The degree of behind-the-scenes dysfunction in government ahead of September’s mini-budget has come into clearer focus as the Bank of England governor described a near total breakdown in communications in the days running up to the event.
Appearing before the House of Lords Economic Affairs Committee, Andrew Bailey said that the Bank, whose Monetary Policy Committee (MPC) took a critical interest decision less than 24 hours before the mini-budget of 23 September, was given little indication of the contents of the fiscal statement.
Mr Bailey’s comments are significant since the Bank was forced, in the wake of the event, to intervene in government bond markets following a sharp fall in long-dated UK bond prices (and consequent rise in their interest rates) which could have created a market breakdown within a matter of hours.
Quizzed by former Bank governor Lord Mervyn King about the degree of information the Bank was given by the Treasury, Mr Bailey said:
“It was just not known. It was not clear what was going to be in this statement.”
“In normal circumstances, we have channels of communication. It wasn’t happening in this case.”
He described it as “a most extraordinary process”, adding that part of the problem was the government’s determination not to involve the Office for Budget Responsibility (OBR) in the event.
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“By not involving the OBR in the process, that took away a good deal of the substance that we rely upon to go with a budget, from the point of view of forecasting and understanding the measures that were in it,” he said.
“That was just not there. There was nothing.”
He added that the Bank was not given any detail about the measures or the detail on the scale of the event, which also triggered a sharp fall in the pound.
He said: “The abolition of the top rate of tax… was something we certainly had no idea was going to happen.”
The governor added that while a Treasury representative was present for the MPC meeting, “I don’t think Treasury officials were clear what was going to be in [the mini-budget].”
The governor also said that while government bond yields had dropped back down following the period of stress, the market was “not back to normal at the moment.”
