Andrew Bailey: speeches

1. Resilient so far

Bank of England Governor Andrew Bailey said the financial system has held up despite the Middle East conflict, high bond yields and new AI-related exposures, crediting post-2008 reforms often criticised as burdensome: banks are well capitalised and markets have kept functioning. Yet slower growth, one supply shock after another and a different make-up of markets leave no room for complacency.

2. A policy dilemma

Slower productivity and a rapid series of shocks (Covid, Ukraine, the Middle East) may be the new normal in a more geopolitical world. Supply shocks raise inflation while cutting output; central banks can look through them only if expectations stay anchored, which is harder after years of high inflation. Rate rises can then coincide with falling incomes and asset prices, and repeated shocks push public debt up, so governments find it harder to cushion downturns.

3. Fragile bond markets and the response

Government bonds are now held more by leveraged, price-sensitive investors than by long-term holders, so forced selling can spread across countries and assets. He proposes faster sustainable growth, including safely deployed AI, whose financing also carries risk; credible frameworks, with a firm inflation commitment, clear explanation of policy under different scenarios and credible fiscal rules; and sturdier core markets through more central clearing, minimum haircuts and better risk management.

1. Energy, the Gulf conflict and the refining wedge

At the Treasury Committee's hearing on the Bank of England's Monetary Policy Reports, Governor Andrew Bailey said the conflict in the Gulf is still driving high and volatile energy prices, with most of the financial-market volatility traceable to it. The Strait of Hormuz remains largely shut; pipelines are being used more, but even they are exposed after Houthi attacks in the Red Sea area, and emergency stock releases that have helped can only run until about November. Oil production has risen somewhat elsewhere. A second development since the committee last met is the wedge between crude and refined products: measured from before the conflict, crude has risen about 51%, whereas diesel has surged 118% and aviation fuel 105%. Part of that gap has nothing to do with Hormuz, because Ukrainian strikes have cut Russian refining capacity, perhaps by around 60%, and some US refineries are running hot or closing, so even a settlement in the strait would leave the refining squeeze in place. Asked whether overworked refineries could run into maintenance problems, he agreed this is a concern, above all in the United States, where facilities are working at high rates while a couple of planned closures also tighten capacity, which could keep the wedge elevated for some time. Deputy Governor Dave Ramsden added that maintenance cannot be postponed indefinitely and that attacks on installations, such as a Saudi refinery hit by the Houthis, make crude and product prices harder to predict the longer the war lasts.

2. Why members voted as they did

Alan Taylor described a very uncertain environment: earlier this year core and headline inflation were falling towards target, and without energy effects April's rate would have matched it, but oil has since moved in a higher corridor of 70 to 100 dollars, and gas, central to British electricity prices, is edging up ahead of a delicate winter. In his view, the outcome depends on which comes first: the expiry of stopgap measures or the adjustment of firms and households on both the demand and supply side. Megan Greene, who voted for a rise, argued that after six months of volatile energy costs the risk of second-round effects justifies a risk-management approach: if the Bank tightens and the effects do not appear, it can course-correct cheaply, whereas if it waits and they do, inflation is hard to get back under control. Conclusive evidence on second-round effects may not arrive until next year, and policy must act on lags. Ramsden, who voted to hold, saw the domestic picture as benign, since private-sector regular pay grew 2.8% in the second quarter against 3.2% expected before the conflict, while seeing global risks, from energy, extreme weather, drought and AI, as mostly on the upside. He still counts unchanged rates as restrictive, as he had expected cuts in spring. Taylor made a similar case: domestic inflation has been coming in below forecast for 12 to 18 months, and by not cutting as expected the Bank has actively kept policy tighter than peers, which is a form of insurance. Greene admitted she has no special insight into how the war will end, which is exactly why she prefers to minimise potential losses, and Taylor said the staff's monitoring will concentrate on wages and on how far energy costs spill into other sectors, compared with earlier energy shocks, adding that he regards the unchanged rate as an active decision rather than inaction. Greene differs mainly in her starting point, noting that agents report slightly lower pay settlements this year but that, with inflation about to accelerate, next year's may not be much lower, which would suggest wage disinflation is stalling, citing weaker wage disinflation, household inflation expectations already at the top of their historical range, and thresholds above which households and firms pay more attention to price rises.

3. Conditional statements, the market curve and mortgage rates

Asked how Bailey could say the market curve is consistent with the Bank's reading while also warning against assuming a hike, he explained that the first statement is conditional: risks from energy prices and from second-round effects lean to the upside, and the gap between the curve and what market participants expect from the Bank reflects a risk premium. The second pushed back on an unconditional reading that the Bank has a secret plan to raise rates. He sided with the new Fed Chair Kevin Warsh that forward guidance, which tries to turn conditional statements into unconditional ones, is dangerous, though he is sometimes frustrated that his conditional remarks are heard as promises. On financial conditions, he noted that UK mortgage rates are about 75 basis points above their level when the conflict began, the largest rise in the G7 with the possible exception of Japan, which is a genuine tightening that the Bank takes into account, but not a case of letting markets do its work: both markets and the Bank are responding to the same upside risks. Pressed on whether this market-driven tightening can substitute for a rate rise indefinitely, he said financial conditions are simply another piece of data the committee weighs, and that the effect on families is taken into account. Ramsden explained that the monitoring framework for second-round effects relies on the decision-maker panel and other forward-looking surveys, with the main difficulty being wages, because most settlements happen around the turn of the year and the conflict began after the 2026 round was done.

4. Communications after the Bernanke review

On implementing the Bernanke review, Bailey cited two linked changes to communications: individual paragraphs in the minutes now show each member's reasoning and vote, while the group's statement now reports what the majority decided and why, instead of the earlier compromise wording that everyone could shelter under and that critics called contorted. Scenarios are also a product of the review, and the review has an iceberg below the surface in data, models, tools and use of AI. Some outsiders find nine separate explanations confusing, but he reports positive feedback overall and a clearer picture of where each member stands and why. Asked whether the three-scenario approach without a stated central forecast helps, Taylor replied that this was specific to the period of grave uncertainty right after the conflict began, when a single central path might have misled, and the Bank has since returned to a baseline. Taylor said there are three balances to strike: the quantity and quality of information (too much is like too much salt), a clear central view without unconditional guidance, and individual accountability alongside a strong collective message; communicating the reaction function through scenarios builds credibility, and the aim is to subtract noise, not add it. Ramsden recalled that scenarios replaced a single forecast in April because uncertainty was so great, before the July report returned to a baseline with adverse and benign scenarios. Ramsden judged that market volatility after both the April and July publications was limited, a sign the message about policy and its risks got through, and Taylor said the central forecast remains a baseline that expresses a view while the scenarios convey how the committee would react to other developments. Bailey and Greene noted that the Bank's nine-member, individually accountable structure, and the unusual practice of several members appearing before a legislature, makes it fundamentally different from the Fed.

5. Food, El Niño and chips

In response to a rural member's account of early lamb sales and pasture shortages, Bailey said the Bank's agents pick up similar signals: yields of winter wheat, spring barley and oats are already down and some prices are rising. An El Niño is building, which historically affects rice, coffee, cocoa and palm oil. Food inflation has so far come in below expectations, at 1.7% in July, but the Bank expects it to rise to about 3.5% by year-end and sees risks as skewed upward; trade bodies have trimmed earlier forecasts of 6-7%. Ramsden said the lesson of 2022 is to watch fertiliser and input costs for next year, and that central bankers from nations already feeling the El Niño reported food price effects at the Basel meetings, and those will reach Britain with a lag. Bailey was cautious about linking El Niño to climate change, while accepting global food prices are more volatile. Greene made the point that frequent shocks mean volatility rather than ever-rising inflation, and she added that no one knows how supply shocks interact, such as AI chip demand, the Iran war and others. Staff modelling suggests chip price pressure could add about 0.1 percentage point to consumer prices. Ramsden added that food is a necessity, so what matters is whether shocks are global and whether consumers can substitute, for example away from dear meat, and that with few favourable supply shocks lately, prices are more likely to ratchet up than down.

6. Quantitative tightening, the 1844 Act and reserves

Ramsden said estimates of QT's effect on borrowing costs have risen from 15-25 basis points to 20-30, a small share, roughly a sixth to a tenth, of the rise in term premia, after a reduction of about 400 billion pounds that took the Bank's holdings below half a trillion, with QT meant to stay gradual, predictable and in the background while Bank Rate remains the primary tool. He defended QE as a tool at the zero lower bound and in the pandemic, though a third round of 150 billion over twelve months should have had a review point, and he voted against completing it as inflation worries grew. On the fiscal losses from QT, Bailey explained that under the 1844 Bank Charter Act the note-issue department's profit, the seigniorage, goes straight to the Treasury, whereas the Fed and the ECB keep everything on one balance sheet, offset losses against seigniorage and book a negative asset. The UK approach is more transparent but makes the losses visible, though in economic terms it makes no difference to the taxpayer, and the Government also gained from issuing long debt cheaply in the zero-rate period, a benefit the Bank now publishes an attempt to net against the losses, which comes out roughly flat. Most reserves, he added, are held for financial-stability reasons. He would not comment on fiscal policy or proposals to tax banks, but argued that paying interest on reserves is how rate decisions are implemented and that stopping it would cut bank margins and most likely be passed on to customers.

7. The economy, labour market, AI and young people

Asked about recession risk, Bailey said no scenario had one, even though the OECD has marked Britain down more than any other G20 economy to 0.7% growth for 2026; activity is weak by historical standards but resilient, balance sheets are sound, household saving has been high, and data since the report have come in somewhat stronger. Second-quarter growth was 0.4%, above expectations, consumer confidence is the highest since August 2024, and the June GDP figures should support the third quarter, though Taylor and others noted a recurring pattern of stronger first halves that the statistics office attributes in part to changed seasonality. Real post-tax labour income grew 3.3% on average from 1998 to 2007 but only 1.5% since the financial crisis, so productivity remains the central challenge. Asked to separate external shocks from the effect of higher employer payroll taxes on hiring, Bailey said softer second-round effects imply that firms are absorbing some costs in margins, so hiring is lower and the labour market is softening, with youth unemployment concerning; Ramsden stressed that there is less firing too, giving low turnover. Greene said early data show fewer vacancies in AI-exposed sectors, but the low-hire, low-fire dynamic matters more for young people, and much of what firms call AI is really automation. Bailey cited a four-part framework of jobs destroyed, created, augmented or reduced in demand, and warned that long spells outside work scar future prospects, so skills matter, with a tension between universities worried students will only use AI and employers wanting AI users. Taylor put the slowdown in long-run context: advanced-economy growth has decelerated for fifty years, so falling to zero from 1% is easier than from 3%, and he warned against overstating resilience, since without the conflict hiring and optimism would probably be stronger and the damage to long-term supply potential lower. Bailey said recent productivity gains are mostly in some service sectors rather than AI-heavy ones and could simply reflect fewer workers. Ramsden expects a premium on technological literacy. Greene also called UK consumers a puzzle: they behave like euro-area ones, saving heavily, saying it is a bad time for big purchases and yet not fearing for their jobs, which could reflect precautionary hoarding after inflation or mortgage resets and would imply opposite policies.

8. Global imbalances, trade and the Bank's own house

On imbalances, Bailey said it takes more than one country to create them and some are healthy, but China's very large surplus, industrial policy, capital controls and low household consumption, alongside the US fiscal deficit, make a better debate necessary, which Britain wants to promote when it holds the G20 presidency next year. Ramsden pointed out that Britain is among the world's largest services exporters, with a comparative advantage in finance and professional services, as the global trading system intends. Britain runs a goods shortfall against China, partly offset by services, though the services surplus, which includes education, is smaller, and he sees AI and robotics as the next general-purpose technology that the UK must be part of. Greene noted that imbalances reflect savings and investment everywhere, so China, Europe and the US would all have to adjust. Taylor said trade diversion is a slow burn, citing Chinese electric vehicles and overbuilding that will find other markets, and Bailey agreed to write with an estimate of tariffs' effect on UK inflation, which staff think is smaller than first feared. On staffing, just over 400 people are leaving the Bank under a mutually agreed resignation scheme out of about 700 applicants, to shift spending towards systems and data, a need sharpened by frontier AI. On new banknotes, whose reverse will carry wildlife chosen by almost half a million people from a curated panel, there is no date and Bailey said it will not happen in his term.

1. The question of legitimacy

Speaking at an LSE conference, the Governor of the Bank of England examined independent central banks as institutions. He recalled that in 1780 a young Alexander Hamilton admired how the Bank of England combined public authority with private credit. Since central banks shape borrowing costs, savings, jobs and financial stability, critics ask why unelected bodies should hold such power: some say they serve financial interests, others that they ignore citizens' wishes. He set out to answer by tracing the ideas behind them.

2. Two intellectual traditions

Economists usually justify independence by credibility: governments are tempted by short-term monetary choices and tend to neglect financial stability until a crisis is near. Bailey went further back. Montesquieu wanted intermediate bodies, such as courts and parliaments, to restrain arbitrary power, though their authority grew from long-standing roots. A second line of English thought moved money away from the sovereign's control: Hobbes saw monetary power as part of sovereignty, while Locke, in the coinage disputes of the 1690s, argued that changing money's value at will destroyed trust and trade, and Hume presented stable money and credit as foundations of commercial prosperity. Monetary stability thus became a public good.

3. The early Bank of England

The Bank was founded in 1694 to support expanding commerce and to fund war with France. It began as a deal between the state and a small circle of wealthy financiers and was deeply involved in politics; writers at the time feared that public debt would give financiers power without legitimacy. Central banking therefore evolved slowly, and its origins resemble Mancur Olson's organised interest groups more than a neutral public institution.

4. Public good, not group interest

Modern central banks combine both traditions: they limit the misuse of power over money and protect a good shared by all. Drawing on Brian Barry, Bailey distinguished competing private interests, which democracy arbitrates, from goods that matter to everyone, such as the value of money. Interest rates and financial rules do affect groups differently, but their purpose is to preserve conditions for lasting prosperity. Lacking deep social roots, a central bank must avoid being captured by any sector or movement. Its legitimacy comes from Parliament, which sets its goals and powers and can change them.

5. Today's challenges

Trust in public bodies is falling. Critics say central banks are too close to finance, while banks complain that regulation has gone too far; criticism from both sides does not prove the bank right, but shows that independence means resisting organised interests. Populism is a second threat: by claiming to embody the whole people, it erases the line between public interest and public good and treats independent bodies as obstacles. Central banks must therefore explain their choices, engage with the public and answer to elected representatives, in Britain the Treasury Committee.

6. Conclusion

Scrutiny is healthy. Prosperity depends on confidence that money keeps its value and the financial system holds. Independence means protection from short-term political pressure inside a democratic framework, resting on delegation and accountability, which should be strengthened through transparency and openness. Households, firms and markets all plan on the basis of stable money, and such trust takes generations to build but can be lost quickly, which is why he argued that the foundations of independence should be reinforced rather than weakened.

1. A higher risk picture: the Gulf, frontier AI and the energy wedge

Appearing before the House of Commons Treasury Committee on the Bank's twice-yearly stability assessments, Governor Andrew Bailey said risks have grown since January for two reasons. The Middle East conflict does not add to the structural weaknesses identified earlier, but it raises the chance that they materialise and the damage if they do. The second, newer factor is frontier AI and its consequences for cyber security, on which he had written to the committee. Asked about the on-off ceasefire, he said that a week earlier he would have said events were tracking the mildest of the three paths in the monetary policy report, while warning that the ceasefire was fragile; that instability has returned, so he cannot judge how long fighting will last. Energy prices are somewhat above pre-crisis levels, crude is well below its peak and pass-through to UK prices remains soft, but refined products have not fallen as far, because China has cut crude imports while also cutting exports of refined fuel, and Russian production capacity has been badly hit. From contacts with Gulf producers, oil output was resuming quickly until last week and new pipelines are being built around the Strait of Hormuz, while Qatar says about 83% of its gas supply is intact and the damaged remainder will take longer, with bigger expansion plans only by 2029-30. The chair noted that repairing regional infrastructure would take at least eight months once a ceasefire holds and asked what modelling the Bank is doing; Bailey replied that it talks constantly to industry and to Gulf counterparts, who say oil damage has been limited compared with the blockages. He added that a fresh inflation figure was due the following week and that evidence so far on pass-through of energy costs into UK prices is soft, but that the committee should not rely on crude prices alone, since petrol and diesel are what households actually pay for.

2. Politics, growth and the cost of a lost decade and a half

Asked whether a seventh prime minister in ten years harms financial stability, Bailey declined to comment on politics, saying that global conditions drive market moves far more than UK events, and that the UK is supported by monetary and financial stability and by its fiscal framework, which caused only a brief market wobble. His main advice for an incoming government is that growth is the central question: the core banking system is resilient and household and corporate debt is not stretched, but growth has been low for sixteen or seventeen years, a general rather than political story. In a naive counterfactual, if potential and actual growth had stayed at about 2.5% a year instead of about 1.5%, with the same fiscal policies and the same shocks from Covid, Brexit, Ukraine and the Gulf, public debt would be roughly ten percentage points of GDP lower, and the debate would be very different.

3. Regulation, growth and the lump of capital

Pressed on whether the push for deregulation to promote growth threatens stability, he said there will be no growth without financial stability, that not every rule is perfect and reviews are welcome, but that he differs from some arguments. He added that the Bank supports reviewing rules but that its own mandate gives it no reason to hold back growth. Banks now earn more than their cost of capital, with price-to-book ratios averaging about 1.7 against below 1 earlier, so they can choose to reinvest earnings to support lending, a choice markets should drive. He rejects the lump-of-capital view that a fixed pool of capital means looser rules let more be lent: a healthy bank earns returns it can reinvest. Randall Kroszner, speaking about the new Fed chair Kevin Warsh, said he is battle-tested on financial stability and the US Basel proposal is about effective rather than weaker regulation, which still lets banks intermediate. Asked whether history informs his thinking, Bailey said it does a lot: memories of the crisis are fading and people now say the response was too strong, but it did not feel excessive when the system had been left extremely fragile and had to be rebuilt, and relaxing standards because the danger has passed is not how it works.

4. Climate, AI infrastructure and clean power

On climate, Bailey said he was making a relative point earlier, not that the absolute risk has fallen; Europe's very hot weather is a reminder, and Nathanaël Benjamin added that the channels to banks, insurers and core markets remain present and are being embedded in mainstream stress testing, with resources allocated to relative risks, where AI has climbed the list quickly. On water and grid needs for data centres, the Bank is not the expert, but Benjamin noted that cooling needs are large and the question is whether water infrastructure can keep pace with market expectations. Bailey linked this to growth: technology is a long-run driver, the next cycle is likely to combine AI and robotics, and grid and data-centre capacity matters. He added that he had learned that AI needs clean power in the sense of very high-quality, continuous supply, which renewables alone do not currently give, so a baseload mix is needed.

5. The leverage ratio and the move from 14% to 13% capital

On the decision to loosen the leverage requirement by a fifth of a point, which looked like a split vote, Bailey explained that the change mostly cleans up an anomaly dating from 2019 that burdened the large domestic banks, which make most UK loans, and makes the leverage buffer as usable as the risk-weighted one; the two regimes run in parallel rather than add up. The complication is leverage in markets, such as hedge-fund and ETF leverage in equity and government debt markets, to which banks are linked as liquidity providers; the committee debated whether to tackle it through banking or market regulation, and Bailey prefers the market route, with further work before the changes are final. Stephen Blyth confirmed there was unanimity on fixing the discrepancy, with debate about a small reduction for other institutions, and said repo haircuts are the effective tool. Kroszner said a 20-basis-point change is not material and that a more releasable capital stack could let banks hold smaller management buffers, which also serves the secondary goal of credit and growth; he noted that most banks now pass stress tests, so the bar is not unattainable. Bailey added that the Bank will do further work before finalising the changes, to check whether they might increase market leverage.

6. Why banks say 13% is not 13%, and the US comparison

John Glen pressed that banks say their effective requirement is nearer 14.25% and claim a 190-basis-point premium over US rivals. Bailey denied the US has been bolder, since its latest package implements the Basel 3.1 rules the UK also follows, with international banks showing higher leverage ratios, and the euro area has done nothing bolder. He gave three reasons for the gap: banks keep voluntary management buffers; requirements differ by bank, with add-ons for weak risk management or concentrated risk; and many still think 13% is too high. Basel 3.1 will lower the bottom-up element that the PRA assesses, which is why the FPC matched it from the top down, and in other cases supervisors add capital when a bank cannot show it manages risk properly, which Bailey said is simply the Bank doing its job. He would like a single releasable buffer, which needs international agreement; excluding government bonds from the leverage ratio is not in the Basel rules. Kroszner said comparisons are more art than science and that US banks complain of gold-plating too, and Benjamin noted US banks hold large buffers without hurting profits. Blyth said academics, rating agencies and investors did not call for lower capital. Chris Coghlan recalled banks made the same pre-2008 argument.

7. Frontier AI and cyber risk

Bobby Dean asked what had been underestimated. Bailey said AI developers themselves are surprised: models are self-improving, an Anthropic model in April advanced faster than expected, and tests by the UK's AI Security Institute show leaps in speed and ability at real tasks. Frontier AI will strengthen both defence and offence: firms can use it to find and fix long-buried flaws, but attackers can do the same, so the race is for defence to be strengthened first, and that is getting harder. Models have a shelf life of two or three months, open-source versions are coming and China is only months behind. Benjamin said firms are testing models on their own systems, the risk is the speed at which weaknesses are found and the need for faster patching, which itself creates disruption risk, and defenders typically get access before attackers. Separately, banks' own AI use is a distinct risk: agentic trading is still more talk than reality, because agents can learn to cheat and lie and legal liability is unresolved. As principal-agent law makes principals liable for agents inside their remit and agents without legal personality cannot be liable, banks must think carefully before using them; the committee asked for a written note.

8. Critical third parties and an AI bubble

On critical third parties, Benjamin said four providers have been nominated, the PRA will supervise them and has specialist divisions, and the Bank sees no concern about their openness. On an AI bubble, Blyth said concentration and heightened valuations resemble the dot-com era, though strong earnings back them; the price assumes an optimistic earnings path, and power, cooling and planning are risks to it. Financial-stability worries are that AI expansion is increasingly funded by debt, with extreme growth in 2026, and that long-side leverage is growing through levered hedge funds using derivatives and prime brokerage and through levered ETFs, which could amplify a fall. On critical third parties, Dean asked about the regulator's capacity to look inside opaque providers, and Benjamin replied that the PRA has entire divisions of operational-resilience specialists. Bailey said a bubble bursting abroad would wash over the UK, and a Bank stress exercise showed lower UK growth, with some interest-rate adjustment. He added that general-purpose technologies take longer to show in productivity than expected, that everyone is priced to win but not everyone does, as Netscape showed, and that the UK has strengths in research and start-ups, with the persistent problem of scaling up. Blyth said the much-quoted estimate that about 650 billion dollars of yearly revenue is needed for a fair return is not physically impossible, though power, cooling and planning approval for data centres threaten the optimistic earnings story, and that the pace at which leverage and debt issuance are growing, including possible crowding out of other debt, is extraordinary.

9. Gilt repo, pensions and public debt

Yuan Yang asked about planned gilt repo reforms. Bailey said a discussion paper and a system-wide stress exercise suggested market regulation, such as clearing and haircuts, is better than classic institutional rules, responses were mixed, and proposals will follow; Benjamin said the update will come in the fourth-quarter report, as thinking rather than a final announcement, doing nothing is not an option, markets are much sturdier than before, yet that sturdiness must be built permanently into how they are organised, and the Bank works with the debt office, the FCA and the Treasury. Yang asked whether a gilt decision would be joint with the other agencies, and Benjamin said that depends on the measures, while Bailey hoped for consensus. Blyth explained the market's particular structure, in which hedge funds buy cash gilts against futures financed through repo, as in the US. Blyth, a former hedge-fund trader, admitted that firms prefer no haircut, supported a minimum haircut on gilt repo, said the cost argument is an effective lobbying line but should fall on leveraged returns, and that evidence does not show it would disrupt the market. Benjamin added the all-in cost must be assessed. Bailey explained the market's structural shift: maturing defined-benefit schemes are no longer natural buyers of long gilts, so the debt office shortened issuance, more demand comes from price-sensitive hedge funds, and the current account deficit increases reliance on overseas investors. Chair Meg Hillier asked how far a sudden equity correction could disrupt the gilt market; Bailey replied that the market had stayed resilient through this year's Gulf volatility, that earlier episodes needed intervention, and that the Bank now has many more tools and is ready to use them. Asked about debt near 100% of GDP, he stressed the fiscal framework, noted the favourable gilt response to the last Budget, and said the fiscal outlook faces three structural headwinds: ageing, the end of the post-Cold War defence dividend, and climate change.

10. Private credit, households, risk transfers and stablecoins

Kroszner and Benjamin said the Bank's system-wide exploratory exercise on private markets, with voluntary participation by all major players, produced a unique dataset on exposures, a first step toward answering the data gap; Blyth said recent bankruptcies like First Brands and Tricolor, which caused unexpected bank losses, re-raise whether linkages are understood, and that the exercise's value is in asking firms whether they are sure. Bailey, as chair of the Financial Stability Board, noted the FSB agenda has shifted to non-banks and that cross-border data sharing remains weak, and that the same big macro funds are leveraged across several government bond markets, so margin calls in one market, for example during last year's tariff volatility, can spill into gilts; with no stable initial margin, models make margining more pro-cyclical. Benjamin and Kroszner stressed that risks ultimately come back to bank balance sheets, because banks are the main providers of leverage to hedge funds and private markets. On households, mortgage rates are about 75 basis points higher since December, the sector is resilient with lower aggregate debt, but lower-income renters, whose median income is half that of mortgage holders, are most squeezed, though this does not threaten the banking system; the loan-to-income flexibility has worked as intended, with high-multiple lending around 13% against a 15% cap, about half to first-time buyers, and no rise in negative equity. Siobhain McDonagh asked whether the six lenders holding about 80% of mortgages squeeze smaller building societies; Benjamin said small firms have applied for the same flexibility and Bailey had heard no such complaint. On significant risk transfers, Bailey said they are not large but growing; lessons from the crisis show some turned out not to transfer risk, the PRA approves each one and has written to banks about unfunded deals, and stress tests assume failures. Benjamin said the differences from the 2008 collateralised debt obligations are that banks are stronger, loan underwriting is stricter and these deals are bilateral relationships rather than traded, though unfunded ones create counterparty risk. On stablecoins, the cap moved from a per-account limit to an aggregate 40 billion pound limit, the backing mix changed to 70% remunerated assets and 30% unremunerated central bank reserves, issuers get Bank accounts and a repo facility, and the UK is ahead of the US, whose CLARITY Act is stuck. Blyth added that the UK's shortage of short-dated gilts to back coins differs from the US and is being discussed with the debt office, and, in answer to John Glen's question about community banks losing deposits to crypto, Bailey said Basel's strict crypto rules limit banks' holdings, and some US crypto firms have obtained banking licences, which has not happened in the UK. Kroszner noted that the 30% direct access to the Bank lets it monitor outflows tick by tick and guarantees a cushion in a run. Bailey drew the line between stablecoins, which must meet the test of money, and crypto, which has no assured value; links between crypto and the core financial system are not deep. The chair closed by summarising a session on whether the capital rules strike the right balance, on the pace of AI-related risks and how hard it is for supervisors and companies to keep pace, and on whether heavy AI investment affects growth in other sectors.

1. Slow growth and why it matters

Speaking at a Mansion House-style dinner, Bank of England Governor Andrew Bailey admitted that his February hope for calmer times was upset by the Middle East conflict: energy prices jumped, inflation has not yet returned to 2% although it otherwise would have, the economy is soft, and the return to target will simply take longer. He then stepped back to the long run. The UK has grown more slowly for about fifteen years, and was hit by a string of negative supply shocks such as Covid, the Ukraine war and Brexit. The sustainable speed limit, potential supply growth, fell from about 2.8% a year before the financial crisis (2.4 points from productivity, 0.4 from labour) to about 1.3% since (0.4 from productivity, 0.8 from labour). Income per head grew 2.0% a year between 1990 and the crisis but only 0.6% afterwards, so lifting growth must be a priority. Stable monetary and fiscal policy is the backdrop, and he believes the frameworks provide it, but lasting growth comes from the supply side: capital, technology, skills, trade, finance, competition, infrastructure and institutions.

2. Regulation framed by purpose

Focusing on regulation, he agreed that critics deserve a hearing, since well-designed rules can correct market failures, lower the cost of dealing, make it easier for newcomers to enter and encourage rivalry and innovation, and financial regulation lowers the odds and severity of crises, protecting the supply of finance. But the debate should not be an abstract argument about too much or too little: each rule should be defined by a positive purpose, designed to reach it quickly and effectively with minimal side effects, and judged on whether it does. Financial stability is a prerequisite for growth, yet not every rule is perfect, and simply arguing for less is unhelpfully reductive.

3. Bank capital

On capital, he went back to basics: banks are regulated to protect deposits, the main stock of money people hold, while still lending through the cycle; capital absorbs losses and backs the assured value of money. Capital providers must earn more than the loss they expect to bear, otherwise they will not supply it. UK bank returns sat below 10% for much of the post-crisis period, rose above it in 2023 and reached 15.4% this year, with price-to-book ratios near 1.7, signalling expected returns above the cost of capital. Regulators should not cap returns, but stability needs returns above the cost of capital. Last week's changes removed some anomalies, and the Bank is open to simplification that keeps the system healthy. He rejected a lump-of-capital view, where a fixed pool of capital means looser rules free more lending: capital is not fixed, healthy returns let banks retain earnings and build capital, and proportionate, effective regulation lowers its cost.

4. Payments and tokenisation

For payments, the two objectives are the singleness of money, meaning the same nominal value across all forms, and settlement finality, so that payments once made stay made. The Bank wants to modernise systems, improve resilience against fraud and cyber attacks and gain the benefits of programmable payments: conditional payments could cut late payments and fraud by moving checks from after the fact to before. The renewed RTGS system underpins this; a Digital Securities Sandbox approved its first live participant yesterday, paving the way for a UK digital gilt, DIGIT; work is under way with banks on tokenised deposits; proposed rules for systemic sterling stablecoins apply the same principles; and a Retail Payments Infrastructure Board published a consultation on 25 June, with feedback due by 11 September, ahead of a blueprint for an industry-owned delivery company. He also noted that atomic settlement could improve efficiency and cut risk in wholesale markets.

5. AI, growth and law

He argued that general-purpose technologies, from steam to electricity to the internet, drive long-run growth in long cycles with gaps between them, and that the last fifteen years, with falling productivity growth, look like such a gap before the next technology, most likely AI, which will support advances in diagnostics, research and robotics. Benefits take time to appear, as Solow's remark about computers showed, and the Governor himself is still experimenting. AI will raise big policy questions that should be tackled promptly and positively. One is resource allocation: if clean power for data centres is short, who decides whether medicine, drones, finance or entertainment get priority, and markets may not reflect the public interest. Another is law: agentic AI that buys or trades on our behalf can learn bad habits such as lying to please, and without a legal personality it is unclear whether the principal is liable for everything, which may force constraints that cut against AI's direction and test firms' governance.

6. Frontier AI and cyber risk

Frontier models' growing ability to find and exploit weaknesses in systems is a major threat to security and hence financial stability. He called for much stronger international coordination of testing before models are widely released, starting with public authorities, where the UK's AI Security Institute and National Cyber Security Centre are well placed, and then testing across critical infrastructure; the Bank is working with regulated firms on forums for patching. He also stressed the need for robust ability to recover from scratch, so-called bare metal recovery. His conclusion: growth comes from supply-side innovation, AI is the likeliest next contributor, regulation done well helps, and it should be approached positively by defining what to achieve, by when, and how, while questioning existing rules in that spirit.

1. Scenarios for an unpredictable world

At the Reykjavík Economic Conference, the Governor of the Bank of England recalled that a year earlier he had explained how, after Ben Bernanke's review of its forecasting, the Bank would use scenarios to explore how shocks spread to inflation and how policy might react. That foresight proved useful: the Middle East conflict has curbed traffic through Hormuz and damaged energy facilities, a large negative supply shock for the world.

2. The shock to UK inflation

Before February, UK inflation was heading back to the 2% target from April, and with slack building and a softer labour market, further rate cuts were likely. Instead April inflation reached 2.8%, with household energy adding 0.8 point more than expected, and it should rise further as utility bills and supply-chain costs climb. As an energy importer, Britain faces a loss of real income that policy cannot prevent; the outcome depends on whether Hormuz reopens and infrastructure is repaired. The Bank's task is to stop inflation from becoming entrenched and bring it back to 2% over the medium term.

3. A flexible target and the lambda question

Since the 1998 Act, the Bank sets policy independently to achieve price stability, under an annual remit from the government and accountable to Parliament, which protects the promise of low inflation from political temptation. The 2% target applies at all times, but the remit accepts that returning to it too fast could cause unwanted swings in output. It does not say how much weight output should get, the parameter economists call lambda, which makes the remit an incomplete contract leaving the committee constrained discretion. He sees this as deliberate: the right weight depends on the shock, high when a temporary price jump can be ignored, low when expectations are at risk. When inflation deviates by more than one point, the Governor writes an open letter to the Chancellor. Compared with a dual mandate, the UK framework puts price stability first but leaves more freedom in managing trade-offs.

4. Applying it to the energy shock

Direct energy effects are usually looked through, since rate rises would hit after the shock fades and would require extra slack to offset them, so lambda is high there. Indirect effects through supply chains last longer and justify a moderate weight. Second-round effects, where higher expectations feed wage claims and then prices, deserve a low weight, but they are uncertain and slow to appear, so the Bank cannot wait for proof yet risks overreacting. Given economic weakness, tolerating temporarily higher inflation is reasonable, but that tolerance would shrink if second-round signs emerged.

5. The current decision

The April report presented three scenarios without a central projection or probabilities because of the unpredictable conflict, covering its length, the scale of energy price rises and the risk of persistence. Holding Bank Rate at 3.75% was an active choice: removing expected cuts has already tightened conditions, with mortgage rates up. Weak activity should limit second-round effects, though they would grow with larger and longer energy price rises, and policy will be adjusted as events unfold.