitoring point—it is a really fair challenge—our decision maker panel tells us both about what they are thinking that they are going to do now and what they are planning for a year ahead. We put different weights on those indicators, but some of these surveys are forward-looking.

Where we have more of a challenge is on the labour market side because the vast majority of annual wage settlements in firms do not happen until around the turn of the year. This conflict started just after the 2026 settlements were finalised and the 2027 settlements are still to come. While I was giving you what I consider reassuring wage numbers, they are about the here and now; they are not telling you anything about the future.

We have a framework. The framework is going to be less clear in the signals that it gives us, but it will enable us to make informed judgments about whether, in wages and prices, those second-round effects are beginning to be more pervasive. That will inform all our judgments. Megan and I have a different perspective on that, but we are looking at the same assessment.

Q458       Bobby Dean: Ms Greene, I wanted to come back to you. I just looked through the papers and I saw your history of voting. You wanted to hold at other times when other members of the panel wanted to cut. Is this perhaps about sharing a similar analysis about the risks of second-round effects but having a different starting position or perspective on what the neutral rate might be? Is that a fair explanation of your position versus other members?

Megan Greene: I do not want to speak for my colleagues, but I do not think any of us thinks that we should wait until we have definitive evidence of second-round effects to act. We all know that that would be too late.

We do have a different perspective about our starting point. Whereas some of my colleagues felt reassured that the disinflationary process was under way at a pace that was acceptable to them, I was more worried about it. If you look at our agents’ pay settlements, for example, pay settlements will be a bit lower based on what our agents are telling us this year relative to last year. Given that we expect inflation to accelerate, it could turn out that they are not that much lower next year, although it is too early to say.

That would suggest that the disinflationary process on wages, at least, is stalling out. I have been worried about household inflation expectations, which before this conflict hit were at the absolute top of the band you could possibly explain using the historical relationship between inflation outturns and inflation expectations. That concerned me in the light of the fact that we have had two major supply shocks hit the economy and this is the third one.

We have done a lot of analysis looking at sensitivity to inflation. If inflation gets above a certain threshold, households and businesses tend to notice it more and that informs their inflation expectation setting. We will be in that threshold this year and possibly part of next year. That worries me in terms of feeding through into second-round effects. We do have different starting points. That goes a long way to explaining our views on the current conjuncture.

Q459       Bobby Dean: Governor, building on your comments about the market curve, could I pick up on something you said in the press conference? I believe you said that the market curve “is entirely consistent with our reading the economy”. For those who have not seen the market curve, it is edging upwards. The market is expecting the rate to go upwards. In the same press conference, you also said, “Please do not leave this room thinking that the Bank of England is edging towards a hike”. Could you bring some clarity to those two seemingly contradictory—I am sure they are not—comments?

Andrew Bailey: I will try to explain why they are not contradictory. Let’s start with the first one. The first one is a conditional statement, which is the normal type of statement that we make, and it is this. It really reflects the discussion that we have just been having. The risks, I am afraid, are on the upside. We made this point very clearly in the report. Most of us had it in our individual paragraphs. I certainly did.

This is really about the risks coming from energy prices. There are two parts to it, as this discussion has already revealed. There is the question of where our energy price is going. That is hugely uncertain. There is then this question about the second-round effects and the transmission of those prices into underlying inflation, which, as you can see, there are different views on. On the first one, I am afraid that the risks are on the upside. Going back to the first question, we are seeing that. I have to be honest with you on that.

When you look at the market curve and break it down, as we can do—in our so-called MaPS survey, we ask the market what it thinks we are going to do and look at how that relates to the curve—you essentially have a risk premium in there, which is the difference between those two things. My comment at the press conference was that that is entirely consistent with the view that the risks are, I am afraid, on the upside. That is a conditional view, because it is a view that, if we get a persistent energy market effect, that is where we will, I am afraid, be going.

To your second quote, the question that I got was about whether we are just gradually going towards a rate increase. To my mind, that is putting an unconditional question. “Are you in fact pursuing a policy that has a rate increase and it is just a question of when?” I draw a very sharp distinction between those two things.

I will bring in what Chair Warsh in the US has been saying about guidance. Forward guidance is an attempt to take you from the conditional world to the unconditional world. I agree with Chair Warsh that that is quite dangerous. We make a lot of conditional statements. I sometimes get quite frustrated privately that a lot of them are interpreted as unconditional statements, but they are conditional because the world is uncertain. That is what we are saying.

The first one is saying, “Look, the risks are to the upside”. That is a distribution of uncertain outcomes. I want to dispel the idea that we have a secret plan, we know where we are going and so it is unconditional. That is the thing I was pushing back on.

Q460       Bobby Dean: Can I also follow up on your comment about mortgage rates? You said that they have gone up by the most in the G7. Is there a fear that that is doing some of the work for you at the moment but it cannot hold for ever? At the moment, that tightening is already having an effect in the economy, which you might want to try to achieve via an increase in Bank rate. The effect is already taking place, but that scenario between the real-world effect and your rate setting cannot hold for ever.

Andrew Bailey: First of all, we have to take financial conditions into account in our assessment of the economy. That is data, as it were. The tightening of mortgage rates has an impact on financial conditions. It is a tightening of financial conditions. That will affect individual families and people. We take that into consideration.

The market is responding. It is looking at all the same things that we are looking at and drawing the conclusion, as we do, that the risks are to the upside. It is pricing that in, and that gets reflected in the mortgage rate. I would push back on the idea, therefore, that we are not doing anything because we are letting the market do all the work. That is not the case. The fact is that we are both, in a sense, responding to the same things. We have to take it into consideration in financial conditions, which we do.

Q461       Dame Harriett Baldwin: Governor, can I take you back to the last bout of inflation, after which the court commissioned Ben Bernanke to do a review of how your models worked through that? Can you just update the Committee on how the review implementation is going under Clare Lombardelli?

Andrew Bailey: Yes. You will see quite a few products and outcomes of the review already in what we are doing. If you look at the minutes, and the individual paragraphs, he did not quite recommend that, but he recommended that we look at the communications. We have done.

We have made two important changes. You have to see those two changes together. They are entirely consistent with the Bernanke review. The first one is to use the individual paragraphs to give people a better sense of what each of us is thinking and how we have reflected that in our votes. Secondly—this is really important—in the collective comms, particularly the statement, we have moved from what we traditionally call best collective judgment to the view of the majority.

You have to see these two things as balancing. We are giving more communication in the individual paragraphs, but, rather than trying to do the collective comms as what I call a tent that everybody can get into, which unfortunately ends up as an average of everybody, we want to give a clear sense of why the majority decision has come out. That is the collective comms. That is a product of the review.

The use of scenarios is also a product of the review. We are still working very much on them because they are things where you realise that you can still do things differently and sometimes better.

There is one other point that I would make about the review work. When I am talking about it, I liken it to an iceberg. What you see is the bit above the water level. There is a lot more below the water level. That is all to do with data, models, tools and the incorporation of AI into our work, for instance. If you look at the total quantum of work, that is the much bigger part. That work is all coming along. It is not particularly put up in lights, but it is really important.

Q462       Dame Harriett Baldwin: To go back to the communication point that you just touched on, it seemed to many outside observers that we ended up with nine separate statements about why decisions were made. Have you had feedback in terms of that granularity being possibly a little bit confusing?

Andrew Bailey: One or two people have pushed that view, but I have had very positive feedback that we are giving a clearer view of the distribution of positions and what stands behind each of our votes. I just want to emphasise again that you have to balance that with what we have done on the collective comms. In the past, the collective comms were criticised for being quite contorted, frankly, at times because of this attempt to get something that everybody could shelter under. It is clearer now.

Q463       Dame Harriett Baldwin: Professor Taylor, if I may, in your recent speech you said that the central projection is the baseline. Is it an improvement to use three different scenarios without saying which is the central forecast?

Professor Taylor: That particular situation was specific to right after the conflict when there was grave uncertainty and it may have been misleading to do a central forecast. That was not a particular issue for me.

More broadly, there are three balancing acts that we have to try to do. This can be seen in light of the history of central banking. Decades ago, the communication of central banks was opaque possibly to the point of being almost non-existent. We moved to central bank independence and inflation targeting in the 1990s. You then had delegated institutions that had to communicate for two reasons. First, they had to communicate to markets to make it clear what they were doing because it was a change from the past; and, in terms of accountability, they had to explain to the public, to you, through these meetings, our speeches or now our paragraphs, what decisions we are making and why we are making them. There was an important change in the quantity of information.

You can have too much of a good thing. It is like adding salt to your cooking. One teaspoon may be good, but you do not want to add three. The quality of information is also important. This goes back to the point that the Governor made. Let’s take forward guidance, for example. What are you saying about the future? Monetary policy is forward-looking. We are setting with an eye to what is going to happen in a year or 18 months. You do not want to make the unconditional statement, “This is where we are going”, but you have to communicate a central view on the economy.

It is our responsibility to set out collectively our central tendency or view of where we are going and what policy must do. That is setting a baseline level. It is very valuable, around that, to communicate our reaction function through scenarios or through other devices, but we have to communicate to markets and the public what we would do in the event of other developments.

The final piece, which is very important and is perhaps a reflection of how special the Bank of England is in terms of our constitutional set-up, is that we have individual accountability. There is a premium on us being able to express our individual views. I have to explain why I voted how I did to you and to everyone. That is good and proper. There has to be that element, but we do not want that to crowd out a strong collective view. Striking those three balances is very important.

Andrew Bailey: It is a very good thing, but this type of hearing is very unusual. If you go to the US Congress, the European Parliament or the Japanese Diet, only I would be here now. By the way, I am really pleased that they are here because I get to share the burden. This is the point. Our system is different in that respect. It is a strength of our system.

Q464       Dame Harriett Baldwin: Ms Greene, with the Governor mentioning just now that the new Federal Reserve head Kevin Warsh is taking a different stance in terms of communication, is there going to be an increasing difference in style between the communication that we get from you and the communication that we hear from the Fed?

Megan Greene: We have a fundamentally different set-up at the Bank of England. There are nine individual members with individual accountability to you as well as the public. That breeds an entirely different set-up anyhow. We have started in different places and we will probably continue in different places in terms of how we communicate and how we are set up.

Sir Dave Ramsden: I just wanted to come back to this point about the evolution of the use of scenarios. The world is getting more and more challenging, and there is more and more uncertainty. That really plays into the Bernanke conclusion that just having a central forecast and really trying to focus everything around it was not helpful. The covid pandemic showed that.

To the point that Alan made, back in April uncertainty was so great that we decided to publish three scenarios. The Canadian central bank did something similar, given the trade shock that Canada was facing. In July, we have gone back to a baseline forecast and then put scenarios around it to help each of us in thinking about how we frame policy. We have the baseline forecast; we have this adverse scenario, which has a more sustained conflict and higher energy prices for longer; and then we have a more benign scenario. That enables each of us in our different ways—going back to what Megan was saying, our starting points might differ—to explain ourselves and our vote.

Andrew is right. From the kind of feedback I got, in April there were one or two voices saying, “You have suddenly gone to scenarios. You need to help us”, and we had to explain things, but then in July they noted that we had gone back to a baseline forecast.

Generally, yes, there is a lot of commentary, but, in terms of market reaction, you can look, as a measure, at how much volatility is being generated by what we do. If there is lots of volatility from our comms, we would be uncomfortable about that. From what they say to us, April and July were both, I would argue, reasonably well received. What I mean by that is that we got our message across about policy and the risks around policy.

Q465       Chair: Professor Taylor, does this new approach give the public a collective view or is it just fragmentation? The FT carried an article quoting the critics. I just wanted to know your opinion.

Professor Taylor: We are balancing the collective against the individual. It is very important to be clear on our reaction function. Credibility comes from saying, if certain unexpected events materialise, how we will react. The comms package and the scenarios help us in delivering that message. The central forecast is another piece. That says, “This is a distribution around some central tendency”. We have a view on how the economy is going to evolve.

The combination of the reaction function, which expresses differences and deviations in the face of shocks, and the central forecast, which is an equally important expression of a view, serves an important purpose for me. There is a lot of noise in the world, but there is also sometimes additional noise in financial markets. It is our job to subtract noise, not add noise. Our comms package is well designed, if it does that.

Q466       Ms Minns: Can I just move us on to some of the inflationary pressures we are seeing with regard to food in particular? My constituency is very rural, up in the north of England. It is not arable, but it is livestock. When I visited the UK’s largest sheep auction, a comment was made to me that we are seeing an earlier sale of store lambs, which means that they are realising a lower price, but also that the pasture has not been there and that they are eating into winter silage. How are you going about gathering this sort of intelligence? When do you expect us to feel the impact of those price changes?

Andrew Bailey: We spend a lot of time going around the country ourselves, as do our agents. The agricultural sector is important, as you say. We are picking up some quite similar comments. We get information on pricing, for instance, from agricultural sources. We are already seeing lower yields on cereal crops. For winter wheat, spring barley and oats, the yields are already down and we are seeing some upward pressure on pricing. That is really a reflection of UK conditions.

As Dave was mentioning earlier, we have this El Niño issue building up. You can look back historically at El Niños and trace them around the world. It has had effects in the past on things such as rice, coffee, cocoa and palm oil. That is coming.

Interestingly, so far—do not put too much weight on this—food price inflation has come in under where we thought it would. Unfortunately, however, this is another area where the risks are on the upside. We have built into our forecast stronger food inflation by the end of the year. We have already got that in, but we will keep having to come back to this with the sort of evidence that you have and that we are getting on whether it is consistent with what we have assumed.

Sir Dave Ramsden: If I can build on that, we really had to learn from the experience of 2022. It took the economy a while to understand what the pressures were on food prices going into that summer and then winter coming from energy prices, fertiliser and other inputs. We can then talk about second-round effects and all that.

What has happened this year, as Andrew says, is interesting. Up to now it has supported inflation perhaps not rising as much, certainly in food, as we might have expected. The latest reading for July was about 1.7%. We are expecting food to go up to 3.5% by the end of the year. The trade bodies have come down a bit. They were originally saying, when the conflict started, that it might be 6% or 7%. They have come down a bit. You have to look at the fertiliser that you have to buy for next year. You have to take account of the difficulty that we have had with yields this year, as you say, already using up winter silage for feed.

We heard this again when we were in Basel at the weekend. The great thing about the Basel meetings is that you get central bank governors from right around the world. The central bank governors from some of the countries more exposed to El Niño now—with us, it will happen with a lag—were talking about the impact on food prices that they are already experiencing. They are some of the biggest producers in the world. Those will feed through to us.

Q467       Ms Minns: Given the fact that climate change is a reality now, are we at a point where the volatility, the pressure on food prices and the pressures on supply mean that we are dealing with a chronic inflationary problem?

Andrew Bailey: I am not an expert in climate science. El Niños do happen. They are not necessarily to do with climate change. This is a big one. Everybody is saying that this is a big one. Again, I am not sure that the link necessarily follows. We have had very hot summers in this country. I remember 1976, which was a very hot summer. Sadly, I am that old.

Certainly, we are seeing more volatility in global food prices than we have done in recent years. If we go back to 2022, that was not to do with climate. That was predominantly to do with Ukraine.

Sir Dave Ramsden: We have touched on geopolitics and we have talked about energy. Now we are talking about food. We seem to be in a world where there are more shocks and more supply shocks. In the short term, the drought and El Niño will have a supply impact because they will affect production, but, going back to what we were discussing right at the outset, what happens to consumer prices, which after all is what we target, will depend on demand. Food is a necessity. It really affects the cost of living.

The incidence of these shocks will also depend on whether this is global or whether other areas can compensate for it. How can demand adjust? If meat prices are very high, for example—you were talking about the lamb auction that you were at—does that mean that consumers substitute away to the extent that they can?

This environment of more—and more significant—supply shocks is more likely to lead to a ratcheting up in prices than a ratcheting down. We have not seen many positive supply shocks of late.

Megan Greene: Can I just make a simple but important point? To see ever-rising inflation, you need to see these shocks get worse and worse every year, all else equal. We are looking at more frequent supply shocks, but that means there is going to be a lot of volatility rather than just ever-rising inflation.

Q468       Ms Minns: We were talking about a very traditional sector there, but you have looked at the AI boom recently and the pressure that that has exerted on the supply of chips. Where does this factor in generally in terms of that inflationary pressure?

Andrew Bailey: There is a box in the MPR on the subject. It does because we are seeing some upward pressure on chip prices. The staff have done a bit of modelling on it. They have come down at about 0.1% on the CPI as a potential effect. Again, we have to watch this because the whole issue here is the scale of demand for chips and how that evolves. We are going to have to watch this quite carefully. Yes, it is having an impact. It has an impact. It is not just AI because there are chips in lots of things. To the extent that it affects broader chip prices, that feeds through. Our staff have done work on that, yes.

Megan Greene: Can I just add a quick point on that? One thing that nobody knows how to model is how these different supply issues interact with one another. That is a big degree of uncertainty for all of us. This AI piece might interact with the Iran war piece, which might interact with other supply shocks to create an effect that you cannot just model directly.

Q469       Chris Coghlan: I want to turn now to quantitative tightening. Sir Dave, the estimates of the impact of QT on interest rates have consistently edged up over time. Is that because the actual impact of QT has edged up or because the estimates have changed?

Sir Dave Ramsden: You give the right framing when you say that they have edged up. A year ago, we said that we thought the overall impact was between 15 and 25 basis points. We have gone up to saying it is an impact of 20 to 30 basis points. Remember, that is in the context of an overall increase in yields of about 350 basis points and an overall increase in term premia, which is the bit that we think QT impacts.

Our principles are all about being gradual and predictable, QT operating in the background and Bank rate being our primary tool. I would argue that 20 to 30 in the context of a 200-basis-point increase in term premia is still very much in the background. Whether it is because another year we have done a bit more QT or because our estimations have been refined, you are talking about such small amounts that I would not want to say it is one or the other.

I have made the point that it is a very small percentage, somewhere between a sixth and a 10th, of the overall impact on term premia. Over that period, QT has amounted to £400 billion. We have gone down from £895 billion to under £500 billion. This has been a very significant adjustment.

Q470       Chris Coghlan: I have seen some analysis by Bloomberg that apparently the fiscal losses being incurred on QT currently relate to the QE that happened during the pandemic. You—I think I am right in saying—voted to curtail the final £150 billion of QE during the pandemic. In hindsight, was quantitative easing the correct policy response to the pandemic, given the inflation that we are seeing now, or is hindsight a wonderful thing?

Sir Dave Ramsden: I am not sure you were on it then, but this Committee carried out a very extensive inquiry into QE and the start of QT in 2023.

Chris Coghlan: Yes.

Sir Dave Ramsden: I was asked a very similar question to that one. Andrew and I did that inquiry with Ben Broadbent, who was then a deputy governor. We were all asked what lessons we would learn. The one lesson that I would learn is a second-order one.

I remain very supportive of having QE as a tool when you are at the zero lower bound and when you are dealing with an economic crisis like we were with covid. I cannot say, if I went back in time, whether I would vote again for the first, second and third rounds, but I am pretty confident that I would because of what they did to support the economy through a horrendous economic period.

However, that third round of QT—

Chair: You mean QE.

Sir Dave Ramsden: Thank you. I always have to correct the record after. That third round of QE was, if I recall, £150 billion over 12 months. It was an unusually long period going into 2021. At the outset of that, we did not even have a vaccine. With the benefit of hindsight, I would have had a review point for such a long period. We did not have a review point at the time, so I started to vote against completing it. I was in a small minority. The reason that I voted against completing it was that I was beginning to worry about inflation.

It was the first tool available. I then started to vote—I think it was with Michael Saunders—both to stop QE and to start putting up Bank rate, but it was only a month or so before the rest of the committee.

Andrew Bailey: Can I just make a rather dull and arithmetic point, if you do not mind? I am sorry about this, but I think it would be true to say, if I remember the analysis, that in cash flow terms there will always be more of the bonds from the last round of QE before you raise interest rates in the portfolio. This point is about where the relative cost is.

Sir Dave Ramsden: There will always be more, yes.

Chris Coghlan: Governor, I thought you might be interested in coming in.

Andrew Bailey: Not with that, you thought, but something more interesting.

Chris Coghlan: I am really interested to hear your thoughts on something from 1844, the Bank Charter Act.

Andrew Bailey: I remember it well, yes.

Q471       Chris Coghlan: Specifically, I want to ask about the accounting treatment on QT. The Treasury receives the full fiscal benefit or loss from QE and QT as a result of that Act, whereas the Fed and the ECB do not because of different accounting treatment. Therefore, if the Government were to change accounting treatment, similar to the Fed and the ECB, would that be one way forward on this issue in terms of not having the taxpayer accumulate £20 billion of losses a year?

Andrew Bailey: I will make a point that you may say goes against my interests, but it is important. In economic terms, this makes no difference at all, first of all. This is all about accounting, but it is also about transparency. That is the point.

In terms of the taxpayer, let us think about the consequences of the 1844 Act. Let us be clear. The 1844 Act—I hope very few of the public carry around in their head how the 1844 Act works—split the Bank of England’s balance sheets into two parts. There is what we call the issue department, and its only liability is bank notes, which do not bear interest. The rest of it is what is called the banking department. The reason that this was done in 1844 was all to do with the gold standard. That is history. It was a way of making the gold standard work—the gold was on the issue department to back the notes, because the Bank originally was also a commercial bank—but it has persisted.

We have the so-called seigniorage, which is the profit of the note issue. Every note that we have is effectively an interest-free loan to the Bank of England. Because of the way the 1844 Act works, all the profit of the issue department is paid directly over to the Government, to the Treasury. The only bit that we withhold is the cost of printing and issuing bank notes, which is very small. It is about £4 billion a year.

In other central banks, it is all in one balance sheet. The seigniorage accrues to the profit of the central bank and they usually have some process in normal times for deciding what gets paid over.

What is the consequence of that? I will start with the other central banks. It is easier that way. The other central banks, therefore, are able to do two things. First, they are able to offset the seigniorage against the cost of the QE/QT. By the way, they also do a second thing, which is a consequence of that—they also book a negative asset. In other words, they book the negative cost of the QE/QT because the one-year seigniorage does not cover it. They are therefore projecting forward to say, “For as long as we need to offset this, we will take seigniorage into the future”. We would have to change our accounting standards to do that, but they do that.

We cannot do that because we have very little income outside the seigniorage. The banking department has a relatively small income. We pay a dividend to the Treasury, but it is about £100 million a year. It is under that. We have only just started resuming that. As I say, the consequence of that is that, in a sense, we are paying money to the Government with one hand but it is having to come back with the other hand. Other central banks do not do that. In economic terms, for the taxpayer, it is the same.

Q472       Chris Coghlan: It is, but the fact is that there is a fiscal hit to the taxpayer today from the current-year losses.

Andrew Bailey: Hang on. If we did not pay the seigniorage, there would be a fiscal hit to the taxpayer by not paying the seigniorage. That is my point. The seigniorage goes into the Government’s funds.

Q473       Chris Coghlan: Where I am trying to go with this is the fiscal hit that we as taxpayers are feeling today as a result of it. One potential solution could be taxation on it. Another would be to leave it alone, as I know—

Andrew Bailey: Let me come back to that. Can I make two other points? First of all, the UK system is more transparent. There is merit in that. It is honestly quite painful. Other central banks do not have the same debate about this that we do, but it does have the merit of transparency. The seigniorage element, the fact that we are paying quite a substantial sum of money every year to the Government, gets lost in all this debate. I would just say that.

Chair: It is helpful to have that point made clearly.

Andrew Bailey: I will make one other point. When we come to this cost, we now present it in a slightly different way because the Government have a considerable benefit from the fact that they have issued long-term debt at very low interest rates during the zero-interest-rate period. UK Governments did a very sensible thing: they issued a lot more long-term debt. UK Government debt has a longer duration than other G7 countries. That is a benefit of QE because the yield curve was so flat and so low. We have started publishing an attempt to say, “Look, let’s try to take that into consideration”. Basically, it comes out flat when you do that.

Sir Dave Ramsden: You and I have discussed this—

Chair: I am sorry, Sir Dave. I am going to Harriett Baldwin.

Sir Dave Ramsden: I thought I would give the latest numbers, but I am happy not to.

Chair: You may be able to respond in answer to Dame Harriett.

Q474       Dame Harriett Baldwin: I just want to pick up on my colleague’s questions. You mentioned pain. You mentioned that it can be quite politically difficult. We have heard you speak this week about populist forces and the impact that they could have on independent institutions. On this accounting issue, the IPPR published a pamphlet recently saying that banks ought to be taxed for the amount that this is costing. That sort of thing is out there in the political discourse. What is your view, Governor, on adding to the tax burden of banks on this?

Andrew Bailey: I am not going to comment on fiscal policy. I have said in the past that I do not agree with not paying interest on reserves. The reserves serve a number of purposes, but they are the way in which we implement monetary policy. The anchor point in our system is that, when the MPC makes a decision on interest rates, the immediate effect is through the interest rate we pay on reserves to the banks. It basically then trickles through into the system. That is important.

The other point that I have made is this. Most of the reserves are held for financial stability purposes and it is important that the banks do hold those reserves.

I would also make one other important point—I am not making a pejorative point here. If we stopped paying interest on reserves, that would reduce the banks’ net interest margins and their earnings, and I am afraid they would have to pass that through. The most likely thing is that they would pass it through to customers. I am not saying that in a pejorative sense; I am saying it in a sort of economic sense.

Q475       John Glen: Can we turn to the state of the economy? Governor, people in the country will be looking to you to make sense of all the headwinds and understand what is going on. The monetary policy report has the Bank’s estimate of underlying GDP growth falling to 0% in this quarter. The OECD’s latest economic outlook gives the largest downgrade of the entire G20 to the UK economy for 2026, to 0.7%. What is likely to happen in the UK economy overall this year? Are we on the verge of a recession?

Andrew Bailey: I don’t think so. Interestingly, since we published the report, I would say that the numbers have started coming in a bit stronger. As I say, we are not doing a forecast for this next meeting, but we will do one for the beginning of November. It is looking a little stronger, I would say, so that is good.

In any of our scenarios, we did not have a recession in the forecast. Activity has been reasonably resilient, I would say. It is weak by historical standards. I have spoken a number of times on this, and it is a very big issue, this question about how we raise the potential growth rate in the country, but, if you look in the short term, it has not been.

It is interesting because there is now pressure particularly on real incomes. One thing that I would say—this applies to both the household sector and companies—is that balance sheets are in quite a resilient state. We have gone into this with pretty resilient household and corporate balance sheets. The household saving rate has been quite elevated since covid.

In terms of households and if we think about what we tend to call consumption smoothing—in other words, they can adjust to some of this without having to ratchet back quite as fast as they would otherwise—their balance sheets may well be helping to sustain some slightly stronger degree of consumption than would be true otherwise.

Q476       John Glen: Can I ask you about the underlying prospects of the economy? You have discussed, in previous questions, the shocks and problems in the middle east. In previous monetary policy reports, you have explicitly highlighted the impact of the employer national insurance hike as a factor in suppressing hiring. How should we discern the difference between those external factors, which are often cited by the Government—and probably all Governments—to justify poor performance, and that underlying situation in terms of the propensity to hire based on the additional costs? This is the core question, because if there is not that resilience without those external shocks, and that burden is so high, we are not well set for a private-sector-led recovery, are we?

Andrew Bailey: It is interesting. We were talking about second-round effects earlier, in terms of the strength of the second-round inflation effects. If, as we are seeing at the moment, they are somewhat softer, and if you take the chain of argument through there, one of the things that we are therefore probably seeing is that companies are taking a squeeze on their margins. In other words, they are not passing on all the increase in costs through to prices, so the question is then around how much of that they can do, and that will differ from company to company and sector to sector.

To the extent that they have higher labour costs, and have possibly already taken some margin pressure on that front as well, that will affect their overall decisions. If you take that into the labour market, as you were saying, we are certainly seeing a lower rate of hiring. The labour market is softening, I would say. We have seen that, and one of the features of that is a lower rate of hiring. That is the message that I certainly get pretty consistently when we go around the country.

Q477       John Glen: We can see that in some age groups, particularly in terms of youth unemployment. There is also an argument out there that says that there is greater investment in productive machinery and assets, which means that there seems to be an unresolved question around whether the UK economy is becoming more productive. There has been a shift away from dependency on labour. How would you interpret the data points in this regard?

Andrew Bailey: I would say a number of things there. We are seeing some signs of productivity picking up. Interestingly, it is not necessarily in the sectors that you would associate particularly with AI, so I am not sure that that is a change yet.

Q478       Chair: Which sectors?

Andrew Bailey: There is quite a bit in some of the service sectors. It would, of course, be consistent with lower employment and reducing labour. In other words, you could get a mechanical increase in productivity by having fewer people.

John Glen: Yes, exactly.

Andrew Bailey: Your point about youth unemployment is right. Frankly, this is concerning, and it has risen. It is, of course, one thing that, I am afraid, does follow if firms rein back on hiring, because the thing about the young is that they are coming into the labour market and do not have jobs. Therefore, if people are not hiring, they will tend to be more affected than people who are in existing jobs, so those two things would be consistent.

Sir Dave Ramsden: Going back to this emphasis on resilience that we were talking about earlier, there does seem to be relatively low hiring, but also, certainly compared with some of the fears around late last year and then into this year with the shock from the middle east, there is less firing as well, so you are seeing just less turnover in the labour market.

It is the case that, when you look at the aggregate GDP number, as Andrew was saying, it was 0.4% for Q2, which was slightly higher than we were expecting. The latest surveys both on the producer side in terms of the PMIs—

John Glen: It is not going to be 0% in this—

Sir Dave Ramsden: We will see what the official—

Q479       John Glen: Is it 0% or 0.1%?

Sir Dave Ramsden: There does seem to be a little bit of—I would not say it was momentum because we are talking about an annual growth rate of 1%—

John Glen: It is 0.7%.

Sir Dave Ramsden: We are not seeing the real slowdown in underlying growth that we were expecting to see from the middle east conflict. This big shock comes along. Households do seem to be smoothing through it. Consumer confidence is at its highest level since August 2024. You certainly have not seen the economy looking as if it is heading towards recession as a result of this shock.

Q480       John Glen: But you have not seen any signs of accelerating growth.

Sir Dave Ramsden: No, but that comes back to Andrew’s big point, which we published in our annexe table. Let’s take real post-tax labour income. Between 1998 and 2007, it averaged 3.3% over those 10 years. The average since the global financial crisis is 1.5%. The key driver of living standards is productivity. We are talking here about cyclical changes. The underlying challenge, as we talked about numerous times before, is improving productivity on a sustained basis. That comes back to investing in physical capital, as well as human skills, and all those kinds of things.

Q481       John Glen: Professor Taylor, you looked like you were edging forward. We have not heard from you for a while.

Professor Taylor: I would not say that I was, but I am happy to do so. I am on the spot now.

John Glen: Nor have we heard from Megan.

Professor Taylor: In a long-run context, we have had slowing growth for 50-plus years. The golden age after world war two had 2% to 3% growth rates. We have seen that edging down, and it took another leg down after the global financial crisis. For the advanced economies, that has been a steady deceleration.

What does it take to then get you in a recession? If you have to go from 3% to 0%, that is a lot harder than going from 1% to 0%, because the delta is a lot smaller. That is an important piece of context.

In terms of where I was six to 12 months ago when I came before you, last year we were seeing a lot of 0%, plus 0.1% and minus 0.1% monthly GDP readings, which are very noisy. The quarterly were flat. I echo what Dave and the Governor just said, which is that, this year, it has been a bit more resilient, which is maybe a surprise to the upside, just as we have seen inflation surprisingly a little bit to the downside on the domestic side, not excluding the global shocks.

Q482       John Glen: What about this phenomenon of seeing growth more heavily weighted in Q1 and Q2, and then tailing off in the second half of the year?

Professor Taylor: That was going to be my next caveat, because that has been a recurring pattern, and there is a debate—

John Glen: It is easy to be positive around this time, because you have not—

Professor Taylor: That is fair enough. We are waiting to see if that is a recurring statistical artifact or something real.

Andrew Bailey: On that, the ONS has put out quite an interesting piece, where it thinks that there has been some change in the seasonality pattern, which may help to explain this. You have to have some catching-up process to that. One thing that it points to, if I remember rightly, is that we have had a change in the timing of Budgets over the years, but its view is that this is probably a seasonal thing.

Megan Greene: I have couple of points. I would just say that the June GDP data, mechanically, should carry through into Q3, just because of where it fell. All else equal, it should be supportive of growth. We are seeing stronger data, whether it is coming through surveys or hard data. Consumer confidence as well has been relatively robust. The labour market has shown signs of stabilisation as well, which could be an indicator that growth might not be as weak as we had thought.

I would also say that, on the productivity AI front, we have hard data. When we ask firms whether they have used or plan to use AI, overwhelmingly more firms plan to use AI in the next three years than have in the past three years.

We have to also overlay anecdata on that. When I go around the country talking to firms about AI, how they are using it and whether it is improving productivity growth, they all say that they are using it. If you ask more and more questions, it turns out that a lot of it is not AI at all. A lot of it is just automation. There are definitional issues that mean that you have to take a lot of that with a grain of salt. A lot of the AI data is just too nascent to make any concrete conclusions.

Q483       John Glen: On the issue of AI and its effect on and interaction with labour market trends, does it actually make the economy more productive? There is a consequence in terms of not hiring as many young people to do grunt work that can be processed—not that those individuals are not worth while, but their work at the lower end is not as valuable, so it can be replaced. Do you have anything to say about what you think will be the roll-out of that?

Megan Greene: There is nascent data in both the US and the UK, suggesting that sectors that are more exposed to AI have fewer vacancies opening up. I would highlight that it is pretty nascent, but, to my mind, the bigger factor for youth unemployment is just this low-hire, low-fire dynamic that is necessarily going to affect people entering the labour market more than anyone else.

Andrew Bailey: There is quite a nice slide that I tend to use in this one. There is a four-part model. It is the economist Daron Acemoglu who came up with this. With all these big technical changes, you can get jobs that are destroyed completely. You can get new jobs that are created—data scientists, for instance.

As for the other two, you can get some jobs where the effect of the productivity increase is to increase part of the process, but not another part. There is a case in point here. If you talk to Demis Hassabis, he will tell you—he has a Nobel prize for doing this—that there are huge breakthroughs in medical diagnosis that AI can deliver. I am not saying that this will happen, but if robots make big progress, and if you do that, you may well need a lot more doctors to deal with the consequences of those diagnoses.

The fourth box is the reverse of that, where the productivity does not destroy a job, but it does reduce the demand for a job.

Q484       Bobby Dean: Ms Greene, I wonder whether I could just talk about the relationship between something you said earlier and something that came up in that discussion. You talked about household expectations for inflation being a potential secondary effect that you are concerned about, but we have also just spoken about how elevated household savings might be helping us in this moment to get through this particularly tough part. Could you tell me how those two things interact and how you would hope to see them work out over time? It sounds like that is a good and a bad thing at once. I am not sure whether I am confusing the point.

Megan Greene: I might be misunderstanding your question, because those two go along quite seamlessly.

Q485       Bobby Dean: It was just said in this discussion now that household savings are helping smooth out consumption demand at the moment, but you also said earlier that household expectations on inflation are a concern to you, which means that people might decide to save rather than spend. Is that what you are saying?

Megan Greene: I see what you are saying. Part of it will depend on how long the conflict goes on for, how long inflation remains elevated and how high it goes. I will say that the consumer has been a bit of a puzzle for us for the past several years, in that, historically, UK consumers have acted a bit more like US consumers.

In this cycle, they are acting much more like eurozone consumers, in that they are not consuming a whole lot at all. When we ask consumers about their plans for spending, they say that now is not a good time to buy a big-ticket item, but, for example, they also say that they are not that worried about their jobs, which is not consistent with the picture that we have seen in the labour market, which has been weakening.

There is something going on with the consumer that we do not quite understand, and so the big question for me is what has been driving that saving. It could be hoarding off the back of an inflation spike that is front and centre for everyone, in which case savings will remain high. It could be the effect of mortgage rates resetting through a cutting cycle that we have had, and then the implications for policy would be totally different. One would require a more restrictive policy. One would require a looser stance.

I would just highlight that there is a big question around the UK consumer to begin with, and now we are adding on another supply shock. We have seen evidence so far that UK consumers have been smoothing their consumption. We see that in the savings rate, which has come down a little bit. We see that in retail sales data, although that is pretty volatile, and in the consumer confidence data. We are starting to see evidence of that, but it is pretty early days.

Q486       Chair: In the last two Budgets, there was a lot of speculation from the new Government—a lot of discussion, and then, last year, a lot of speculation. Do you think that is just a natural belt tightening, in that people are not quite sure what is true and what is not, and so will hunker down and not buy big-ticket items, or things that are nice to have but not absolutely essential?

Megan Greene: It is possible. Coming from the US, where the Budget is just a wish list of the President and everybody ignores it, this is a very different system. It is something that is much more of a focus for businesses and consumers. What we see is that, when you have uncertainty, regardless of what it is driven by, that generally tends to hold back business investment in particular, but also consumption to some degree.

Q487       Chair: Governor, I just want to pick up on the comments that you made about young people, because we have discussed this before. It is looking like this is potentially a long-term impact. The Government have done work on long-term NEETs, as they are called—not in education, employment or training—which is another cohort coming through that will be impacted by the things that you were discussing earlier. Have you done an analysis of the long-term scarring effect on the economy of a cohort that will not get the skills and development into the jobs that would have normally led to greater productivity and growth?

Andrew Bailey: There is a long-standing finding/argument in economics that, the longer you spend out of the labour market, the less likely you are to come back in or succeed in it. I do not think that we have anything to contradict or change that, so that is the concern.

Sir Dave Ramsden: If you were trying to be optimistic—it is challenging, given how difficult the numbers are for youth unemployment—there is clearly going to be a premium on being technologically literate, compared with me, when I look at the generation below me and their ability to do data processing and all of that. That comes back to this point about skills.

Q488       Chair: If we are skilling up young people in the right way in sixth form and at university, we could bridge this potential scarring.

Sir Dave Ramsden: It would certainly be a remediating factor in this, because the skill requirements are changing, I would argue, much more rapidly than they were when I was leaving school. It feels like a very different environment.

Q489       Chair: Covid was a good model, in that people who could adapt to that, and do things online and go digital, managed to survive better than others.

Andrew Bailey: We picked this up. There is a real tension here in the educational system. I can well understand why schools and universities are saying, “We are really worried—if all they do is use AI, what are they learning?” That is true, and I do not doubt that for a moment. On the other hand, as an employer, we want people who can use AI, so we have to achieve a balance.

Chair: Professor Taylor, you are looking pensive.

Professor Taylor: This goes back to the resilience point earlier. You do not want to overemphasise that. If we were in the no-conflict counterfactual—we had lowered rates, households were not just using savings to smooth, but there was more optimism, businesses were growing and hiring was happening—things could be looking very different in that counterfactual world, in terms of unemployment and scarring. That always has to be in the back of the mind, and it is damaging the long-term supply potential.

Chair: Hospitality would be one of those areas where people would use discretionary spend and create jobs, potentially.

Q490       Chris Coghlan: Governor, in January, you gave a speech about global imbalances, where you highlighted the role of a large-scale and sustained industrial policy, which, when combined with a closed capital account and suppressed domestic demand, can have an impact. You did not name the culprit, but is China the main example of this?

Andrew Bailey: I would start by saying that, on any global imbalance, it takes two—or more than two—to have an imbalance. It cannot be just one, because somebody has the surplus and somebody has the deficit—or somebodies. China does have a large surplus.

There are two or three points here. First of all, it was always very likely that China was going to catch up in terms of industrialisation in the grand scheme of things. The focus is on what the consequences are, how China has done it and how it maps into this picture of global imbalances.

The second thing I would say is that, when we talk about global imbalances, there will always be imbalances, and there should be. Going right back to Adam Smith, he taught us about the benefits of trade for growth. The question is the extent to which these balances are excessive and persistent, and having distortionary effects.

There are two things about China that stand out. One is that it has achieved this very big take-off in industrialisation. It has very low domestic household consumption, so it has done this in a model where domestic household demand is very low for an industrialised country.

One argument that runs through the thinking on this is that China has relatively weak social safety nets and, therefore, households compensate for that, in a sense, with a higher saving rate.

The second argument is industrial policy. Industrial policy went out of favour in the 1980s. It was a period where the old thing about picking winners really got quite discredited. Industrial policies have come back, and not just in China, but they are not picking winners. They are broad, cross-sectional industrial policies. A lot of countries are doing them. The evidence is that China is doing a lot more of it.

Chris Coghlan: And it has capital controls.

Andrew Bailey: And it has capital controls, yes. I was at the G20 last week. There is a very big debate on this question of imbalances. It is a big debate for the US Administration. I speak a little bit for the UK authorities here, because we are going to have the G20 presidency next year. We want, frankly, to get a better quality debate on imbalances. We have been working very closely with the IMF to improve this. I hope that we can, because we do want to have a debate with the Chinese. We do want to have a debate with the US, because the US fiscal deficit sits considerably on the other side of this, so we have to look at this in the round.

Q491       Chris Coghlan: You said back then, “Absorbing countries see employment drawn away from tradables into lower-productivity sectors”. Is the UK one of those countries? To what extent are we damaged by Chinese industrial policy?

Andrew Bailey: One of the consequences of this is that China has a strongly export-led goods market. The UK has a goods deficit with China. I am not surprised by that, given the Chinese take-off in industrialisation again, but the question is to what extent that is justified and to what extent it is excessive. We just need better analysis to get to that point.

What I would say is this, though—let us come back to AI for a moment. I certainly think that some combination of AI and robotics is going to be the next big step-up in what I tend to call general purpose technology, which will lead to the next pick-up in productivity. It is important that the UK is in that, because that is the best way that we can pick up growth, partly in this debate on imbalances, because that will shape imbalances. The question of who gets the benefits of this will also shape imbalances. It is very important that we get there.

Sir Dave Ramsden: It is also really important to look, beyond goods, to services. Andrew’s speech in January was focusing on tradables at times, but we were talking earlier about the banking sector. We are the second largest, if not the biggest, exporter of services in the world. We have a huge comparative advantage in financial and professional services. We are also very good at things such as advanced manufacturing, but we have moved away from some of the things that China has an industrial policy in, and moved towards other sectors. That is how the global trading system should work.

Andrew Bailey: The UK has a goods deficit with China and a services surplus, but the services surplus does not offset the goods deficit. It is smaller. It has quite a large educational services surplus.

Megan Greene: This issue of global imbalances comes in and out of vogue, and has done for my entire professional career. It is very much in vogue right now, partly because some of the policy responses to global imbalances have been really front and centre and have affected a lot of economies.

If you take morality out of it entirely, and just look at it all as an accounting exercise, current account balances reflect national savings versus national investment. The Governor is right that you cannot blame this on just one country. It is the balance of savings versus investment in each of these countries, and their relationship to others.

As an economist, you can sit here and very easily say, “China needs to consume more, Europe needs to invest more, and the US needs to save more”, but all of those things have to happen to address these global imbalances. It cannot be down to just one country.

Q492       Chris Coghlan: Governor, there was an analysis in the monetary policy report that tariffs on China by the US have diverted trade towards the UK. Does the UK gain from the lower import prices or lose out from the hollowing out of domestic production?

Andrew Bailey: We have seen some evidence of weakening global export prices and some softening of UK import prices. The challenge here, which comes back to Megan’s point, is that it is quite hard to know whether, if you have seen some pick-up in imports of goods from China, the other side of that is weaker UK domestic production or substitution for other people’s exports to us. That is a much harder question to answer. I do not have a definitive answer to that question.

Professor Taylor: I gave a speech in Cambridge about a year ago on the topic of trade diversion, maybe expecting some of this to come through. It is a slow burn issue because it does take time for global trading arrangements and relationships to reconfigure. Some things are more headline, obvious or salient. Battery electric vehicles was an example that I gave a year ago, which was starting to come through into the headlines and show up on main street, but is maybe even more obvious now. That is going to be something to watch, but it is already evident.

As the Governor explained, it is a bit more overdetermined or multifaceted in the case of trying to understand how events in China and trade policy in the US interact in this moment. I was in China in July. Let’s take the vehicle situation there, for example. As it was explained to me, there has been rapid growth. There is inter-provincial competition. If one province has an electric vehicle factory, the next province wants one too.

In terms of economic history, there was overbuilding of railways and canals in the 19th century. It is not an unusual phenomenon. There has been a big increase in supply. Some of it was absorbed domestically through promotions for consumers to trade in their old vehicles for new ones, so I saw a lot of new vehicles on the road, but you can do that only once, because, once everyone has traded in, you still have the production. That is now hitting the global market, so we are likely to see more of that.

It is not just a single sector, and there are many other sectors where this is not as visible, but it is a wave that is coming. As I said in earlier testimony, it is like water finding a level. If these products cannot enter the US market, they are going to find other markets.

Q493       Dame Harriett Baldwin: Forgive me if this number has been well publicised, but is there a single figure that the Bank has come up with for the impact of tariffs on UK inflation since they were implemented?

Andrew Bailey: I do not think we have a single figure. Can we take that one away? I will write with our best shot at the analysis.

Chair: It is a moving situation.

Q494       Dame Harriett Baldwin: It has been over a year now. I just wondered whether you now had a figure where you could say, “I think it had this impact”.

Andrew Bailey: Certainly what our staff tell us is that the impact so far has probably been rather less than what we thought it would be at the outset, but I am happy to pull that together.

Q495       Chair: It would be interesting to see whether there is any modelling that you can show us about what decisions businesses are making that may be dampening it, as you suggested.

Andrew Bailey: We can do that.

Q496       Chair: You have your redundancy programme under way. How is that going?

Andrew Bailey: For our staff? That is very much under way, yes. The way that it works is that the period over which staff will be leaving us is running until the very early months of next year, but it is substantially done, and a lot of staff have left.

The reason for this is that we, like a lot of organisations, have had to shift the balance of our spending towards systems and data. We were very clear that we did not want the budget to go up, so we had to have that scheme, in a sense, to help us to achieve that, and that is what we are doing.

By the way, since we started that scheme, of course, the whole frontier AI issue has come along, which is pushing us to have to do more. Like many organisations, we are having to spend more on our technology because you just have to patch things much more quickly.

Q497       Chair: Presumably, you are going to make sure that you lose the right people, not that there ever is a right person to lose.

Andrew Bailey: Yes. In the way that the scheme works, the choice of who departed was ultimately ours.

Q498       Chair: So it was not fully voluntary. How many people have gone so far?

Sir Dave Ramsden: Just to clarify, the “R” in our MAR scheme is “resignation”. It is not a redundancy scheme.

Andrew Bailey: No, it is not a redundancy scheme.

Q499       Chair: Do people get redundancy payments though?

Sir Dave Ramsden: They get a settlement that is negotiated with us.

Q500       Chair: Resignation would mean that you would go without payment.

Sir Dave Ramsden: MAR stood for mutually agreed resignation.

Q501       Chair: So they get a payout.

Sir Dave Ramsden: They got a payout. On the executive side, we thought about how that would relate to if we did go down the redundancy route, because we did want to incentivise people to leave.

Q502       Chair: So it is, basically, voluntary redundancy, effectively.

Sir Dave Ramsden: Well, it is very important that it is framed as—

Q503       Chair: You make the decision on who, but they choose whether they go. It is a bespoke Bank of England redundancy plan.

Andrew Bailey: We published these numbers. Just over 400 people are going. About 700 applied.

Sir Dave Ramsden: We did turn quite a lot down.

Q504       Chair: We would be interested to know which professional groups have been affected in time.

Andrew Bailey: It goes right across the institution.

Q505       Chair: If you could send us a note on that, that would be very helpful. Finally, when are we going to see the new banknotes?

Andrew Bailey: That will be some time, I am afraid. I am sorry to disappoint. This will be a whole new series, so there will be a whole load of work to do on design and security. I am afraid that there is no date at the moment.

Q506       Chair: Under the Chancellor’s new approach to consultation, will there be a consultation with the public about who or what might be on the banknotes?

Andrew Bailey: I know that this does feature in certain newspapers. We have already done two consultations.

Chair: Ahead of the ban, then.

Andrew Bailey: We must keep control of the security features on the banknotes. By the way, this is on the reverse side. There is no change on the front with the monarch and so on. For what I call the aesthetics that go around the security features, we thought it was sensible to let the public choose. The first consultation with the public was that we gave them a series of headings. You could go on having historical figures. You could have scenery. You could have architecture. You could have wildlife. The public chose wildlife. I know that there have been lots of articles written on it. My rationalisation is that Britain is a nation of animal lovers. The way that that came out was not exactly tremendously surprising to me.

Chair: You consult more than the UK passport service anyway.

Andrew Bailey: For the second consultation that we have done, we have had some wildlife experts. We do not dream this up ourselves, because I am not qualified. We had a panel of animals, birds and fish—or aquatics—and the public chose from that. That is pretty much complete.

Q507       Chair: Who is the final arbiter, Governor? Is it you?

Andrew Bailey: It is me, but I am not really, unless the public did something very odd. By the way, we had the panel because we did not want the Boaty McBoatface thing. I am afraid we were saying, “You can choose from this panel”. I can tell you now that almost half a million people participated in this. From that, we had a list of popular animals, birds and aquatics. I am not quite sure when we are going to announce it.

Q508       Chair: You said that it is some time yet, so are we talking months or years?

Andrew Bailey: It takes a few years to do a full design of a banknote. It is a complicated thing, because you have to integrate the aesthetics and the security.

Q509       Chair: So we are talking about quite a long period.

Andrew Bailey: Watch this space.

Q510       Chair: It might be a future Committee, then, that looks at that, from the sounds of it.

Sir Dave Ramsden: It might be a future Governor.

Andrew Bailey: It might well be. It will not be in my term, I can tell you.

Chair: It certainly will be a future Governor if it is going to be years.

Andrew Bailey: You will not be seeing any of this in my term as Governor.

Chair: There we go. You set it all rolling and it will be your successor to defend it. Can I thank our witnesses very much indeed? That is Professor Alan Taylor and Megan Greene, both independent members of the Monetary Policy Committee, the Governor, Andrew Bailey, and the deputy governor, Sir Dave Ramsden. The transcript of this session will be available on the website, uncorrected, in the next couple of days. Thank you to our colleagues at Hansard, who are represented by a recording machine today, and to our colleagues at Bow Tie for the broadcasting.