Bank of England Governor warns of Middle East Oil Shock Risk

Bank of England monitors the Middle East Crisis amid fears that a worsening warbetween Iran & Israel will make it difficult to stabilize oil prices, leaving the global economy susceptible to an energy shock similar to the 1970s. Andrew Bailey, Bank of England governor, said that he is watching developments “extremely carefully” and there are limits to what can be done if things get “really bad”.

Bailey, in a broad-ranging interview with the BBC, hinted that the Bank could become “a bit more aggressive” when it comes to cutting interest rates if inflation continues to rise. The pound dropped by C/1.5, to its lowest level in three weeks, shortly after the interview was posted online. Traders reacted to the hint of a more aggressive approach to reduce the cost of borrowing.

Bailey also reacted to claims made by former Prime Minister Liz Truss, who claimed that the Bank of England had been part of a “deep state that was out to frustrate her plans. Truss was responsible for her own problems, said the governor. Bailey spoke from his Threadneedle St. office after the Israeli invasion of Southern Lebanon this week and Iran’s response of launching ballistic missiles. Oil Prices rose by 3% amid concerns that an intensifying conflict could disrupt Middle East crude supplies.

Bailey stated that geopolitical concerns were very grave. It’s tragic. “There are clearly stresses, and the real question is then how they could interact with some still very stretched markets in certain places.” Bailey stated that the oil price has not risen as much in the last year following the Hamas’ attack on Israel. It’s great that we don’t have to deal with an increase in oil prices. We’ve certainly had this experience before, in the 1970s the oil price played a major role.

We are always watching. We closely monitor the news to determine the impact. My impression from the many conversations I’ve had with my counterparts in the area is that, at the moment, there is a strong commitment to keeping the market stable. There’s also a recognition that there’s a limit beyond which this control could fail if things got really worse. This thing could go wrong, so you have to keep an eye on it.

Bailey said that the economy is more resilient than what he expected two years ago or even one year ago. “I believe the economy has survived the shocks in the last five-year period better than we feared. There’s already a foundation to build on.

The government has done well to concentrate on ways to encourage capital investments. Infrastructure is in dire need of capital investment. There are at least three major structural problems. The first is the ageing of our population. We’re not the only ones who face this problem. The second is the demand for increased defence spending. “The third is climate change.”

Bailey was appointed governor in March 2020 – just as Covid began to spread. He said that the Bank has been in crisis management for most of the time since then, but he hopes the second half his eight-year tenure will be more calm.

He said if the news on inflation continued to be good there was a chance of the Bank becoming more “a bit more activist” in its approach to cutting interest rates, now at 5% %.

He defended the Bank’s response to the pandemic and global supply-chain problems, as well as the invasion of Ukraine. He rejected criticisms that he and colleagues had left the stimulus in place too long. This led to the highest inflation rate in 40 years and the need to increase interest rates by 14 consecutive increases from 0.1% up to 5.25%.

“I read some of these comments and wonder, do you recall what happened with the economy in 2020? We did fall off a cliff. Anyone who says that it was wrong to support the economy in the way we did and others did is just not realistic. He added that if the Bank hadn’t acted as it did, Britain could have fallen into a Second Great Depression. Truss is among the critics of the governor, claiming that Bailey was a member of the “deep-state” which undermined her brief premiership.

Bailey replied, “I don’t know what she is saying.” He added that he hadn’t met her. Truss’s troubles, said Bailey, were caused by her chancellor Kwasi Kwateng’s mini-budget, which resulted in a sharp rise in market interest rates, and possibly massive losses for UK Pension Funds before the Bank intervened.

“I remember Liz Truss telling me at the time that it was the Bank of England’s responsibility to handle it. We did. We used our intervention tools to deal with it. It is ironic that someone who has been so critical of regulators would then come out to say that the problem was the Bank of England didn’t regulate.”

Bailey said that accusations against the Bank of America made his job more difficult as governor.

“I’ll say one thing about what’s said about the “deep state”: running public institutions is not easy these days. I can tell.

The agenda is to make an institution as effective as possible.

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