The government has moved to quash city speculation that Liz Truss is out to interfere with the political independence of the Bank of Englandamid a currency depreciation in which the pound hit its lowest level against the dollar since 1985.
In a charm offensive in the Square Mile as sterling came under renewed selling pressure on Wednesday, the new chancellor, Kwasi Kwartengused his first full day on the job to try to calm nervous financial markets amid growing concerns about the economic policy of the new prime minister.
Meeting with the City’s top bank bosses and investors, as well as Bank Governor Andrew Bailey, he insisted that Threadneedle Street’s independence from government was “sacrosanct” in the fight against the increase in the cost of living.
Treasury said Kwarteng met with Bailey to “emphasize his full support for the Bank’s mission to control inflation.”
The comments came as sterling staged a renewed slide against the dollar, falling as much as 1% to $1.1406 at one point to hit a 37-year low. Although the dollar has risen against other currencies in recent weeks, experts say Britain has been singled out as being particularly exposed to runaway inflation and a looming recession.
The prospect of political interference in the central bank, after Truss promised a review of his term in his leadership campaign, as well as increased public borrowing by the new prime minister through unfunded tax and spending plans, they have also weighed on UK assets.
“It’s hard to avoid the conclusion that a UK sovereign risk premium has been creeping into the pound,” analysts at Dutch bank ING said. “[That is] presumably because of doubts about at what price investors would be prepared to finance future UK borrowing schemes.”
Sterling’s latest slide came as Bailey defended the Bank’s track record in managing inflation, amid speculation Truss could remove him as governor earlier than planned.
Analysts at Goldman Sachs warned of “potential personnel changes” in a review of the Bank’s mandate due this fall, speculating that Bailey’s eight-year term could be cut in half, meaning a new appointment in March 2024. .
“We do not expect Prime Minister Truss to remove Governor Bailey from office, but his term could be reduced to four years from the current eight-year appointment,” the US investment bank said. Threadneedle Street and government sources rejected the suggestion, saying the governor’s eight-year term was fixed.
Speaking to MPs in the Commons Treasury committee, Bailey said a review would be welcomed as “a sensible and good thing” but that the Russian invasion of Ukraine was responsible for the huge inflationary shock that hit Britain and left the bank central with limited tools in response.
“The person who is going to put this economy into recession is Vladimir Putin, not the MPC [Monetary Policy Committee],” he said. “By far the greatest contribution to this [inflation shock] it is war. That is not something that, I am afraid, is within the realm of monetary policy.”
The governor suggested that Truss clarifying her economic plans this week could help clear some of the storm clouds over Britain in financial markets, saying: “I very much appreciate the fact that there will be, I understand, announcements this week, because I think that will help, in a sense, to frame the policy and that is important.”
With the annual increase in the cost of living now five times the Bank’s 2% goalBailey rejected suggestions that the inflation targeting regime used since Gordon Brown gave the Bank the independence to set interest rates 25 years ago was no longer fit for purpose.
He said: “This is by far the biggest shock we faced during the lifetime of that, but it doesn’t suggest the regime has failed. What it suggests is that the regime now has to do its job and respond to a much larger shock and we are sure it will.”
Last month the Bank forecast inflation above 13% this year, with a long recession as a result of the increase in household energy bills that affect the purchasing power of consumers. Truss is widely expected to cap prices in an emergency support package on Thursday, which economists expect will reduce inflation and lessen the impact of any contraction.
Bailey replaced Mark Carney as governor in March 2020 at the start of the covid pandemic, in a period running until March 2028, despite speculation that he was not Boris Johnson’s favorite candidate for the job. The then Prime Minister was thought to love Gerard Lyons, a prominent Brexit supporter and his economic adviser while Mayor of London, but warned against dating by Treasury. Lyons has advised Truss during his leadership campaign.
Efforts to intervene in Threadneedle Street were also highlighted on Wednesday when new City Minister Richard Fuller revealed that the government planned to give itself powers to override City regulators, including the Bank.
“[The intention is] to introduce a power of intervention that would allow Her Majesty’s Treasury to direct a regulator to make, amend or repeal rules where there are matters of significant public concern,” Fuller told MPs. The change would be part of amendments to the financial services and markets bill, which are intended to repeal a series of EU laws.