This week in Say More, PS talks with Howard Davies, Chairman of NatWest Group and former Deputy Governor of the Bank of England.
Project Syndicate: In May 2021, you noted that, despite Brexit, the City of London would remain Europe’s largest financial marketplace, but its Golden Age as Europe’s financial capital was over. With Prime Minister Boris Johnson’s resignation, the United Kingdom now confronts a new bout of political turmoil, compounding post-Brexit uncertainty. How might this affect the fortunes of the City of London, and the UK economy more broadly?
Howard Davies: There is no chance that either of the remaining candidates – former Chancellor of the Exchequer Rishi Sunak and Foreign Secretary Liz Truss – will change the government’s policy on Brexit. Sunak is more familiar with the policy’s regulatory elements, and there are some potential changes that may help insurance companies and the capital markets. But regulatory cooperation between the UK and the European Union – with which a memorandum of understanding has been negotiated but not signed – will remain blocked until the Northern Ireland issue is resolved. In the near term, London’s fortunes are in Belfast’s hands – an unusual state of affairs!
PS: Not long after the US Federal Reserve implemented an interest-rate hike that ran counter to its previous guidance, European Central Bank President Christine Lagarde announced that the ECB would shift to a “meeting-by-meeting” approach to setting its policy rate. In January, you warned that “the costs of losing control of consumers’ inflation expectations, which the leading central banks appear to have done, could be high.” Does the ECB’s decision to abandon forward guidance aggravate or mitigate that risk?
HD: The ECB is still playing catch-up, I fear. The history of central-bank forward guidance is short, and not at all sweet. The Bank of England tried it and failed under Mark Carney. The ECB’s experience has been similar: its guidance was rapidly overtaken by events. My concern now is that, since all three major western central banks were slow to react to inflationary pressures, the cost of squeezing inflation out of the system will be quite high.