Andrew Bailey is leading the Bank of England through its most turbulent and politicised era

The new governor is flying in the dark without a map, surrounded by dodgy instrument readings and carrying some very noisy passengers in the back

In reality, the bank’s boss can’t do very much (Reuters)

The first thing to understand about new Bank of England governor Andrew Bailey is that he comes from Leicester, where everyone is very proud of him (especially those of us who went to the same state grammar school). He’s not Gary Lineker, granted, but still. I’d also like to think his background gives him that grounded outlook that east Midlanders are so known for.

The second thing – a bit more crucial, admittedly – is to understand that the governor of the Bank of England can’t do very much.

All the palaver about him being the most powerful non-elected figure in British public life may be true, but it raises expectations dangerously. The UK is an extremely open economy, which means it is easily buffeted by global trends that no one in the UK can influence: a downturn in China that triggers a near-recession in Germany, say – as we are seeing now. All the Bank (and HM Treasury) can do is react and use economic diplomacy to try to influence other nations. We cannot prevent revolutions or stock market crashes, or indeed predict them.

Nor can the governor solve the housing crisis; the Bank cannot build a single block of flats. Nor can it solve Britain’s productivity problem – the big one – by investing in industry or developing new software.

Nor can the governor and the Bank fix Brexit.

This is obviously the greatest challenge facing the governor and his team. They are set a remit every year by the chancellor and the one for 2019-20 is overdue, perhaps as a result of the general election. It will be interesting to see what Johnson’s administration will ask them to do. There is the ever-present danger of politicisation these days, and the risk of some bonkers line about Brexit being inserted into its role. And the Bank, I’m sorry to inform you, is powerless to resist such demands, however unreasonable.

As it stands, the Bank of England’s job is as follows: “To maintain price stability; and subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”

“Price stability” means an inflation target of 2 per cent. It is met by moving interest rates or creating new money, but with long and variable lags. (The governor has to do this with the agreement of the Monetary Policy Committee, with its independent members.) Thus an interest rate move now would have some immediate effects on the economy – on people whose mortgage payments change immediately, for example – but other effects would take months and years to work through, such as postponing big infrastructure projects. For its inflation forecasting, the Bank takes a time horizon of about two years, and works on the balance of probabilities of outcomes around that time.

Given the uncertain world we live in, it is remarkable that the Bank does as well as it does in setting rates at the correct level. Trump, election results, trade wars, bank scares, euro crises, terror and real wars: all can muck up the best of assumptions.

Now, of course, we have the added reality of Brexit – and still so many major uncertainties about that. These land right in the middle of the Bank’s monetary policy timescale, the early 2020s, and are impossible to predict.

Bailey and his colleagues do not know whether we will have a trade deal with the EU in a year’s time, or what the terms might be. No deal is on the table, whether it is a bluff or not. It might happen: a real crisis. It might not: a lesser but still major change, and one that is not entirely in Britain’s gift, either.

The incoming governor may have the benefit of knowing what is in the minds of Boris Johnson and Sajid Javid (no jokes, please), but much less idea about what Charles Michel, president of the European Council, and Ursula von der Leyen, president of the EU Commission, are thinking – let alone Emmanuel Macron, the French president.

The governor is flying in the dark without a map, surrounded by dodgy instrument readings and carrying some very noisy passengers in the back.

The one thing he can be sure of is that any new trading relationship with the EU will be less smooth than the current one, will add cost and complexity, and damage trade and inward investment, growth, jobs and confidence, other things being equal. These factors will have a dampening effect on demand and inflation. We also know that the UK-US deal, and the others, will take more than a year or two to agree, ratify and implement. So those will not take up any slack from a weakening position with Europe in the first half of the next decade (at least).

That is the broad case for keeping rates low, with inflation already low now – 1.5 per cent, a three-year low. The problem comes with what happens to the pound.

The usual way an internationally open trading economy such as the UK deals with an economic shock is through an exchange rate adjustment, tanking sterling. A cheaper pound will help maintain exports at a time of disruption, but it also means higher import costs. The Bank of England can discount this temporary effect if it is indeed a one-off. However, if it starts building through the system into an inflationary spiral through higher wages and prices feeding on themselves then the Bank would have no alternative but to take painful action, raising rates.

This would be politically deeply unpopular and unwelcome to No 10. High stakes, then.

A related issue here is another unknown; what will Brexit actually do to the UK labour market? It is, after all, already tight. How big an exodus of EU workers might there be? How low will new migration be under the vague and unspecified “points-based” system? In other words, how much will the supply of workers, relative to the demand for them, fall? And how much upward pressure on wages will that bring? Will firms absorb the new cost base? And if they do what will the impact on profits and investment be?

One might also chuck in the new ever-higher rates for the living wage pushing labour costs higher in everything from catering and hotels to social care and the NHS.

Nor is that all on Bailey’s medium-term agenda. The Bank of England will also have to find time to make contingency plans in due course for any rush to Scottish independence – again, you cannot rule that out. The break up of the UK would affect not just macroeconomic policy, but also the status of UK banking assets, savings, pension funds and insurance businesses domiciled and/or headquartered in Edinburgh. The same goes, although to a lesser degree, for Irish unification.

Under a Johnson government with a populist programme, the Bank may also have to take account of a potentially far looser attitude to British government borrowing, and what that means for the outlook for financial and economic stability. History tells us that markets can be impatient if they sense a government is running an economy for purely political ends.

Bailey is a man of the world, and is perfectly well aware of the personalities he is dealing with in government. As a Bank of England lifer and its former deputy governor, he has a loyalty to the institution that means he will do his very best to protect its integrity and keep it honest. I suspect he will be quite skilled at fending off most of the incursions – firmly, if needs be – and will be wise enough to pick his fights carefully and do so only in private: going public would only invite recrimination from this most vindictive and ruthless of governments.

So he will do the right thing, I’m sure, but there will be no fireworks under Bailey – or at least none visible from the outside of that impressive, impassive facade (Threadneedle Street, that is; although the same goes for the governor himself).