Bank of England ‘blindsided’ by Kwasi Kwarteng’s mini-budget, says governor

Andrew Bailey tells Lords committee of ‘extraordinary process’ with ‘no formal communication’ between Treasury and Bank

The governor of the Bank of England has indicated it was left blindsided by Kwasi Kwarteng’s disastrous mini-budget, describing an “extraordinary process” in which there was “no formal communication” before the chancellor unveiled his measures.

In candid evidence to the Lords economic affairs committee, Andrew Bailey said Kwarteng had broken with tradition by failing to brief the central bank, suggesting that even Treasury officials were not fully aware of his plans a day before the event.

“I’m afraid there was parts of it we had no idea what was in it,” Bailey said. Asked by the Lords whether this suggested a slapdash approach from the government when making major changes to tax and spending policy, he said: “There was no formal communication of the sort we normally have. It was a quite extraordinary process in that sense.

“I didn’t say to the chancellor ‘you have to tell me what’s in this fiscal statement’, because, frankly, I would never say that to a chancellor. But then I don’t need to say that in normal circumstances. We have channels of communication.”

He said it had been an “extraordinary time”, as the mini-budget came in the same week as the state funeral of Queen Elizabeth II.

Financial markets were plunged into turmoil after the former chancellor unveiled more than £45bn of unfunded tax cuts largely directed at higher earners, sending the pound plummeting to its lowest level in history, and government borrowing costs surging to the highest rate since the 2008 financial crisis.

The Bank was then forced into an emergency intervention to buy up to £65bn of UK government bonds to halt a run on pension funds and wider financial instability.

Responding to questions from Mervyn King, who was the Bank’s governor during the 2008 financial crisis, Bailey suggested even Treasury officials were not fully informed of Kwarteng’s plans a day before the mini-budget.

“I don’t think Treasury officials were clear what was going to be in it,” he said.

Bailey said the Bank was not informed of Kwarteng’s plan to scrap the 45p additional rate of income tax, which he said was one of two reasons City bankers had given him when explaining the subsequent financial market meltdown. The other was Kwarteng’s decision to sideline the Office for Budget Responsibility.

“What people said to me was they were surprised, substantially surprised, that it was done at that point in time in that context in that situation.

“And people in the markets said those two things had quite a big impact on them in terms of their reaction to it. And their judgment of the direction of UK economic policy and fiscal policy making at that time, which was obviously very negative.”

King said it was normal for a Treasury official to attend meetings of the Bank’s rate-setting monetary policy committee, and they would typically provide guidance to the central bank before major announcements on tax and spending.

King said the MPC had met a day before the mini-budget, and asked whether a Treasury official was present and had provided a broad update on Kwarteng’s tax and spending plans and their economic consequences. Bailey said the official had “told us what they understood to be the situation,” but suggested they did not have a full picture.

Bailey rejected suggestions that the Bank’s time-limited intervention in the bond market after the mini-budget “brought down” the Truss government. “We did not bring the government down. We did a limited operation for financial stability purposes and we did exactly the right thing and ended it promptly.”


Richard Partington

The GuardianTramp

Related Content

Article image
Brexit and drop in workforce harming economic recovery, says Bank governor
Andrew Bailey also said disastrous mini-budget had damaged Britain’s international reputation

Richard Partington Economics correspondent

16, Nov, 2022 @7:15 PM

Article image
OBR forecasts likely to show £60bn-£70bn hole after Kwarteng’s mini-budget
Predictions handed to chancellor expected to paint gloomy picture for UK economy amid sweeping tax cuts

Richard Partington Economics correspondent

07, Oct, 2022 @5:20 PM

Article image
Kwasi Kwarteng’s mini-budget: key points at a glance
The chancellor has delivered his mini-budget – here are the main points, with political analysis

Richard Partington and Aubrey Allegretti

23, Sep, 2022 @8:40 AM

Article image
The Bank of England governor plans to stick – but it is a gamble
Andrew Bailey’s tough stance fuels the danger that ending one form of emergency intervention creates a need for a bigger one

Nils Pratley

12, Oct, 2022 @6:10 PM

Article image
Who is the ‘sexy turtle’? Andrew Bailey helps decide your mortgage costs
Some praise UK’s most powerful non-elected official for mini-budget response while some say Bank of England governor is out of touch

Anna Isaac

14, Dec, 2022 @3:00 PM

Article image
Bank of England completes sale of £19bn emergency bond purchases after mini-budget
Bloomberg estimates Bank made profit of £3.5bn after intervening to prevent run on pension funds

Richard Partington Economics correspondent

12, Jan, 2023 @6:33 PM

Article image
Banks among biggest beneficiaries of Kwarteng’s mini-budget
From scrapping the cap on bonuses to slashing red tape, the chancellor unveils a raft of policies he says will boost economic growth

Kalyeena Makortoff Banking correspondent

23, Sep, 2022 @3:00 PM

Article image
Mini-budget an ‘international embarrassment’ says NatWest boss
UK’s reputation ‘scarred’, Howard Davies tells staff, as he also warns of government plans to boost competitiveness

Kalyeena Makortoff Banking correspondent

06, Dec, 2022 @6:00 AM

Article image
How Kwasi Kwarteng’s mini-budget hit UK economy – in numbers
Reckless ‘fiscal event’ may have damaged Liz Truss’s government beyond repair

Jamie Grierson

30, Sep, 2022 @12:46 PM

Article image
How Kwasi Kwarteng’s budget-busting growth plan turned into week from hell
Tories head to conference with rocketing mortgage rates, a sterling crash and a 33-point poll lead for Labour

Heather Stewart

30, Sep, 2022 @3:06 PM