The governor of the Bank of England (BoE) has issued a stark warning against dismantling the financial regulations introduced after the 2008 global financial crisis.
Speaking at the University of Chicago Booth School of Business in London, Andrew Bailey insisted that financial stability and economic growth should not be seen as opposing forces, but rather as mutually reinforcing elements.
“There is a reaction taking place against regulation, and the responses to the GFC [global financial crisis]. We must not forget the lasting damage done by the GFC. There is no trade-off between economic growth and financial stability,” he said.
Bailey acknowledged that policymakers often face difficult decisions when it comes to addressing vulnerabilities in the financial system. He also suggested that these challenges do not always require additional regulation, stating: “It is critical that we have and develop tools of assessment and intervention. But these interventions may not always need to be more regulation. They can be liquidity facilities, and they can be to improve areas of the financial infrastructure.”
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Bailey’s comments come amid mounting calls for regulatory reform, particularly from chancellor Rachel Reeves, who has urged UK regulators to “tear down” barriers hindering economic growth. In the US, tech mogul Elon Musk has taken a more extreme stance, advocating for the wholesale removal of regulations, prompting concerns that his views were desecrating the country’s constitution.
This comes after BoE policymaker Catherine Mann said she backed bigger cut in UK interest rates last week because she believes the downturn in the jobs market will make the inflation “hump” this year short-lived.
Last week, the Bank’s monetary policy committee (MPC) decided to cut the Bank rate by a quarter-point to 4.5%. Mann was one of two dissenters, both advocating for a larger reduction.
Mann argued that, given the slowdown in the jobs market, workers would be unlikely to push wages up enough to offset the impact of higher prices. Additionally, weak consumer demand would prevent retailers from passing on rising input costs, such as energy.
She said: “Wage settlements and the pricing power of firms will determine how much inflation outcomes will be driven by expectations as well as the one-off factors. I judge that both will face strong headwinds.”
Mann also pointed to evidence suggesting that some companies are becoming financially vulnerable. Data from the Office for National Statistics revealed that companies are holding cash reserves sufficient to sustain them for only four months. “Research suggests that such cashflow vulnerability is associated with job shedding, which may become more apparent as COVID support policies run off,” she said.
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However, Mann did not point to the need for fresh rate cuts in the immediate future, despite voting for a half point cut this month.
Pointing to what she called “structural impediments” to achieving the Bank’s 2% inflation target, she said “the activist policymaker needs to maintain this stance of tightness, restrictiveness, even after this decision.”
“Active doesn’t mean cut, cut, cut,” Mann said in a question and answer session after a speech at Leeds Beckett University.
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