ALEX BRUMMER: Bailey insists Brexit has “created opportunities” as he hails Britain’s prospects

When Prospect magazine hired Andrew Bailey for an interview, it was undoubtedly dreaming of a devastating narrative about the catastrophe of Brexit.

Bailey is not his predecessor, Mark Carney, who has been vocal about Britain’s life cut off from the EU.

In my own encounters with Bailey, before and after his appointment as governor of the Bank of England, he always seemed like a glass-half-full optimist when it comes to the post-Brexit UK.

In his interview with former FT editor Lionel Barber, the governor will have disappointed those who would like to see Britain cozy up to Brussels again.

When asked to rail against Brexit, he responded mildly that there would be “short-term” negative effects of reducing the openness of an economy.

Optimistic: Bank of England Governor Andrew Bailey argues that Brexit has “created opportunities for the City” with much of the market and industry still based in the UK

He pointed out that the UK will build new relationships in the long term. Financial services, Britain’s trump card, could benefit.

The assumption that Brexit will lead to a 4 percent fall in GDP over time, as the Office for Budget Responsibility predicts, is unproven.

Britain’s trade balance with the rest of the world has deteriorated. However, real GDP (inflation-adjusted output) since the Brexit referendum has been in the middle of the G7 club of rich nations, on par with France and better than Germany and Italy.

Bailey argues that Brexit has “created opportunities for the city” with much of the market and industry still based in the UK. This is despite efforts by President Macron, among others, to promote activities across the English Channel.

On other fronts, Bailey defended the bank against criticism that “groupthink” meant it was too slow to tackle inflation.

However, citing other central banks broadly aligned with Britain, he acknowledged a global, if not Threadneedle Street-like, mindset.

Prospect viewed the bank’s handling of the truss bond market eruption as Bailey’s finest hour. Bailey was quick to miss the mark in rescuing pension funds after Liability Driven Investments (LDIs) almost failed.

It is often forgotten that the warnings about the dangers of converting government bonds into derivatives have been heard for several years, but the bank responsible for stability has done nothing. It planned an escape route from the catastrophe that was on its radar, but did not react.

Bond interrupts

The mantra that the Tories crashed the UK economy is now fading as bond markets around the world have caught up with the Truss tantrum.

The herd instinct driving market trends has pushed American long-term interest rates to their highest in 16 years, and euro zone bond yields are at their highest in a decade.

Amid the alarm, Britain is in a downward spiral as the yield on long-term 30-year government bonds hits its highest level in three decades.

But the shorter two-year Treasury bond remains virtually unchanged. It’s the Americans, not the Brits, who pay 7.5 percent for a 30-year, fixed-rate home loan.

The financial markets are finally realizing that the era of extremely low interest rates is over. The fixed rate hike is a recognition that Joe Biden’s fiscal failure, so admired by Labor, carries economic costs comparable to unfunded tax cuts.

It also doesn’t help that the political stalemate on Capitol Hill means last week’s extension of the debt ceiling – the total amount of debt accumulated by the US government – is a very short-term solution.

Toxic American politics is now driving bond markets as the presidential election approaches next year.

Troubled water

As a supporter of the northern leg of HS2 you can only be horrified by the cancellation.

It would have been a bold move to bring in new management of world-class engineers from the private sector. Instead, the country was presented with a list of “new” projects worth £36 billion, such as the electrification of the Trans-Pennine lines, which have long been evidence of inaction and are “unfeasible”.

It’s great that the funding is being allocated to the North and Midlands. Many of the projects feel familiar and there is no guarantee that resources will ever be released.

Meanwhile, voters in London and the South East are likely to be saddened that the historic Hammersmith Bridge remains closed to traffic after three years of incapacity: a familiar story.