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The governor of the Bank of England has defended the ringfencing rules that force UK lenders to separate their retail operations from other activities, saying that scrapping them would make mortgages and other loans more expensive.
Andrew Bailey said in a letter to the influential Treasury select committee, published on Tuesday, that bank bosses were wrong to argue that ringfencing hampered their ability to lend to UK households and smaller businesses.
“Removing the ringfence would most likely have a negative effect on UK lending, both in terms of cost and quantities, with banks directing funding from retail deposits away from UK households and SMEs and towards investment banking activities or activities outside the UK,” he said.
The regulations, which came into force in 2019, were introduced to avoid a repeat of the taxpayer bailouts of failing lenders that followed the 2008 financial crisis. Bank bosses have stepped up pressure on the government to wind back the more onerous parts of the scheme.
Bailey also told the Treasury committee on Tuesday that further UK interest rate cuts would hinge on whether wage growth slowed as expected over the course of the year, against a backdrop of global economic uncertainty.
He said he voted to cut the BoE benchmark rate by a quarter point to 4.25 per cent last month chiefly because the job market had loosened and businesses were expecting to make lower pay awards — with turmoil in global trade policy then tilting his view towards a cut.
“We’ve got a view which is that we will see pay coming down this year.”
“That’s going to be a crucial judgment going forwards, which is why ‘gradually and careful’ remain my guiding line,” Bailey added.
Sarah Breeden, a BoE deputy governor, told MPs she had seen enough evidence of the jobs market weakening to justify her vote for a rate cut, even before factoring in turbulence caused by US President Donald Trump’s tariffs.
But Catherine Mann, who voted to leave rates on hold at 4.5 per cent, said she was concerned both by recent volatility in financial markets and by an environment in which more volatile inflation could influence behaviour.
If inflation — which hit a 15-month high of 3.5 per cent in April — rose above 4 per cent because of short-term global factors, for example, that was “a threshold that may change consumers’ attitudes”, Mann said.
The BoE’s interest rate cut last month marked the fourth reduction since last summer, taking the cost of borrowing to its lowest level since 2023.
But the decision — taken as Trump launched his “liberation day” onslaught of tariffs — also revealed a three-way split.
Led by Bailey, a majority of five MPC members supported the cut, while two favoured a bigger, half-point reduction and two — Mann and chief economist Huw Pill — did not want rates to change.
Bailey said that, as well as intense uncertainty over the twists and turns of global trade policies, the impact of tariffs on inflation remained ambiguous: the hit to global growth would weigh on prices, but disruption to supply chains could have the opposite effect.
For the UK, the trade deal agreed with the US could mitigate the immediate effects, but “still leaves the average tariff level higher than it was before all this started”, Bailey said. “What affects our economy is always what the rest of the world does.”
Britain’s trade agreements with the EU and India would have longer-term benefits, however, both Bailey and other MPC members said.
Swati Dhingra, an external MPC member who voted for a 0.5 percentage point rate cut last month, said post-Brexit trade barriers meant the UK economy had both entered and come out of the pandemic in a much weaker position than its peers, with its share of global services trade shrinking “even though we are such a services superpower”.
The trade deals could “stem the tide” and pay off in future, Dhingra said.
