UK BOE Gov Bailey Speaks

Thank you for inviting me to speak today. It’s always a pleasure to be back in my home town, and particularly here at Leicester University, not least because I went to school next door. I am going to speak today about a topical subject – economic growth. The question I set myself is, what does it take to create a sustained increase in the growth rate of the economy in today’s world? I’m going to range quite wide in answering the question, drawing in the current situation here in the UK and the world, and some economic history too. Economic growth is, quite simply, the rate of expansion of the size of the economy. Let me start by explaining how it matters to the Monetary Policy Committee when we decide on the appropriate level of interest rates to achieve our objective of price stability, the 2% inflation target. There are two parts to why growth matters for monetary policy – the outcome and the inputs. On the first, quite simply, low and stable inflation is the best contribution monetary policy can make to growth in the economy. The same goes for financial stability, our other core responsibility as the central bank, which is also a key condition for growth. On the inputs side, growth matters because monetary policy decisions require us to assess the inflationary consequences of the pressure on economic resources in this country. That pressure reflects the balance between demand and supply in goods and services and labour markets. To observe that level of pressure, we can’t just look at actual national income or output and employment. If that’s all we did, we would be left saying “so what?” We have to compare the actual position with the productive potential of the economy (the supply capacity of the economy) and in doing so assess resource utilisation and thus the degree of pressure. Except that, we can’t observe or directly measure the supply capacity of the economy. It has to be estimated to derive an assessment of potential national income/output. Don’t worry, I’m not going to use algebra today, but just a simple illustration: when we do those estimates, we label actual national income/output as Y, and potential income/output as Y*.footnote[1] When Y=Y*, the value of g post: BoE Gov. Bailey: The UK must raise its growth potential. post: BANK OF ENGLAND'S BAILEY SAYS WE FACE A CHALLENGE TO RAISE THE POTENTIAL GROWTH RATE OF THE ECONOMY, THERE ARE STRONG HEADWINDS

post: BoE Gov Bailey: We Are In A Period Of High Uncertainty - Disinflations Is Continuing post: BOE GOV. BAILEY: WE ARE FACING A WEAK GROWTH ENVIRONMENT IN THE UK. post: BOE GOV. BAILEY: THE HUMP IN INFLATION DUE TO ADMINISTERED PRICES. post: BANK OF ENGLAND'S BAILEY: "CAREFUL" LANGUAGE WAS CHOSEN TO HIGHLIGHT INCREASED UNCERTAINTY

I am going to spend most of the time today setting out the scale and significance of changes in financial market activity in recent years, and what this means for financial stability. My main message is that the significance of these changes has not been fully taken on board in many assessments of the challenges facing financial stability and the tools we need to assess the risks the changes have created. I will also put these issues into some broader context, around the role of central banks and of regulation. An important theme here is that of moving to a financial system in which the presence and impact of non-banks and market-based finance is much larger. In this context, I will set out the importance of two recent Bank of England innovations which are I think pioneering in the central banking world: these are our System Wide Exploratory Scenario, a new form of stress test tool, and the introduction of our new contingent liquidity facility for some non-banks. There is another important area of focus involving non-bank finance, namely the growth of private credit. That is not my focus today. post: BOE GOV. BAILEY: WE SHOULD APPROACH THE RESPONSE TO FINANCIAL VULNERABILITIES WITH AN OPEN MIND post: BOE GOV. BAILEY: WE ARE UNDERESTIMATING CHANGE IN FINANCIAL MARKETS post:

post: BoE’s Gov Bailey: Wouldn’t Over-Interpret Moves In Voting Patterns - We Think Path For Disinflation Remains In Place post: BOE GOV. BAILEY, WHEN ASKED IF THE BOE IS HAPPY TO CUT RATES AS INFLATION RISES: I EXPECT PATH FOR RATES WILL BE DOWNWARD, BUT THERE IS MORE UNCERTAINTY. post: BOE GOV. BAILEY: THE CUT TO GDP GROWTH FORECAST FOR 2025 IS NOT ABOUT THE BUDGET REALLY.

post: BOE'S RAMSDEN: THERE HAS BEEN STRONG DEMAND FOR DELIVERY SLOTS FOR GOLD; WE CAN MEET THAT DEMAND. post: *BOE'S RAMSDEN: GOLD STOCK HAS GONE BY DOWN 2% SINCE END-2024 *BOE'S RAMSDEN ON GOLD: A VERY ORDERLY PROCESS UNDER WAY post: BOE'S RAMSDEN: ALL EXISTING GOLD DELIVERY SLOTS ARE BOOKED UP.

post: BOE GOV. BAILEY: WE EXPECT TO BE ABLE TO CUT THE BANK RATE FURTHER post: BANK OF ENGLAND GOVERNOR BAILEY: WE EXPECT TO BE ABLE TO CUT BANK RATE FURTHER BUT WE WILL HAVE TO JUDGE MEETING BY MEETING HOW FAR AND HOW FAST ROAD AHEAD WILL HAVE BUMPS BEHIND UPTICK IN HEADLINE INFLATION STANDS A CONTINUED, GRADUAL EASING OF UNDERLYING INFLATIONARY… post: BoE Gov Bailey: Contact Of Weakening Economic Activity - Coming Rise In Inflation Almost Entirely Due To Factors Not Directly Linked To Pressures In The UK Economy - We Expect These Factors To Be Temporary post: BOE'S BAILEY: IT'S IMPORTANT TO A TAKE GRADUAL APPROACH TO EASING post: *BOE'S BAILEY: RISKS TO INFLATION ON BOTH SIDES *BOE'S BAILEY: SHOULD SEE 'GRADUAL' AND 'CAREFUL' TOGETHER *BAILEY: BOE MUST PROCEED CAREFULLY, JUDGE AFRESH EACH MEETING

post: BOE GOV. BAILEY: IT'S IMPORTANT WE RAISE GROWTH RATE OF THE ECONOMY. post: BOE GOV. BAILEY: FINANCIAL STABILITY IS A FOUNDATION FOR GROWTH, THERE IS NO TRADE-OFF. post: BOE GOV. BAILEY: I'M SUPPORTIVE OF GOVERNMENT EFFORTS TO BOOST GROWTH. post: BOE'S BAILEY: WE HAVE DELAYED BASEL BECAUSE OF US UNCERTAINTY, THERE IS A COMPETITION ISSUE HERE. post: BOE'S BAILEY: WE DON'T KNOW WHAT THE RESERVES EQUILIBRIUM LEVEL IS.