Brexit: Bank of England Governor Andrew Bailey must be bold

You could go further than that and say it is incumbent on him to do so, given his roles as Bank Governor and chairman of the Monetary Policy Committee.

Some people might think anyone in Mr Bailey’s position would be cautious on this subject, given the ruling Conservatives are big fans of Brexit, but this would be to ignore the crucial importance of the Bank of England asserting its independence when required.

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Of course, it is impossible to be certain Mr Bailey, who was chief executive of the Financial Conduct Authority for nearly four years before becoming Bank of England Governor in March 2020 and comes across as more of a regulator than an economist, would rather not talk about Brexit. Even if he does give this impression.

Whatever the case, he did bring up Brexit this week, flagging a detrimental effect, albeit in the most tentative of fashions.

And it was surely a more realistic take on the effects of leaving the European Union than that he provided during the summer when he appeared to attempt to play down the effect of Brexit in fuelling inflation.

Mr Bailey mentioned the “B” word in a speech to the Central Bank of Ireland’s financial system conference in Dublin on Wednesday.

He declared: “Let me also add a comment which relates to events nearer to home. As a public official I take no position on Brexit per se. That was a decision for the people of the UK.

“It has led to a reduction in the openness of the UK economy, though over time new trading relationships around the world should, and I expect will, be established. Of course, that requires a commitment to openness and free trade.”

Mr Bailey could certainly not be accused of stirring controversy.

However, the comments nevertheless seemed highly significant, especially given what he has said, and not said, about Brexit in the past.

Brexit, to take the key point he did make on Wednesday, has “led to a reduction in the openness of the UK economy”.

It is not much, really, but, coming from Mr Bailey, it is at least something.

He could have, but did not, mention that the European Economic Area is the UK’s largest trading partner. Mr Bailey could also have, but did not, observe that the hard Brexit delivered by former prime minister Boris Johnson destroyed frictionless trade between the UK and its biggest trading partner. And the central banker could have, but did not, point out this hard Brexit ended free movement of people between the UK and the EEA, fuelling skills and labour shortages as plenty of people in business in various sectors in Scotland and elsewhere in the UK would tell you.

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Having said that, it would probably have been a surprise if Mr Bailey had chosen to talk about any of that.

Mr Bailey did, however, highlight in his comments the importance of “a commitment to openness and free trade”.

And he declared: “I will say at the outset, to avoid any doubt, that I am a strong advocate of free trade and open economies.”

Dissecting Mr Bailey’s comments further, his “over time new trading relationships around the world should, and I expect will, be established” remark is noteworthy.

You could form the view he is taking diplomacy to a whole new level by not mentioning the massive blow to free trade arising from the Tories’ hard Brexit and the relatively tiny benefits from the new agreements signed with the likes of Australia and New Zealand. The UK Government has made so much noise over these new trade deals.

However, Mr Bailey’s comments at least do acknowledge the damage Brexit has done to the openness of the UK economy. And in the context of a clear message from him that such openness is a good thing for an economy.

His “public official” comment in relation to taking “no position on Brexit per se” is interesting.

It is perhaps worth noting that Richard Hughes, who chairs the independent Office for Budget Responsibility set up by former chancellor George Osborne, has been far more forthright about the effects of Brexit.

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And this brings us to a crucial point. Mr Bailey should not be expected to express any sort of political opinion on Brexit but he absolutely should, in his position, be willing to talk frankly about Brexit’s effects.

Back in the spring, Mr Hughes summed up Brexit’s effect as follows: “We think that in the long run it reduces our overall output by around 4% compared with had we remained in the EU.”

He added: “It’s a shock to the UK economy of the order of magnitude of those sorts of other shocks that we’ve seen from the pandemic, from the energy crisis.”

These comments seem to contrast starkly with the tone of Mr Bailey when he appeared to deliberately play down Brexit as a factor in the UK’s inflation crisis.

The Bank of England Governor’s comments, back in the summer, were interpreted in some quarters as a response to Mr Carney, who has quite rightly flagged the major impact of the ruling Conservatives’ hard Brexit on UK inflation and the economy more generally.

Reflecting on the labour market situation in the context of the UK’s high inflation rate, Mr Bailey said then: “I think more of it is to do with the response to Covid, frankly. We saw people come out of the labour force in Covid, other countries tended to see that reverse more quickly and more strongly than we've seen in the UK."

These “other countries” did not of course have Brexit - that is perhaps a more pertinent observation.

The Bank Governor’s seeming view that Brexit was somehow not an enormous factor in the UK’s labour market tightness was truly baffling.

So, while they were not much, we should in light of Mr Bailey’s track record probably muster a small cheer for his public comments this week about the detrimental impact of Brexit on the openness of the UK economy.