BOE Governor Urges UK Growth Push in Direct Appeal to Burnham

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(Bloomberg) — Bank of England Governor Andrew Bailey said Britain needs to prioritize economic growth and maintain fiscal discipline, in a thinly veiled warning to incoming Prime Minister Andy Burnham 

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In his speech at the annual Mansion House dinner in London on Tuesday, Bailey said robust macroeconomic policy is vital to boost productivity and living standards that have increased at a feeble rate since the financial crisis.

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“It must therefore be a priority to raise the potential and actual growth rates,” Bailey said, according to a text released by the central bank. “The best thing we can do on this front is to create and maintain stability – and here I am talking about monetary and fiscal policy.”

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Burnham is almost certain to become prime minister next week after he was unopposed in the contest to succeed Keir Starmer, who resigned last month after poor local elections for the governing Labour Party. However, markets remain in the dark over who will become finance minister and the direction of fiscal policy.

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Energy Secretary Ed Miliband is the bookmakers’ favorite to replace Rachel Reeves as chancellor of the exchequer, an appointment that some investors fear would signal a shift toward a higher-spending, left-leaning agenda.

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Burnham, who caused jitters last year when he referred to the UK being “in hock” to the bond markets, has since moved to reassure investors by committing to Reeves’ fiscal rules that permit borrowing only for investment and seek to lower the burden of government debt.

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“My strongly held view is that, notwithstanding the sequence of adverse shocks, including the latest one from the Middle East, we have the policy frameworks, and policies themselves, in place to provide that stability,” Bailey said.

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He laid out the gloomy economic backdrop facing Burnham, warning the UK is “operating in a fairly soft economic setting activity-wise.”

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“The economy has been hit by a sequence of negative supply shocks which have contributed to the lower growth rate – we can think of Covid, the Ukraine war, the impact of Brexit,” he said. 

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Bailey noted how the UK’s potential growth rate — the speed the economy can expand without overheating — has halved from 2.8% in the 15 years prior to the financial crisis to 1.3% in the period since.

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He repeated his view that inflation would now be back at 2% but for the energy-price shock triggered by the Iran war. “We will ensure inflation returns to target and the context is currently encouraging, although uncertainty remains a feature of the situation. But, it will take longer,” he said.

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That uncertainty was underscored on Tuesday as oil rose amid escalating tensions between the US and Iran before retreating after President Donald Trump backed away from his plan to demand payment for cargo moving through the Strait of Hormuz. Traders are fully pricing in one interest-rate rise from the BOE this year and a strong chance of a second.

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