‘Very serious’: Bank of England governor warns of risk of oil shock in Middle East | Andrew Bailey

The Bank of England is monitoring the crisis in the Middle East, fearing that a worsening conflict between Iran and Israel will make it impossible to stabilize oil prices and leave the global economy vulnerable to a 1970s-style energy shock.

Andrew Bailey, the Bank’s governor, said he was watching developments “extremely closely” and that there were limits to what could be done to prevent crude oil costs from rising if things got “really bad.” become”.

In a wide-ranging interview with the Guardian, Bailey outlined the prospect of the Bank becoming a “little more aggressive” in cutting interest rates, provided inflation news remained good.

Shortly after this interview was published online, the pound fell almost a cent to a two-week low as traders responded to indications of a more activist approach to lowering the cost of borrowing.

Bailey also hit back at claims by former Prime Minister Liz Truss that the Bank of England was part of a ‘deep state’ bent on thwarting her plans. Truss’s problems were of their own making, the governor said.

Bailey was speaking from his office on Threadneedle Street following the Israeli invasion of southern Lebanon this week and the Iranian launch of ballistic missiles in response. Oil prices rose 3% on concerns that a deepening conflict could disrupt the supply of crude oil from the Middle East.

“The geopolitical concerns are very serious,” Bailey said. “It’s tragic what’s going on. There are clearly tensions and the real issue then is how these might interact with some still quite tense markets.

Bailey said that in the year since the Hamas attack on Israel, there has not been a major increase in oil prices as we have seen in the past. “From a monetary policy perspective, it is a big help that we have not had a big increase in oil prices. But of course we’ve had that experience in the past, and in the 1970s the price of oil was a big part of the story.

“Of course we will continue to look at it. We’ll be watching closely to see the impact of the latest news. But… from all the conversations I have with colleagues in the region, I feel like there is a strong commitment right now to keep the market stable.

“It is also recognized that there is a point beyond which that control could fail if things got really bad. You have to keep an eye on this thing all the time because things could go wrong.”

Bailey said the economy has proven to be more resilient than he feared two years ago, or even a year ago. “I think the economy has weathered the shocks of the past five years better than many of us feared.” So there is a basis to develop.

“The government is right to focus on encouraging capital investment. There is a clear need for infrastructure. We have at least three very major structural problems. One of these is the aging of the population, in which we are of course not alone. Second, there is the demand to increase defense spending. And the third is about climate change.”

Bailey became governor in March 2020, just as the Covid pandemic hit. He said the Bank had been engaged in “crisis management” for much of the period since then, but he hoped the second half of his eight-year term would be calmer.

Inflation, as measured by the Consumer Price Index, is currently 2.2% – just above the official target of 2%, but Bailey said he was encouraged by the fact that cost of living pressures were not as persistent was as the Bank thought they would be. He said that if news on inflation continues to be good, there is a chance the Bank will become “a bit more activist” in its approach to cutting interest rates, which now stand at 5%.

He strongly defended the Bank’s response to the pandemic, global supply chain bottlenecks and the invasion of Ukraine, rejecting criticism that he and his colleagues left stimulus measures in place for too long, resulting in the highest inflation in forty years and the need to increase interest rates from 0.1% to 5.25% in 14 consecutive jumps.

“I sometimes read some of this commentary and think, remember what happened to the economy in 2020? I mean, we fell off a cliff. Anyone who says it was wrong to support the economy as we and others did – that’s just not realistic.”

If the Bank had not done anything about this, Britain would have entered a second Great Depression, he added.

Among the governor’s critics is Truss, who said Bailey was part of the “deep state” responsible for undermining her short-lived premiership.

“I don’t know what she means by that,” Bailey said, adding that he had never met her. Truss’s problems, he said, were the result of its chancellor Kwasi Kwarteng’s mini-budget, which led to a sharp rise in market interest rates and potentially huge losses for British pension funds before the Bank stepped in to help.

‘I remember Liz Truss saying at the time: ‘It’s a matter of financial stability, it’s the Bank of England’s job to deal with it.’ We did. We came in and used our intervention tools and ran with them. But it is a bit ironic when someone who is so critical of the regulators then comes out and says the problem is that the Bank of England has failed to comply with regulations.”

Bailey said allegations that the Bank was part of a deep state made his job as governor more difficult.

“I will say this about some of the things being said about the ‘deep state’: It’s not easy to run public institutions these days. I can tell you.

“People say that somehow there’s an agenda for this or an agenda for that, and the agenda is really that we’re trying to make an institution function as effectively as possible.”