Trump's 'damaging' attacks on Fed could spark higher inflation, says Bank of England chief

Andrew Bailey, the governor of the Bank of England (BoE), has warned that US president Donald Trump’s attacks on the US Federal Reserve are damaging and could lead to higher inflation and interest rates.

Speaking to the Treasury Select Committee, alongside deputy governor Clare Lombardelli, and external monetary policy committee (MPC) members Alan Taylor and Megan Greene on Wednesday, he said he was “very concerned” that the independence of central banks is being threatened.

It comes after Trump’s mounting pressure to cut interest rates, as well as his attempt to fire governor Lisa Cook.

“The Federal Reserve is the central bank for the world’s strongest economy. It has built up a very strong reputation for its independence and for its decision-making,” Bailey told MPs.

“I think what we’re now seeing is people saying we should be able to trade off the foundations for those other decisions, and I’m afraid I just think that is a very dangerous road to go down.

“The job of an independent central bank is to provide those foundations, to take independent decisions to do it… that’s how it works, that’s how it should work. And so the threats to that I take very seriously.”

Wednesday’s session focused on the Bank of England’s August monetary policy report, and the decision to reduce the bank rate by 0.25 percentage points to 4%.

In an unprecedented situation, the MPC voted for a second time after the first ballot failed to provide an outright majority. The result of the first vote was a split between four to keep bank rate unchanged at 4.25%, four preferring to cut by 0.25% to 4% and one voting for a 0.5% cut to 3.75%.

The governor proposed a second ballot on a forced choice between holding the current bank rate or a 0.25% cut, with the latter gaining Alan Taylor’s vote for a majority of five. This is the first time that a second vote has taken place.

Bailey, who was one of the five who voted to cut UK interest rates at its last meeting, confirmed that the future interest rate path will “continue downwards, gradually over time”.

“…Because policy is still restrictive…. there is now considerably more doubt about exactly when and how quickly we can make those further steps.

“That’s, that’s the message I wanted to get across. Now I think actually, judging by what’s happening to market pricing, I think that message has landed,” he said.

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He also addressed concerns about recent bond market activity, insisting that we shouldn’t “over focus” on the 30-year bond rate, which hit the highest level since 1998 on Wednesday morning.

He said: “Of course it’s a number that gets quoted a lot, it’s quite a high number. Historically, the UK has because it was a very sensible policy to lengthen the maturity of the UK debt stock. There are real benefits of doing that.

“It was possible to do while the defined pension world were still demanding those sort of assets. The structural demand for long-dated bonds has gone down.

“When you look at UK yields in terms of the steepening, we’re actually about in the middle of the pack – Germany and Japan have gone up considerably more than us, the US less than us. We’re in the middle.”

Meanwhile, BoE policymaker Alan Taylor, one of the dovish members of the monetary policy committee, told MPs the UK economy is getting closer to a “soft landing,” warning that we are at a “fragile” moment.

In the annual report to parliament’s Treasury Select Committee, Taylor said: “Despite being buffeted by new shocks, we are getting closer to that soft landing (for the UK economy) now, but we are also in a fragile moment, and monetary policy will need to be carefully calibrated in the coming months to keep us on track.”

He added that he is looking to see “four or five” interest rate cuts a year, highlighting that wage inflation is coming down.

Clare Lombardelli also told MPs in written evidence that she “judged that there might not be that much further to go before the current policy stance is effectively neutral”.

“Looking at history, it’s plausible that neutral may be closer to the upper end of the 2% to 4% range from bank analysis.”

“I am not predicting that we are already at neutral, but nor am I confident that if we reduce restrictiveness much further we will still be sufficiently restrictive to return inflation to target sustainably.”

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Trump’s ‘damaging’ attacks on Fed could spark higher inflation, says Bank of England chief

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