Andrew Bailey struggles to resist the pressures for monetary financing

He refused to vote for the Bank of England’s latest £100bn dollop of quantitative easing. And now Bailey says that when the time comes for monetary tightening, it will be done first by reducing the size of the Bank’s balance sheet, not by lifting the bank rate. Good luck with that, because as things stand, the whole Western world seems fast to be following Japan into a state of permanent monetary financing and low growth.

How long will it be before the Bank of England, US Federal Reserve and European Central Bank formally mimic the Bank of Japan by setting a target of zero for long-term interest rates? That would require virtually unlimited bond buying. How long will it be before, like Japan, we start to believe that public debt of multiple times the size of GDP, financed largely by the central bank’s balance sheet, is a perfectly acceptable state of affairs? Whatever Bailey says, that seems to be the direction of travel.

In insisting that central bank reserves should not be taken for granted, Bailey may be just spitting against the wind. Even so, it is small wonder the Bank is getting worried.

Since being granted independence 23 years ago, the Bank has actually been remarkably successful in achieving its objectives, more so than any other UK institution I can think of.

Going into the pandemic, we had both price stability and full employment, quite an achievement by post-war British standards.

Endless money printing endangers that record by pushing up inflationary expectations. Bailey has to tread carefully.

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