Written by William Schomberg, David Milliken

LONDON, (Reuters) – Andrew Bailey has led the Bank of England to one of its greatest challenges in decades. However, he is facing harsh criticism in a critical part of his role – how to explain the Bank’s thinking.

On Wednesday, Bailey celebrates two years in office as Governor. He succeeded Mark Carney as Governor in March 2020. This was just when the fifth-largest economy in the world was in its historic COVID-19 slump.

Just days before Carney left, the BoE cut interest rates. It did this again on April 4, four days after Bailey was elected. The BoE also increased its bond-buying program by 200 billion pounds (£260 billion).

This prompt response allowed financial markets to stabilize and won the BoE accolades.

Bailey was criticised by investors, trade unions, and some of his former colleagues.

Late February was a busy month for the International Monetary Fund, which stated that predictability and clarity in communications regarding forward guidance will improve the effectiveness of policy by BoE.

Bailey also angered unions last month and was rejected by Boris Johnson, Prime Minister. He called for pay restraint to combat fast-rising inflation.

While other BoE policymakers attempted to shift focus away from pricing decisions made by companies, Bailey was once again in the news when he couldn’t answer a question regarding his pay (575,000 Pounds including pension contribution) that was asked him.

Bailey was not alone in having this problem. His career has been primarily as a financial regulator.

Many investors believed his comments late last year suggested that the BoE was ready to increase monetary policy. Goldman Sachs (NYSE 🙂 and banks forecasted a rate increase in November.

The British bond market jumped the most after the Brexit shock in 2016 when the Monetary Policy Committee held rates at a low level. Sterling plunged by its lowest level in 18 months.

Many investors also lost out on December’s BoE rate hike.

Oliver Blackbourn is a portfolio manager at Janus Henderson Investors’ UK multi-asset group. He said that “he has not shown an appreciation for the effect his comments can have on the markets.”

“The way central banks communicate is very delicate. They have sometimes misinterpreted that, I believe.”

Blackbourn indicated that the market expects UK interest rates will peak between 18-24 month’s time. This is due to concerns over whether or not the BoE can control inflation and avoid a recession.

Britain will be facing severe cost-of living pressure as inflation is expected to exceed 8%. That’s four times the BoE goal. The fallout from Russia’s invasion of Ukraine has led to an increase in energy prices as well as COVID-19 supply chain bottlenecks.

Expect the BoE to announce on Thursday a third interest-rate increase from December.

When Reuters reached out to the BoE press office, they declined to comment.

Bailey has said that he did not commit to any policy move in advance of November’s decision and that he never made such comments.

MIXED MESSAGES

Bailey began having messaging issues in 2020, when he stated that the BoE’s bond buying, along with helping to bring inflation back to target, would help to smooth out the government’s borrowing requirements.

Commentators suggested that this blurred the BoE’s independence.

Others in the BoE top-ranking policymakers stressed then that bond-buying had been increased to reach the inflation target.

The Economic Affairs Committee, which is the highest house of Britain’s parliament, stated last July that Bailey’s comments could have increased the perception than the increase in bond-buying was motivated at least in part to fund the government.

In a report, the committee warned that “if such perception continues to spread”, the Bank of England’s ability control inflation and preserve financial stability may be compromised.

Bailey’s colleagues at the BoE have said that he made some unprepared remarks, as opposed to Carney, who was more prepared before speaking to parliament or the media.

Carney’s messaging difficulties were not his alone. His “forward guidance,” which he had used to predict the path of interest rates, was overtaken on occasion by economic shifts.

A senior BoE official stated that the Canadian was so focused in the details that his aides made certain he knew how much milk and bread he could buy.

Bailey isn’t the only high-ranking finance official to have difficulty communicating.

Federal Reserve officials and leaders of other central banks have been forced to reconsider their belief that inflation spikes were likely temporary.

Christine Lagarde (ECB President) has tried to make divisions more profitable for investors. Investors also fell prey to her missteps.

However, a BoE source said that Bailey can be rigid about his views even when his colleagues with more experience in macroeconomic policy matters try to change their minds.

Bailey linked bond purchases to 2020’s government fiscal policy. He also voiced concern publicly about the bank’s debt stockpile. Fellow colleagues warned that this could increase the perception of weakness in the BoE.

Bailey was defended by another BoE official, who said that Bailey had prepared well for his tasks and spent as much time getting ready to go for public events as any governor before him.

Bailey was known for giving straight answers. Officials also said that Bailey made it a point to give direct answers.

As inflation and recession risk mount, Bailey’s communications challenges will only grow.

Blackbourn of Janus said, “Looking ahead, given how markets are concerned about policy mistakes, and the evolution inflation and growth outlooks, investors could really use a steady hand on the tiller here.”

($1 = 0.7681 pounds)