Reserve Bank governor in good company

What should one make of the Reserve Bank Governor’s extraordinary donation of a hostage to fortune in forecasting an end to interest rate hikes?

Conspiracy theorists will be scratching their tinfoil hats and mumbling about positioning for a whacking great payoff on being forced out by a new government. 

But presumably – given Orr does not exactly lack self confidence – he believes it.

Which surely risks turning it into an inadvertent post-dated resignation letter?

Central bank governors are believing all sorts of things these days.

Take the European Central Bank’s Christine Lagarde for example.  She’s been playing to the populist gallery with hints that big business is responsible for greedflation.  It’s a different model to the one she was selling no-less-confidently in the last decade, when lack of demand kept her awake at night.

So a round of applause please for the Governor of the Bank of England, Andrew Bailey.

Unlike the polished Lagarde, Bailey seems an unprepossessing candidate for monetary stardom.  A bit like Orr.

But he has provided the definitive expert monetary analysis.

We don’t know. 

Err – not quite so blunt.  But Bailey was reported in The Times as saying: 

““I think there are very big lessons about how we operate monetary policy in the face of very big shocks” and that they had “a lot to learn” about navigating such an environment.”

Adding plaintively:

“We have to make policy in real-time, we don’t make policy with the benefit of hindsight.”

The Financial Times led on Bailey’s explanation that the bank’s own forecasting model was not delivering accurate results and its role in setting interest rates had been scaled back. 

Would ignored be a more accurate way of putting it? The Financial Times again:

“Instead of using the model’s results, Bailey said the BoE’s work was now to think hard about “how we operate monetary policy in the face of very big shocks”. He added: “We’ve got to get on top of it and get inflation down.”

This humility might turn out to be more helpful than more facile explanations and less-warranted confidence.

Deep expertise is understanding the true limits of the ability to control events.  It allows one to make the case for necessity, without causing panic, while imparting confidence that the cycle will turn.

At this stage, Bailey’s effort looks more likely to be scapegoated than rewarded.  But it might not take very many events to put him ahead of his global colleagues.

Bailey himself can seem more comfortable in the lecture theatre, for example at the London School of Economics, where he explained – at length – the vital importance of the supply side.

He’s absolutely right of course.

Might we see more of Bailey’s pioneering humility from his global peers?

More reminders that central bankers (and finance ministers) can’t fine tune everything.

That voter-pleasing policies which tie up the supply side eventually drag heavily on productivity growth, which in turn makes inflation so much harder to bear.

That if you make large quantities of money available, you will eventually get painful (if ultimately beneficial) adjustments through the price system. 

Perhaps even a few more tremors when examining the flimsy microfoundations of the low-real-interest-rates-for-ever movement.

Central bank governors need an unimpeachable reputation for telling the truth and nothing but the truth.  

But remember they don’t have to tell the whole truth. 

And the bits they tell and the bits they omit tell us something about their capability and character.

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