Bloomberg Audio Studios, podcasts, radio news. Bailey for taking a couple of questions.
I mean I should say that our conversation had moved on to the much more important subject of rugby.
But we'll get back to.
The you know, we will talk rugby, you know what will end with rugby.
But before we.
Get to rugby rugby, we can talk trade, right, Okay, So you've urged the government basically to strike in your speech earlier, to strike a deeper trade deal with the European Union to improve growth and minimize negative effects of Brexit.
Where would you start?
Where would you go first? Well? I would say I think the government, you know, has made some important steps and I think that's helpful. I mean, as I said, I don't take a view on brexitfasly. What I do say is, you know, we should take it do everything we can to ensure that the trading relationship you know, redeveloped,
if you like. I think there's important things we can do together in financial services, and I think by the wait, look, I think the recent obviously market volatility of recent weeks and months illustrates why it's important that we do work closely together and when we do by the way we do, and that's that's true also in the financial stability board. You know, we have we have many common interests. There are many things that are common to our markets that
are happening, and so we can do that. Plus I say, I think that there's a natural common interest between UK and Ireland and the UK and EU on these things. So I hope we can, you know, very much hope now we can take that forward away.
From financial services or there are areas that you want the other areas that you think that the government should focus on without overstepping any of the red lines that they've put in place.
Well, I think that I start often, as I said in the remarks I made, I start from the point that trade is an important underpinning for growth, It's an important underpinning for activity in the economy. There are lessons to learn from from recent years which we you know, which we can put into effect. But there's no question that you know, open economies are important. And let me put this into an important perspective, and this is the story on growth. I mean, you know, the UK is
not a loneliness respect by any means. So this is not a it's a UK story, but it's not a uniquely UK story. We have had a lower potential growth rate in the UK for the last well really since it's a financial crisis by the way. I'm not sure that's causal, by the way, but it happens to coincide, so that you know.
The point I always make is that if you go back.
Before the financial crisis, the potential growth rate in the UK was probably around two two and a half percent a Yet since then it's been one to one and a half percent, and most of the difference is to do with productivity and to do with investments. And you know, you look at the job we have with monetary policy, which is balancing supply and demand. You look at the obviously the job that you know, fiscal policy has. It is harder to run macroeconomic policy when you've got a
lower growth rate. I mean, history tells us this.
So raising the.
Potential growth rates is critical. And say the UK is not alone in this respect.
How much more necessary is it because of the trade war also that we're seeing.
I mean, I think it underlines.
The importance of it because the trade situation will you know, if the world economy fragments, that will also have an impact on growth, you know point I made. I mean it impacts on things like knowledge transfer packs, impacts on supply chains, so it will have an effect.
Yes, Is it world fragmenting for real? Or are these just digitters that then will settle?
Well, I hope, I hope we can get past the sort of disruption we're going through. It's why, as I said in my remans, I do think it's critically important that we focus on ensuring that what I call the multilateral system is you know, is.
Rebuilt and is robust.
And you know, I include the World Trade Organization actually the IMF, because they are are absolutely important fundamental sort of parts of the system.
But does the current I guess trade turmoil make it more necessary, yes, for the UK and you to get together one hundred percent?
Well, I think I think it does emphasize the need to do it. Yeah, because it puts you know, puts all of us in a situation where we've got another risk to activity in the economy. So I think, you know, doing everything we can to rebuild that relationship in this situation. But of coaurse, we also don't by the way, Look, we don't want to lose the relationship with the US. I mean, we really want to under you know, get to the issues that are underlying this and help to
solve them. It's it's not something we want to sort of wish away.
Is there more uncertainty because of the trade turmoil than there was after Brexit?
Oh, that's a that's a hard thing. I think.
Well, I think post breaksit. I mean, there was obviously there was no question what the decision was. The uncertainty was of course, it was around how it was going to be put into effect, and that went on for quite you know, you think about it, That went on for quite a long time. I think the the challenge we have at the moment is that we don't actually
know what the outcome is here. I mean, this is one of the problems we have in you know, obviously in market policy is you know, I would say, when we take our decisions on interest rates, so you have to sort of stop the music, as it were, and say, okay, we'll take this read of what's going on, what's going on in the economy and in the world economy, and
then apply it into our monetary policy decision. But obviously, when I say that, however, you're making decisions on a forward basis, because marketary policy has its effect looking forward. So then you've got the challenge as we had, you know, three weeks ago, what exactly is going to.
Be the end point of all of this.
I mean, you know, if we've been having this conversation twenty four hours ago, we might have had a different you know, we'd have a different facts around this for the moment. So that you know, that introduces you know, we we're sort of classic as central backs and talking about uncertainty constantly. We've also introduced the word unpredictability because I think that's a slightly different thing.
I mean, I know investment managers, you know in Europe, are really around the world, are again trying to figure out the turmoil. I think someone's come up with the term the taco trade, which is Trump always chickens out when it comes to imposing ruthy tariff, getting like a slightly nervous laugh. But how you know, if you're thinking, because I know you think about trade wars, like how should investment managers think about the trade wars?
Like what do we know?
What do we not know? At every decision?
How do you look at it?
How do you look at probability.
Well, I think there's a number of things that we have to think about. Well, let me take one in the real economy and then we'll come on to markets maybe. I think the one in the real economy that we have to think about is if there is a negative effect on activity, is it going to be a demand effect or is it going to be a demand and supply side effect. And this is important because obviously we saw with we COVID and Ukraine this problem of having repeated supply side.
Shocks going on.
I mean, I think it's quite interesting and I observe quite all of the commentators that and this tends to happen that they immediately assume that it's a demand shock, and obviously that from uncy policy. If you if you stop there as it were, then you think, well, that's
actually negative for inflation. But of course, if it's actually turns out and this does happen that there is a supply shock element to it, and if that's say on supply chains, and if that turned out to be persistent, then that would not the effect on inflation would be quite different. Now, reading that is very hard at the moment, So we have to keep coming back to that. It's why we keep using as you know, we could, we keep using these terms gradual and careful in the approach
on markets. I think, you know, the issue is that I think is this. We've seen very big changes in what I call the sort of structure of core financial markets in recent in the last five years ten years, big shift from the sort of traditional sort of bank
dealer model to a non bank model. And before any of this happened, we were already, you know, spending a lot of time saying, well, what is the sort of pattern that you know, what shocks can that can happen and how would they sort of push and go through that system.
And of course it's even more acute.
Now in terms of understanding you know, where the fragilities are in a world of volatile markets with that structure of bond markets for instance. So it's a thing we spend a lot of time on.
But how close have markets come to this financial doom loop spiral similar to what happened in the LDI crisis.
Well, the good news is is that I don't think, yeah, we didn't get near to that point. And by the way, I think that's you know, that's important for a number of reasons. One is that it does suggest and this is where I do somewhat push back on the sort of the you know, the deregulation agenda, which is not because I think our rules and regulations are all perfect.
They're not.
But there isn't a trade off between financial stability and growth, and there isn't a trade off between financeidability and sort of macroeconomic stability.
And that's important.
Now.
I think what we should you know, what we have seen so far is that the system has stood up in that sense. Now so far, of course, you know, you know, we've got to keep a very careful eye on this, and we've then got to know we'll have to come back and you know, as we always do, sort of go over the entrails of what's happened and sort of you know, look look look under the bonnet and say, well what, you know, what can we learn from this? And we will, know, doubt learn a lot
we always do. So far, I would say the system has stood up, but you know, but there has been straining in there.
I mean it's clearly been straining in markets.
I mean, so far, this doesn't feel anyone with confidence, how big of a risk is.
It Now you think, well, well, you know that there's a lot of unpredictability and uncertainty out there, so we have to watch it very carefully. What I would say is that I think we've you know, all of us have now developed tools you know, to handle that.
We've got more.
Tools to handle it. So that was one of the things that you know, we we built out of the ld I issue, for instance. It's not just about having resilience in the sense of more protection, it's also you know, my view is, look, these are what I call sort of tailor the distribution risk events. There comes a point where holding sort of permanent resilience for very very extreme
events is not the right answers. You know, there is a there is a world where it's actually more cost effective for the central bank to come in and.
Deal with it.
That's why we've you know, we're moving towards having these you know, non bank emergency lending facilities which we can we can trigger more easily. They're not standing facilities, because that's the world of banks and money, but because we've had this shift to the non bank world so much in our markets, we've got to have these tools at our disposal.
But I know you were.
I mean, you're paid to worry really about inflation, about grows, about everything. But do you worry more about a market event than anything else.
Well, look, we're paid to do both. I mean, we worry about monetary policy because that's crucial to you know, to the well being of the economy. It's crucial to the value of money, to real value of money. And you know, I sometimes hear people saying central banks are taking their eye off it.
No, we haven't at all. But you know we have to. We have to do both.
You know, these things don't they can't exist in a separate universe. That's the mistake that was made before the financial crisis, certainly in the UK. So we have to spend a lot of time on financial stability, and we do because that is equally about the resilience of markets. It's about the nominal value of money. And you know, I say to people, Look, the last few months would have been wholly worse if we've been dealing with a fragile financial system at the same time that we're having
these shots gone. You know, we've had that experience, We've dealt with it. That's wholly worse.
Governor, you have said that trade wars are bad and that imbalances in the global economy need to be managed by multinational institutions or multilateral issudes like the IMF, But actually their scope is very limited. So it is you know, is President Trump not right to try something different?
Well, I think, I mean, you're right about the scope.
But the scope is the scope.
And the effectiveness of these institutions is what we, as the sort of the member countries, enable them to be. You know, I don't think we can expect you know, I work for a moment and I spend a lot of time with the IMF. I don't think we can expect the IMF to go around waiving a magic wand solving every problem that comes our way.
What they can do.
And I think this is crucial and it's been you know, it's deeply embedded in the Breton Woods system. Is you know, if you look at the articles of the of the IMF, trade is right up there from a macro perspective, and we have to then as the as the participant countries, as as we are as you know, as a as a permanent member of the board, as one of the
big shareholders. You know, we have to enable them to you know, to help us in that sense and to provide the you know, the evidence and the analysis and the you know, the sort of the framework for them saying, look, we've got to rebuild policy. I'm not so closely involved or not closely involved in the w t A, but I do see, you know, as we see them a lot in the context of the IMF I talked to and goes see a lot.
And again, I think.
We've got to say, look, if it isn't working, we can't just abandon it, you know, We've got to get together and say what does it take to bring it back to where where it can play the role that we need it to play. We can't say sorry, that's you know, that's no more. What do you think is needed to bring well? I think I think I said in my remarks, I mean, I think we've got to sort of look at the question of to what extent well.
First of all, I think, just because this is where the macrolamac comes in, I think we've got to come to an agreed view on what is a persistent imbalance, because it isn't any imbalance clearly, what is a persistent imbalance. What's the meaning of a persistent imbalance? And then what
do we do about it? And then I think allied to that is this question of what you might have loosely called industrial policy, which is, to what extent is that being in the sense contributed to by industrial And then's got to be a more robust framework in which those things can be sort of in a sense hammered out.
Do you think the rest of the world is decoupling from America but pulling tighter somewhere else, or is it just decoupling full stop?
I don't think.
I don't don't think frankly, the whole process is that advanced. Really, First of all, I don't really believe that. I think it doesn't. It's not useful or really right to talk about this sort of you know, is the dollar going to be a reserve currency? The dollar is still the most used currency and is going to go on being the most because there's so much infrastructure built around it
that you know, that's a long way off. We may see some rebalancing of sort of activity, but I don't think we're anywhere near that, and I don't think we should want to be anywhere, know that. Frankly, I don't think really there's a you know, there's a great sort of move to sort of let's get together and sort of fight the US together. I don't think that's the case. I think there's still a lot of you know, what, what are we going to how are we going to
deal with this? And I think we want to come together, and we want to come together with the US and say, look, you know, we we've got these multilateral forums. We've got to make these things work together to deliver you know, sensible outcomes.
I guess the.
Question could be, you know, is there can it come back to what it was? Or is the world splintering, you know, irrevocably.
Well, look, I think we have to we have to put all our effort into doing that. I mean, I'm, you know, as you know you said earlier, I'm you know, I'm taking over the chair of the FSB of Fantanctability Board. I mean, I you know, fortunately we haven't seen those tensions in the FSB, but we have to be very acutely aware of it.
And I certainly am.
So it isn't it isn't fracturing. I think, look, I think the world economy has come under strain. I mean, let's be honest, you know, the Russia Ukraine situation has created a lot of strain in what a my called sort of world economic policy and world em for it. So if you go to the G twenty for instance, you know it's you know, it is having an effect on those institutions. They're not able to do the job that we need them to do.
But how much do you worry about bond markets in general when you look at financial stability, right? I mean, I think the IMF was saying that guild market has vulnerabilities, that management office targeting sales at the short end of the curve where the demand is pension funds have pulled back.
I mean, there's just a lot going on.
Something could go wrong.
Yes, I mean, obviously we're not responsible for that management policy. It's the debt management office. I mean, I think that they've said they're looking at this because the UK course has had a history of actually.
Issuing more at the long end.
And look, there's a lot of sense to that, a lot of sense to that, but the curve has deepened a lot, and I think you know they're rightly now looking at well, what does that tell us about going forwards about the market government.
We have five minutes left and by poor Man, I think we'll talk a little bit about UK monetary policy and wage and inflation growth since the Mayor decision and some recent CPI and wage data markets slashing their bets on radcuts to just one this year. Does that sound about right?
Well, you're welcome, yes, yes, yes, or no? Hands up. There's a there's a there's a lot of uncertainty around at the moment. You know, it's three weeks since obviously since I think we were last sitting talking to another discussing this the day we took the decision to be honest with you on the UK front. I think the evidence that we've seen since really it's been pretty much in line with what we were expecting to see and it really underlines the big decisions and the big questions.
That we have to keep coming back to.
So we we we've been predicting this, this hump up and inflation for some time. It was basically sort of give or take under NAT point one what we expected it to be. It's not in what I call the sort of the pieces of the parts of the economy. We tell you much about supply and demand. Unfortunately it's it's in the sort of so called administered prices. But the big issue for us is it going to call second round effects in the labor market.
I think.
The aroound of data that we've had since we're pretty much in line with.
What we thought.
But the big question, and I think Hugh pull has put this story well, is you know, have we seen some change and the sort of structure of the labor market which is causing for instance, you know, the pay increases to be higher than it's consistent with the target.
Is that going to be persisting or are.
We seeing this very gradual sort of movement back to a position which is which which is going to sort of bring us back to the sort of the target framework. And we have to keep coming back to that. And you know by the way that you know we we obviously you know, we convoke different ways as we do. I mean, you know, if I describe the difference between probably my position and somebody who you know didn't vote for a cut last time, it's not because we have
a really different, different analytical framework. I'm probably sort of I see slightly probably more evidence that I think we are going back, But I have to keep coming back
to this judgment every time. Now, I would say, and I think you know we've discussed this before that I think you know, certainly in our case, All okay, all the news is coming out of tarifs and trade and obviously they can have a very big impact, but I think still the fundamental drivers of what's going to sort of influence inflation in the UK is UK issues.
Yeah, and given that, you know, you were just talking about that crucial payrolls data for April, how does it impact your thinking on where interest rates should go?
Well, it was pretty much in line with what eye slash we were expecting.
So you weren't surprised that it held up.
No, I wasn't surprised.
I mean it was basically very much in line with what our staff had been telling it it would be. In terms of the lad market data that we had a couple of weeks ago. I spent a lot of time talking to firms. I was in Norman, Ireland, just say, talking to firms and about what they're seeing.
You know, we've got it.
We've got essentially got a profile that brings you know, pay increases down to you know, somewhere like three three point seven percent later this year. I think we're still broadly seeing that pattern intact, but we have to keep coming back to it. It's not something where we can assume, well, will.
Just happen on inflation.
I have two final questions on inflation. The print overshot your projections, especially in services. Why do you think what? What do you think is driving there?
So?
I think I think services inflation is interesting because it really has two parts to it. There's a volatile part and a sort of a non volatile part. So the volatile part is in the sort of the transport, hotels, you know, what have you that that part it is quite volatile. It may have got a bit more volatile. We had a stronger number in the in the data release we've just had. You know, was it because easter had a different time. I don't know, to be honest
with your time. Time will tell. We'll have another set of data before we take the final decision next time in three weeks time. The non volatile the less volatile paths. Again, it's sort of gradually grinding down, but very slowly.
You look at other parts of the picture.
Good surprice inflation was a bit weaker, but food we're seeing some you know, we're seeing strengthening and food inflation. But I think that's we're not alone in that respect. I mean, I think we see other countries. Other governors told me they're seeing somewhat similar things. But of course, you know, the thing about food is that it does have a very big director. You know, it's what people perceive inflation to be. Can be heavily influenced, particularly by food and energy. I'm governor.
Final question, bringing it back to trade. Since the boes May forecasts, the UK government has actually secured trade agreements with the US.
And the EU.
So how big of a boost to growth do you think that will be?
Well, look, I think it's a good thing. You know, obviously it's a good thing in the circumstances. And I say that I'm not criticizing the UK government. Look, I think they would say the same thing. The circumstances are of course that you know, even with this agreement, we're still going to have tariffs that are higher than they were before all of the started. So you know, that's
something that we have to bear in mind. And the second thing we have to bear in mind, and it goes back to the points I made about you know, economies like the UK and Ireland being as open as they are, is that, of course the UK US Trade Agreement is important, but what the rest of the world does is as important to our economy because our economy is so open, So we have a very strong interest in what the rest of the world does alongside the UK and the UK the UK Trade Agreement doesn't sort
of settle it across the board in that sense.
It can't do obviously.
Maybe one final question, because I get asked that a lot. How do you get briefed on the leaders to just trade news? I mean, do you you know, are you scrolling through I don't know, a Bloomberg website or do you get you know, hourly updates from.
Your spare Well, you get up in the morning and you say, oh my god, what's happened overnight this today?
Uh?
Well, I mean if you do, I still look at we have staff, We spend a lot of time following it, you know, we have obviously I talked to I talked to other central banks, we talked to the market a lot. Obviously, we talked to your authorities, and we then have to try and piece the story together really and particularly obviously.
How is it.
I mean, trade data also are inherently quite volatile. You know, they're not the most stable data necessarily ever to look at it in that sense, and that's not a criticize the fact of life. So for instance, trying to you know, taking the data that have been released in the last month or so and saying, well, let's sort of spot the impact, you know, it's it's not easy to often
to do that. I think you can probably see more of it in the US data because obviously they've had quite a big so as I can see quite a big obviously anticipation, you know, stuff being taken into the US and anticipation which was why you've got slightly negative GDP but positive domestic demand going on. It's a negative net trade effect. But our data it's it's it's not as it's not not yet as easy to see.
Governor, Thank you so much for your time. That was Andrew Bailey. Everyone before you get