The Money Gains Podcast
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The Money Gains Podcast
Bank of England Senior Advisor Reveals: How The UK Economy REALLY Works
From interest rates to inflation - this is what you really need to know 💸
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In this episode of the Money Gains Podcast we welcome Bank of England economic advisor Jack Leslie to the show.
We chat about the things that really matter when it comes to what's happening with your money.
This episode reveals the intricate processes behind Britain's most powerful financial institution, exposing how decisions are made that directly impact millions of mortgages, savings accounts, and the entire UK economy.
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Bank of England online https://www.bankofengland.co.uk/
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✅ Why the Bank of England's basement contains 1/20th of all the world's mined gold
✅ How your mortgage rate is determined by what banks think interest rates will be in the future
✅ What Taylor Swift has to do with interest rates
✅ Why cash usage is rising during economic uncertainty
✅ How a Central Bank Digital Currency could replace traditional banking
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This video is meant for educational purposes and should not be considered financial advice. When you invest your capital is at risk. Past performance is not a guarantee of future success.
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Welcome back to the Money Gains podcast. Do you ever look at interest rates changing and think, what the hell is going on here? Well, joining us today is the Bank of England's economic advisor, Jack Leslie. Jack, welcome to the Money Gains podcast, man. How are you doing? I'm good, thanks. How are you? Mate, I'm good. I'm good. It's like the weather's changed in London now, hasn't it? It's got a little bit like, do you wear a jacket? Do you not?
Speaker 01:Yeah, it's definitely reached awesome vibes, right?
Speaker 00:And you've literally walked over from here as well, right?
Speaker 01:Yeah, about a 25-minute walk. Yeah, over the river. Yeah.
Speaker 00:Amazing. And for context for everyone today, you are an economic advisor at the Bank of England.
Speaker 01:Yep, that's right. Yep.
Speaker 00:What does that mean?
Speaker 01:So, I mean, my day job is mostly writing about the economy. So I like look at data, try and work out what's going on, put that into documents and reports for the outside world to try and tell everyone what the Bank of England thinks is going on.
Speaker 00:And it must be like really interesting going to work in that building at every day, right?
Speaker 01:Yeah, I mean, it's quite a building. If anyone has been in the centre of the City of London, it's really the heart of the financial district. It's this really historic building. So you definitely get the kind of grandeur as you go through those sort of big doors in the front. And, you know, there's big vaults underneath the ground. So it's quite something, yeah.
Speaker 00:Is it full of gold like they say it is?
Speaker 01:Yeah, so it's about a 20th of all the gold that's ever been mined is underneath the floor in the Bank of England. It's so cool. more floor area below the bank of england than there is in the in tower 42 which was i think the uk's tallest building at one point definitely not anymore but uh yeah
Speaker 00:oh really what from like square footage
Speaker 01:yeah square footage yeah
Speaker 00:wow i didn't know that so it is it is literally enormous yes it's like a city within itself down there
Speaker 01:a little bit yeah
Speaker 00:do you um does it like how how like to go down there and when you get down there is it kind of like a really cool experience especially when you've been there and you're probably a like oh yeah whatever now but like when you first go down there and you're just like this is unbelievable that this exists
Speaker 01:I think it is a bit surprising I mean there's obviously there's big sort of doors everywhere and there's concrete I mean it's not very glamorous it's all sort of you know dusty corridors and things exactly it's got a bit of that vibe but I mean you know it's a working office too so you know there's a gym down there and things like that so you know
Speaker 00:so if something does happen to London then you know where you're going you're going straight onto the bunker basically that is an option yeah that would be a bad way to go with a big pile of gold like it'd be quite good fun but for those who don't know would you mind like explaining because I think people look at the Bank of England and they don't really understand fully what the bank actually does and I'd love to sort of hear it from someone like yourself that works there and really understands it because yeah it's way wider than what people think
Speaker 01:yeah so the Bank of England it's it's not like other you know high street banks it's not like HSBC it's part of the government and it's been around for over 300 years. And it's kind of when it was set up, it had this sort of tagline, which is still very much part of what the Bank of England sort of thinks about itself now, which is to promote the good of the people of the United Kingdom, which it does through kind of a few different ways. So it's targeting monetary stability, which is kind of a fancy way for basically saying inflation should be low and stable and predictable. And financial stability is the other big one. So that means, you know, your insurer, your bank, you know, are protected they're not going to go bust or if they do your money is protected anyway and then it's got a sort of a bunch of other different responsibilities so for example it runs payment systems so when you you know tap your card at a till there's a little bit in the basement of the Bank of England that kind of goes where eventually and so to make all that work the Bank of England is responsible for bank notes so if you if you ever kind of look in your wallet and see it you know everyone has in England or Wales has you know the Bank of England's logo and responsible for making sure they get where they need to go and they're secure. And yeah, look after the gold that's in the basement
Speaker 00:too. So obviously the big ones, your interest rates, right? And that's what everyone sees on the news. You see, you know, Andrew Bailey up there having his moment telling everybody that it's either going to come down and everyone goes, woo, or not. And that's what they see, but that's just a small part of it.
Speaker 01:Yeah, I think that's fair. I mean, you know, interest rates are probably the thing that gets reported on most often because it's sort of lots of times a year there's a meeting and, you know, they might get, you know, they get announced, they might get changed. And, you know, that is a really important part of it. But yeah, there's lots of else.
Speaker 00:And that's called the Monetary Policy Committee.
Speaker 01:Yeah, that's right. So the Monetary Policy Committee, so it's nine people, five kind of internal sort of bosses at the Bank of England, as well as four external members who are kind of there to sort of challenge and make sure that there's not kind of groupthink. They, yeah, they get together eight times a year, decide interest rates and that's kind of one of the core ways that the bank tries to make sure that inflation is low and stable.
Speaker 00:So what are they really looking at in that meeting they're getting together? You mentioned this and obviously people are super interested to hear about how they're making these decisions in relation to those rates that they're receiving either free savings or on their mortgages.
Speaker 01:Yeah, so it's probably worth starting with what they're sort of trying to achieve. So low and stable inflation. I mean, people hear kind of inflation knocked around all the time. It has quite a specific meaning for the Bank of England because the government sets what the kind of target is, and that is 2% a year. So that means on average, if you took sort of everyone across the country, average everything that we all buy, you know, I don't have a car, so I'm not paying for petrol, but someone else is going to have a car and they're paying for petrol. You kind of average all of those things up, work out what's going on the prices, see how they change year to year. And so 2% inflation means that on average, if something cost £100 last year, it would cost £102 this year. That's the kind of goal. And so that's what they're kind of trying to achieve. And they do that through setting interest rates. The Bank of England sets one interest rate called bank rate. Often might get called base rate as well for kind of historic reasons. But they set this one interest rate and that sort of feeds through to the wider economy. So, you know, it will affect if you have a mortgage, it'll eventually affect that. If you had a credit card, it'll eventually affect that. Savings rate, sort of everything you can think and eventually sort of gets there. And that helps to kind of either stimulate the economy or cool it down. And that means that you can then help to that overall average price changes over time. You can kind of control that and keep it out that low and stable 2% target that the kind of government has given the banks responsibility for.
Speaker 00:Okay. And then so that's their goal. And then when they get in that meeting, what's happening there?
Speaker 01:Yeah, yeah. So there's there are a lot of meetings that lead up to each individual decision. Just
Speaker 00:turn up a day ago, that one. Yeah, yeah, yeah.
Speaker 01:Just a dartboard. That's not quite what they're doing. So there's, you know, kind of a couple of hundred economists or so, people like me who go away, look at all the data, try and bring it together. So, you know, that means everything to do with prices, everything to do with sort of economic activity that's going on. There's also a network of, we call them agencies. So these are kind of hard offices that are all around around the country and so there are specialized economists that go out and meet businesses so day in day out you know from you know a sole trader all the way up to the household sort of high street uh sort of names that you know um and they ask them what's going on the economy and that all gets sort of fed back in and so all of this kind of stuff gets um funneled into to what's going on to try and understand trends where the economy is going what's going to happen in the future um and then these nine these nine members of the committee they they discuss it and they really you know they go for it i've been in some of the rooms they'll you know they have disagreements they'll they'll kind of really challenge what's what they what things going on they have different views and then they all vote on what they want to do with interest rates and so when there's a majority for a particular decision that's one that kind of gets taken whether you know uh interest rates should go up or down or stay the same
Speaker 00:yeah and it's always very close like recently it's been very close like it's been like five four and it's quite like so then like there must be disagreements happening for there to be you know up or down And then you see the votes change sometimes as well, which is super interesting.
Speaker 01:Yeah, absolutely. I mean, you know, these people who are on the committee, they take the job very seriously. So, you know, they're looking at all this stuff. They're trying to kind of make the right decision. And to be honest, you can kind of sort of look at different bits of data and think different things. You know, some people might put more weight on, you know, what's going on with the labour market, how many people are unemployed. Some people might be looking more at price statistics and sort of what's going on there. And, you know, they're weighing them up differently and coming to different judgments. And yeah, you're right. It's been really close over the kind of past few months. Lots of decisions have been quite finely balanced. And that's because, you know, we're in a period where the economy is quite uncertain. You know, there are big global things going on. We've obviously been through some big, economists call them shocks. So, you know, we had obviously the pandemic, which has long-term consequences. Russia's invasion of Ukraine really pushed up energy prices in Europe. And so kind of dealing with all these different things and how they play through the economy and what's going on is tricky.
Speaker 00:That's why I want to have you on, because it's not just an interest rate decision. You are really deeply looking at the economy and then making a decision which obviously affects millions of people. So you've got to get it as right as you possibly can.
Speaker 01:Yeah, and I think some of these things probably look more detailed than you might imagine. For example, last year, some of the inflation numbers that we were getting were particularly high for hotels. So they look at really detailed things and he was like, oh, why are prices going up for hotel rooms so much? And there was a question of like, oh, Taylor Swift was on tour. Was it Taylor Swift? And so people are going, well, what dates was she doing? Where was she? Does it look like that was the driver? And the answer was it probably wasn't, but Pink was also on tour. So maybe it looked like it might line up a bit better with Pink having an effect. So these things, we go into a lot of detail, kind of really digging into understanding these things.
Speaker 00:It's like Oasis said that they were going to drive a billion pounds to the UK economy I would love to see that data.
Speaker 01:Exactly. And, you know, this stuff does matter because it can, you know, it can have an effect on sort of, you know, people's economic lives and what actually happens.
Speaker 00:Yeah, no, absolutely. So that's so cool. So you've actually sat in some of those meetings then as well and seen it all live.
Speaker 01:Yeah, I've heard the NPC talk about Taylor Swift. Talk about Taylor
Speaker 00:Swift. There we go. There's the TikTok click right there, the NPC and Taylor Swift. But I would love to unpack the interest rate a little bit more because Once the moment it's set, it has such a wider ramification than just your savings and your mortgages, even though that they are the two key factors of it. Could we start by having a look at those two things and really the effects that it has on the rider economy from there?
Speaker 01:Yeah, yeah. So this is sometimes maybe a bit kind of mysterious because, you know, it just comes on the news that interest rates have changed and sort of what does that mean? So as I said, so the Bank of England sets this one interest rate called bank rate and this feeds through into the wider economy. kind of through the financial system. So basically every high street bank that you could think of has their own bank account with the Bank of England. And so they basically sort of have a current account in the same way that you or I might have. And that bank rate that the Bank of England sets is the interest rate that they get on their current account. And so when that changes, it means that they're getting a new interest rate on their money. And so it affects the decisions that they make. So if you put yourself, imagine I'm a bank and you're coming to me, Sammy, and you want to get a mortgage.
Speaker 00:Can I have a million pounds mortgage, please?
Speaker 01:Yeah, yeah, yeah. A million pound mortgage. You know, so interest rate, bank rate at the moment is 4%. Yeah. So I, as, you know, I don't know, Lloyd's say, could go, well, I can stay, I can put my money in my, you know, current account at the Bank of England to get 4% return. Right. Or I could go to, well, Sammy wants his mortgage. I could lend him the money. What return am I, what am I going to, you know, offer you as an interest rate? Well, you know, it's a bit expensive for me to offer you the mortgage. I'm going to have to do some admin. You know, I'm sure you're good for it, but maybe you won't pay me back because there's a little bit of extra risk there. The Bank of England isn't going to go bust, but I'm sorry, you might not pay back. And so they go, well, we'll give you that 4% plus a little bit extra. That's the interest rate you charge. And so that's how it kind of feeds through into mortgages. And that's true of kind of all loans and savings accounts are the same, but sort of in reverse, they'll kind of give you that minus a little bit for kind of costs. And so that's how it ends up being the case that that sort of decision that nine people are taking affects your finances. And that has a broader impact then on the economy. So when sort of lots of people are sort of feeling good about the economy, you know, incomes are going up, people are kind of positive, they might be going out and spending quite a lot of money. If you're running a business, you're seeing lots of people come through your door, you know, there's lots of demand, maybe you're kind of struggling to keep up. Well, you go, well, I'll just I'll stick up my prices a bit. Because that means that, you and you know people seem seem keen uh and vice versa you might have the same you know if people are like there's lots of unemployment or people are struggling you know you you kind of have the reverse maybe businesses sort of have to start cutting prices what interest rates do is sort of kind of counterbalance those effects so when you put up interest rates it makes it more expensive to borrow so mortgage you know credit card everything like that but also makes it kind of encourages people to save because you get a higher return your savings account so when interest rates go up people go well i'll borrow a bit less i'll save a bit more and so I'll spend less and so if everyone kind of across the country you know everyone's been affected by this starts making that decision that affects that kind of demand those businesses are seeing so interest rates are higher fewer people are coming through the door and they go oh well I probably can't put my prices up and that's why you kind of have that impact on inflation through interest rates
Speaker 00:and I suppose on the loan side of things as well it's like someone wants to start a business you know it might be harder with a bigger rate on their loan so that you know there's not as much stimulation for new things at that time but they're getting great savings rates so there's the counterbalance
Speaker 01:yeah exactly so that i mean we kind of gave that example and kind of sort of at people level but businesses are exactly the same right you know you're going well shall i shall i you know build a new factory well i'm gonna have to borrow money for it
Speaker 00:exactly
Speaker 01:so there's that expansion exactly you know whatever that whatever they're doing and so higher interest rates sort of might sort of put a kibosh on on on investment that happens as well um and so that that's you know and vice versa if interest rates go down you can you can boost that that kind of activity. And so you see those kind of, yeah, that impact too.
Speaker 00:So then really interestingly, if you're like an everyday person listening to this now, like the less risky you are with that provider and also subject to the provider and what they're willing to take, is that called a spread?
Speaker 01:Yeah, exactly. So that gap between sort of the kind of savings account, you know, at Bank of England minus a bit and the kind of the borrowing sort of Bank of England plus a bit, those are spreads. And yeah, so, you know, the more likely you are to pay to pay you know the less to pay back the the bank that you're borrowing from is going to be less worried about that they're going to kind of ask for a little bit less um
Speaker 00:yeah yeah and they do that to me recently like our loan to value went down and our rate came right down so it was like well it's because you're technically borrowing less and you have more equities let's risk so they're willing to like lower your rate for you but i you know it's confusing because you see it on on the um on the news or in the papers or online and you're like i've one's like, well, your mortgage has gone down, but it hasn't because often you're in a fixed rate. How does that normally work then?
Speaker 01:Yeah, so fixed rate mortgages, I mean, in some ways they work the sort of same as the way I just laid out, except there's kind of an extra step in the journey, which is that the kind of what matters for the bank when they're making that decision is what they think the bank rate, that kind of central interest rate that the Bank of England chooses, how that's going to move in the future. So, you know, if I were, again, let's go back to that million pound mortgage that I I'm offering you as a bank. Thank you so much. You know, so interest rates are 4% today. But if I was like, oh, I think that the Bank of England, they're going to whack up interest rates, say, to 5%, you know, I'm not going to give you 4% plus, you know, I don't know, 0.5%, four and a half, because then I'm going to be lower than I would be for, you know, the five years.
Speaker 00:I'm losing money halfway through the time. Yeah,
Speaker 01:exactly. So kind of expectations around how these things move are also really important. So there's kind of financial market sort of pricing you know people are trading interest rate sort of instruments they're going on and so it's those kind of financial market sort of trading and the expectations there that are kind of the thing that ultimately sort of will affect the price that you get offered which the economist way of putting it is the price but it's the interest rate
Speaker 00:I'm 100% going to show my other half this because I tried to explain it to her and I did not put it as eloquently it's like the thing is because she's like well the rate on the telly says this why are we getting this and that you have to explain that process. So I think, you know, that made me think, well, I've got to ask Jack that because, you know, it's such a big thing. And it's sure everyone looks at that and then thinks about it and they don't really understand what then goes in and the steps in behind of all the actual rate you get given and what you end up paying each month. But a large part, obviously, of that interest rate decision is the big bad wolf in the world, Mr. Inflation. And the changes have such a dramatic effect on how that plays out. And right now we're in a very challenging time where everyone wants to see rate cuts because they're higher than they have been traditionally, say, for the last sort of 15 years or so pre-COVID. But inflation is quite sticky and has been jumping up or jumping down a touch here and there. That's such a challenging decision, right? And so how does that rate decision really affect what you're going for in terms of your target inflation?
Speaker 01:So the target is always that two percent that's what well you know that's what the government uh you know sets the bank of england to off to go go do so that's always what the kind of bottom line is for the mantra policy committee that's that's that's where they want to get to they're kind of weighing up um sort of uh where things are going to go in the future in the economy because interest rates sort of they take time to affect you know it has to go through the bank the banks have to you know take into account that the bank rate has changed and how that affects the pricing you also that can take a while to sort of feed through to um household sort of finances you know if you someone has a five-year fixed mortgage you might still be in the case that you were you got it when you interest rates were low and so you might be that you've actually still not experienced the fact that interest rates interest rates have gone up so these things these things kind of take time to appear which means that the monetary policy committee when they're deciding interest rates today for the future they need they need to think about where inflation is going to be in one or two years time and so that's where you know inflation is above target at the moment but They need to work out, well, you know, what level of interest rates do they set today? That means that, yeah, when, when, when it has a full impact, will you be back at that 2% target?
Speaker 00:That's such a good point because I actually didn't think of it like that as well. You're right. Because like, yeah, you're right. You're the mortgage five years time. I've got friends that have coming off their, their, you know, 1% rates that they got in 2020. I'm like, oh my God, I got bumped up in like 2023. I think we had to remortgage. So we got hit hard. Like we were right at the peak. but there's nothing we could do about it you just had to run with it and that's when you play the game of like should I fix for two years or should I fix for four or five or what do you do and yeah luckily we did it but On the savings side, they're seeing their rates come down, but their mortgage hasn't come down yet. So it's like, it's tough, isn't it, in those times? And that's why it could be playing out over long periods of time.
Speaker 01:Yeah, absolutely. I mean, I think sort of people, you kind of hit the nail on the head that people can be in really different situations. You know, if someone doesn't have a mortgage, maybe, you know, they own their house outright and they've got a lot of money in savings, you know, interest rates being cut is just bad for them. You know, they're getting less money. At the same time, yeah, you've got people who are kind of on the flip side um who uh you know interest rates coming down now maybe they were on a floating variable rate mortgage uh you know so every time there's an interest rate cut you know that's kind of pounds in their pocket um so you do you do get people in quite different different circumstances
Speaker 00:so you're obviously influencing this decision no doubt in some way shape or form with the work that you do with the team that you have you mentioned there's nearly 100 of you right is
Speaker 01:it i think it's about probably about 200 economists feed through in one way or the other into the monetary policy committee. I mean, they'll do other things too. They'll sort of work for other bits of the bank as well, but yeah.
Speaker 00:That's wild. And so you're obviously looking at enormous levels of data, but what are some of the big key indicators that they look at? Obviously, you mentioned the hotels and things like that before, and it's great to hear that Andrew Bailey's talking about Taylor Swift, but there must be some real key big ones that they look at, and yeah, I'd love to know what they are.
Speaker 01:Yeah, so I think that the most important one is what is going on with inflation so that aggregate inflation number also another key one so it kind of is a bit of jargon that gets sort of knocked around GDP which yeah economists are really not good at naming things so it's gross domestic product all it really means is just how much are people producing in the economy so you just add up everything that everyone does and sort of you know work out how much that's worth and that's what GDP is so if we if there's kind of positive GDP growth that means the economy is growing there's sort of more economic activity and sort vice versa. If it's slowing and there's a recession, that means there's a shrinking. The labour market is really important. So unemployment and employment and something called the participation rate, which is the proportion of working age people who are either unemployed or looking for work, but they're kind of, you know, part of the labour market. All of those things are really important because they affect what wages people get. So that's another key thing. And so wages are the kind of the biggest sort of cost for And so if wages are going up fast, that can affect, you know, businesses' decisions. And then financial markets is probably the other really big one. So, you know, the Bank of England is sort of constantly looking at what's going on with interest rates, asset prices, so things like, you know, stock markets, bond markets, you know, sort of lots of more technical things as well. But, you know, currency, so what's going on with exchange rates between, you know, the pound and other currencies. So there's kind of, you know, anything you could think of really the Bank of England's trying to look at and understand.
Speaker 00:You mentioned like obviously we've had like Donald Trump and tariffs recently like that there's global effects to this as well and does that play into how you would think because obviously we're trading with these countries and you know goods are moving and cross-border and equally digitally as well.
Speaker 01:Yeah the global economy is really important so when we have a kind of area of the bank that's sort of you know that's its focus is on in what's going on I mean and it's particularly important for the UK because you know we're quite an open an economy so that means we do a lot of trade relative to the size of our kind of economic output and that's kind of been sort of true for a long time and so you know and we're relatively small compared to say kind of if you took the EU as one economy or the US or China they're kind of bigger and so if you know something happens in one of those areas that can you know move the UK economy so understanding the things that are going on and you know the US government sort of changes on tariffs is is one one really important story you know we know that it's starting to affect uh trade flows around around the world and the prices of those trade flows as well so you know uh that can feed through into the uk economy through you know if for example china was sort of exporting something to the us but now there's a new tariff for the us well you know that chinese exporter might go well i need to find a new market so i'll go and find someone in the uk to to buy my goods but maybe i'll have to cut my price a bit to make it so that they will accept it until So actually you see a reduction in prices as a result of a US tariff on China. So you have to think about the network on all this stuff is really important as well. So there's lots of different parts of it. That's
Speaker 00:so true. So you may see, say, China selling, keep it simple, timber to the US. It's now no longer there, but they have to drop the price in the UK. That then affects house builders, multitude of different things that would then be going on in the economy because they're buying that commodity or product or whatever that might well be and there's so many wider effects.
Speaker 01:Exactly, and that's a knock-on. There are knock-ons for each of those steps. And also, if you're a timber trader, a timber producer in the UK, and now there's a cheaper Chinese competition, that could sort of negatively affect you. So there's kind of things can go in lots of different directions at the same
Speaker 00:time. Yeah, of course. Wow. No wonder there's 200 of you. Because that seems like a serious bit of work. And even just to get right, but then you're obviously forecasting, I would imagine, quite heavily as well.
Speaker 01:Yeah, so I mean, it's not the only thing kind of that people are trying to do, but producing forecasts is something that the Bank of England does. So kind of quarterly, so four times a year, the Bank of England publishes a kind of a big forecast, which says kind of what's kind of likely to happen over the next three years. And that's obviously, you know, trying to tell the future is pretty tricky. But it's a kind of useful mechanism to sort of make sure you think through properly what are the effects of these things because you have to say, well, what's going to happen to the prices in a year's time? Well, you have to be like, I have thought about, you know, the tariffs. I've thought about what's going on in the labour market with wages or, you know, everything else as well.
Speaker 00:I suppose you must make a sort of, like you would with an investment in a way, you make a sort of calculated risk associated with each scenario and how that could affect.
Speaker 01:Yeah, you definitely see, I mean, actually this is something the Bank of England is doing a bit more than it used to, is doing kind of scenario analysis. So yeah, exactly. You want to look at, well, you know, we don't know exactly what the U.S. government's going to do on tariffs or maybe... I don't think even he knows. If they were at that level, then, you know, that might mean this for the economy. If they were at kind of that opposite level, you know, that might mean something else. And so trying to sort of think through those is, yeah, as you say, I think it's a great analogy.
Speaker 00:Okay, interesting. This is blowing my mind because it's so in-depth. And I'd love to know from you at the moment, you're obviously facing a lot of challenges, the economy, rising inflation, interest rate pressure. It must be a very challenging time at the moment for the banking England like how are you guys managing that decision making process and what's the changes that you're making because of all of this?
Speaker 01:Yeah I think it is challenging I mean whenever inflation is high or you know obviously it's always going to be the case that people are kind of struggling in the economy and that's you know it's the job of the Bank of England to try and improve people's economic lives through kind of making the right decisions and so whenever things yeah inflation is above target and that is challenging and when it's kind of there's so much on certainty as well you know both kind of in the UK but also in that global economy it makes it's got a job harder and so you know the kind of the way to deal with that is to try and sort of make sure you're kind of doing the analysis as well as possible giving those nine members of the monetary policy committee the kind of the best chance to kind of make the right decisions and there was a review done by former head of the US Federal Reserve so that their central bank to kind of improve processes in this area. And so lots of that work is going on to try and make sure the kind of underlying processes, things that like some of the kind of data systems that we have are improved. And so we can kind of do that analysis as quickly as possible and kind of as accurately as possible and all that kind of stuff. So that's always kind of going on behind the scenes. I imagine AI was helping you do that? I mean, you know, so yeah, it's sort of trying to work out how that can be useful in people's jobs, but also just actually working out what AI is doing to the economy at larger is something that's really important. Very true. And it is, you know, it's something that people are trying to think about.
Speaker 00:Yeah, certainly makes job easier, but then also scary when you think about it from like an economic perspective of like how many jobs is this going to change and how rapid that's going to be.
Speaker 01:Yeah, and it's always tricky. I mean, there have been lots of sort of big technological changes in the past and sometimes these have come with, you know, people's, you know, jobs have just got better, you know, safer machine and sort of you know you can have fewer people working in kind of a dangerous situation for the same amount of output and you know people find new jobs to go and do and so that's sort of everyone wins and then there probably have been some technological changes in the past where you know some people have kind of probably benefited more than others and we've seen unemployment go up and so you know sometimes it's quite hard at the outset to know exactly sort of which way some of these things will go.
Speaker 00:Yeah I'd love to know as well do you do you look online like at the sentiment things and the way people are feeling and online as well is that something that plays into it because obviously that's a new thing that's not necessarily like very obvious as such with a number.
Speaker 01:Yeah, I mean, yeah. So do you look at that kind of data? I mean, so Google Trends is a place that you can, so that's a kind of data set that Google allow you to basically look at how frequently people are searching for various terms. And so one thing you can do is to look at how many people are searching things like redundancy. And that gives you a kind of an early steer on actually, oh, are people worried about their jobs and you can sort of kind of, yeah, get a handle on that. So all that kind of data is something that you take into account.
Speaker 00:Love it. Okay, so aside from interest rates, we hear about, you know, something called quantitative easing, QE, and it's another fancy term, isn't it?
Speaker 01:Yeah, another really bad branding, I think, from
Speaker 00:economists there, but yeah. Damn you guys. No, like why is it important and why does the bank use it?
Speaker 01:Yeah, so the bank really, so quantitative easing is this thing that's been done a few times since 2009. And I think it's been done for kind of a couple of different reasons. So, I mean, taking the example in 2009, so we had the big kind of global financial crisis that happened. Unemployment was around 8%, kind of close to double what it is now. You know, people were kind of worried about how we were going to stimulate the economy. The MPC, the Monetary Policy Committee at the time, you know, cut interest rates as much as they could. And, you know, there still worried that the economy was too weak and inflation was going to be too low. And so they needed another way to stimulate the economy because interest rates are quite hard to cut interest rates below zero for kind of quite a lot of technical reasons. But one easy way to think about it is if imagine your bank started charging you, which is what a negative interest rate would be to have money in a savings account. I'm going to put my money under my mattress in cash because that doesn't cost me anything. And so it's quite hard to cut interest rates below that level. So they reached 0.5%. percent then, and the Bank of England at the time was a bit kind of, ooh, but maybe can't go further. And so quantitative easing was another way to stimulate the economy. And people might be kind of aware of it in a sort of, it was a sort of money printing exercise, which is, there's a little grain of truth to that. It wasn't quite what the Bank of England was doing. So it has got sort of banknote printing presses up the road in Debton and Essex, but they didn't turn those on extra hard. So what they did was they basically kind of created digital money and use that to buy financial market assets, particularly government bonds. And so these are things that are owned by pension funds, insurance companies, sort of financial firms like that. And what happens if you buy those bonds, it reduces the interest rates on them. That's kind of how it works. And that sort of feeds through into other interest rates going in the economy. So it was a way of going beyond just setting that one interest rate bank rate to sort of target the interest rates that are kind of more broadly out there and lower those down. which again, sort of the same mechanisms we talked about earlier to boost the economy. So that's kind of why QE
Speaker 00:was done. And that floods into the economy via those mechanisms.
Speaker 01:Exactly. Yeah, yeah, exactly. So, you know, yeah, it sort of helps, you know, in the same way that setting a bank rate, you still get the same kind of benefit to reducing mortgage costs and things like that eventually. In 2020, the Bank of England did another round of quantitative easing. That one was a bit more to do with financial market stress because, you know, if you think back to the kind of early 2020, you know, going into to the pandemic. You know, obviously everyone was kind of rightly sort of really worried what was going to happen. Financial markets were no kind of exception to that. So it was a way of sort of smoothing out sort of financial stability issues in the market. And so that's kind of, it was also used to that to kind of chill everyone out.
Speaker 00:Yeah. And obviously you see like the bank unwinding QE, the bank maybe considering it again. Is there a level of printing which is like printing or adding money into the economy which is kind of constant, or is it more done in waves and then you bring it back to zero kind of thing?
Speaker 01:So quantitative easing is very much done on a sort of, we need to respond to a challenge that's going on in the economy, and as you say, it's being unwound now through a catchly title, quantitative tightening. But money creation does sort of happen sort of naturally all the time. So the Bank of England is printing banknotes. That happens based on demand for themselves So, I mean, one thing that happens every year is people use cash more in the run up to Christmas, you know, whether that's to give gifts or that, you know, they're just buying more things in shops. And so the Bank of England sort of will print more or release more money that they have already printed into the economy at that point because people want more cash. There are also some sort of techie things going on in the background on sort of payment systems and things that can affect it. Though actually sort of private banks are kind of the main way that sort of money creation happens in the economy
Speaker 00:it's so interesting isn't it because you hear a lot of people talk about that you know we've got we there's money printing happening but it happens in such a like different ways and at different rates and different levels due to what's going on and then you know it's just really interesting to hear it from you so I'd love to like understand as well because you've mentioned it a couple of times we've spoken about banks we've spoken about financial markets and you play such a massive part in keeping these stable and we had 2008 which you mentioned and that was obviously in a crazy time Lehman Brothers etc all of these types of massive events happening and obviously since then there's been you know measures taking place or something like that doesn't happen again but how does the bank really affect these banks and financial markets as well?
Speaker 01:Yeah I mean it's a great question so I think the Bank of England kind of has maybe two or maybe three ways sort of key things that it does for that so one thing is, so again, another terrible economist term, microprudential regulation. Oh,
Speaker 00:wow. That's a good one.
Speaker 01:All that means is, so there's a bunch of people in the Bank of England. There's a kind of area of the bank called the Prudential Regulation Authority, the PRA, which was created after the 2008, 2009 crisis, which they're kind of, they're called supervisors. They go out and they look at those individual firms. So they'll, you know, go to your high street bank and they'll kind of check, you know, how are you running your system You know, what's your kind of financial performance? You know, are you kind of making sure that you've got enough capacity to absorb losses if something bad goes
Speaker 00:wrong? Yeah, how much leverage you've got, except all of these things. Exactly. And so
Speaker 01:they set rules around that and make sure that they're being followed. And so those are kind of individual firm, you know, businesses that they're kind of targeting. There's also a kind of, a sort of, that was micro prudential, there's macro prudential, which, so the financial policy committee is now the committee at the Bank of England sort of oversees looking at the financial system as a whole so one of the problems in 2008 and 2009 was that people were thinking about each individual bank on their own but they weren't thinking about how actually if they all got into trouble at the same time that would be a problem and so now which seems with hindsight very bad that people had missed that but so now there are people specifically kind of looking at that financial system whole and looking at sort of different places within the system that risks could occur that that might not be sort of where you would normally normally think of. So, you know, they're not just looking at High Street Bank or an insurance firm, but they're looking at kind of very different types of financial institution or networks and things like that. And so they have various kind of tools they have to try and make sure that that's stable. And the third one is sort of kind of partially between the two, which is if things do go wrong, we now have more tools than we did to kind of get things back up and running. So we have a thing called resolution, which is if a bank were to fail, we now have lots of extra tools so that we wouldn't need to kind of go to the bailouts that we saw the government doing in 2008, 2009. And they'd, you know, there's things in place and strategies in place to make sure that it protects people's money. So, you know, anyone who's got a savings account in the bank or, you know, businesses, everything like that. And so those institutions, particularly if they're really big ones, that if they get into trouble, it's not going to be, it's not going to have such a widespread impact. And things like that are sort of part of that for For example, people might have seen whenever they get something through the letterbox about their bank account, they might see a little logo with FFCS on it.
Speaker 00:Yes.
Speaker 01:Yeah, so that means the first £85,000 of any savings accounts that you or I have or a current account or a savings account in a bank is protected. So if something went wrong, that's guaranteed. You get that money very quickly and that's financed by the financial system itself.
Speaker 00:Is that managed by that committee?
Speaker 01:So the Bank of England sort of feeds in to it a bit but it's kind of it's a separate institution
Speaker 00:but yeah because that's such a like massive protecting factor of being with said financial institution seeing the FSCS protection on that account but it's brilliant because it's across your ISAs your current accounts and but it's per financial institution which is something which people are like well I've got 85,000 pounds in my current account and I've got 50,000 in my savings account but I'm with Halifax or someone for example and I'm like well it's not the only the first 85 is protected.
Speaker 01:That's right. But if you sort of moved the rest into a different firm, that would then
Speaker 00:be protected. Yeah. And people worry about that a lot. We get that question like, hey, I've just hit it. What do I do? And I'm like, well, it's a tough one to say because then you're managing multiple accounts, which can have its challenges. But some people are okay with that. So you've got to kind of make that decision. Now, we've mentioned, obviously, as a part of the financial markets themselves you obviously going into banks and assessing that they you know they are sort of making sure they're getting through these assessments with financial markets in particular pensions and bonds etc what are you looking at there as a bank and how are you playing into that with decisions that you're making
Speaker 01:yeah there'll be lots of different metrics that people people are looking at so there's kind of financial market data to sort of see the health of these things so for example you can see how much a particular financial asset might be traded and sort of the difference between what people are kind of willing to buy and or willing to sell it at and things like that how frequently trades are happening those can all be metrics of exactly sort of the health of these institutions and also for you know insurance firms as with banks you know we have kind of supervisors so there'll be people that will go in and sort of look at the data look at their accounts you know challenge the senior managers in a room you know are you sure that this is right this looks a bit dodgy or something like that yeah and so there are lots of different tools and parts of that.
Speaker 00:So cool. I mean, you guys are obviously thinking about the future and there has been rumours of exploring a digital pound. What is that and how could that potentially change our lives?
Speaker 01:Yeah, it's a great question. So this is something that sort of work is ongoing and it's something actually lots of central banks around the world are thinking about. So, I mean, we've seen lots of new financial innovations, technology innovations. I mean, cryptocurrency is probably the buzziest one but actually you know there have been lots over over the past few years and decades i mean obviously you know when you contactless is not something that used to happen um and so a central bank digital currency which often gets uh acronym to cbdc uh another another great maybe uh yeah yeah so the idea is that this would be uh the bank of england sort of having a digital equivalent uh to cash now the banking actually already has a digital currency but but it's only accessible if you're a bank. So, you know, you or I or any business really is never going to kind of interact with it. The question is maybe you could expand it to others. And this potentially has some advantages. You could think about, you know, this might open up new kind of innovations kind of in financial markets or in consumer sort of payment system, things like that. There are potentially benefits in terms of kind of some financial resilience. If you get a new option that means I mean we all hear that sometimes you know a high street bank might have a problem with their payment systems and you know so you know so and so banks like card systems gone down you can't pay well maybe if there was you had an alternative account at the Bank of England or something like that that might be an alternative and so you know you wouldn't worry so much and also it just maybe some people would quite like it and you know the Bank of England wants to give people choice to use the money in the best way they want I think this would is sort of ongoing. There are a few things the bank has already said about this, which one, any decision that will be taken will include cash still existing. Lots of people get lots of value out of cash for lots of reasons. I mean, some people find it much easier to budget with it. Some people don't have access to bank accounts or technology. You know, there are some sort of some important features of cash that are useful for particular people. So, for example, some disabilities or people... Domestic violence, often financial independence is a real barrier for people leaving a kind of an abusive home and cash is a really important part of people being able to kind of get out of those situations. And you might not be able to do that as easily if sort of, you know, a controlling partner was controlling a bank account, things like that. So cash kind of use isn't sort of, you know, it's here to stay for as long as people want to use cash. And so the bank is carrying on work on what a CBDC might look like, how it would work. Because there are lots of different kind of questions around, you know, things to do with kind of privacy. Do you want the central bank to be able to see the transactions that are going on? You know, there may be ways that you could sort of set it up so that that information is private. You know, will people trust that? Those kind of things. There are lots of questions. So the kind of decision hasn't been taken yet. And that's kind of, yeah, something that will kind of materialise in the future
Speaker 00:one way or the other. It's so interesting, isn't it? Because on paper you go, oh, that's interesting. And then you're like whoa hang on there's so much behind that but it's going to like privacy for me is the big one it's like i'm not sure i really would like anyone to see my entire ledgers but then it's like well hang on a second my bank can now
Speaker 01:yeah absolutely but i mean maybe you know some people maybe are comfortable with that and aren't comfortable with kind of part of the government being able to see it or and vice versa some people might not like their bank seeing it and would be fine with their government seeing it i mean you know cash is is always available as a kind of uh as a sort of privacy um you know people can't track that and so you know i think that's that's always going to be sort of part of part of the part of the kind of the way we use money
Speaker 00:and cash has been back on the rise as well recently i saw in the news recently but you might argue differently you probably see lots of different data but
Speaker 01:yeah so we saw uh during the pandemic in 2020 um cash cash usage uh start to rise despite kind of people not wanting to pass on uh some people not wanting to pass on notes and things and actually yeah again more recently we there's a there's a quite a long-term trend that whenever the economy, sort of people are feeling sort of there's challenges going on. If there's, you know, they're worried about things, people tend to want to hold a bit more cash because it's sort of seen as a sort of a safety net. It's something that's kind of there and ready. And so that's probably part of the story. I think part of the story is, you know, people, some people just like using cash. You know, lots of people, there are lots of people who kind of really never use it, but there are lots of people who it's absolutely their main preferred and really their only kind of method of payment so you know I think
Speaker 00:my sister does my sister runs her entire business she does lashes and all different types of beauty and she just prefers it it's not because she's trying to do anything that I'm not going to out her or whatever there in terms of what she's holding but it's just she actually physically prefers at the end of the day being like okay this is how much I've made and I'm doing it like that I can do that I just show me the number of you know I'm a pay the 1% stripe fees or whatever I need to. But she really does prefer it. It's so interesting.
Speaker 01:Yeah, absolutely. I mean, there are really good reasons. I mean, you know, cash is, I mean, economists would call it instant settlement, which means that, you know, as soon as you've been given the cash, you've got it. You don't have to wait for it to kind of a transaction to clear through your bank or anything like that. And also, you know, there's kind of financial resilience to it. I mean, you probably remember early in the year, Spain had that big kind of electricity network outage and sort of all the businesses that were kind of card only or something couldn't take any cash. or their tools didn't work and things like that. So cash is something that you don't have to worry about your Wi-Fi going down and therefore your contactless payment not working. So there are lots of reasons why it's useful.
Speaker 00:I suppose people say cash rich, right? I think it's important to have a little bit. My granddad always told me always carry cash no matter what. And even until recently, he still does it now. He still has cash in his pocket because you just don't know. And if you are in that position in Spain and something does go down or, you know, we get a massive cyber attack. We saw that in the UK with the payment systems going down before. And it's like, if that happens and you need to buy a glass of water from the shop, like whatever that might well be, you can, you're okay. Or the transaction for a pint of beer after work, which is much more important. It can still happen, right?
Speaker 01:Yeah, I think exactly that. I think that's really important. And just sort of people having the choice is just really important.
Speaker 00:Yeah, I completely agree. I'd love to sort of ask you around, because when we spoke initially, you said the bank really thinks about climate change as well. Why? What's the thought process there?
Speaker 01:I mean, the kind of bottom line is that to understand what's going on in the economy, it's something that's happening and something that they need to take into account. So, I mean, thinking about, for example, climate change, there's been an increase in severe weather events globally. And, you know, we've got some, you know, big multi, you know, global insurance firms, you know, they have to pay out if there's, you know, been a flood somewhere. And so understanding those risks and how they've changed is something that's important for those people who are supervising those firms to make sure that they can be able to pay out those insurance claims when they need to. And also understanding if, you know, we are adapting to having to kind of reduce carbon emissions. And so that means the kind of the types of industry that are in the economy are changing. You know, go back 20 years, people weren't, you know, making solar farms, right? And so the way investors, you know, maybe banks are putting their money, you know, if they're investing in a coal power plant versus, you know, a wind farm, is that kind of what do the risks of that look like in the future as that kind of adaption happens? So I think that's really important. And some of these things can kind of crop up just understanding the world It's important they can crop up in interesting ways. So, for example, there's kind of research that shows people who have more energy insulated homes are less likely to default on their mortgage. And that makes sense, right? Because, you know, if gas prices go up, electricity prices go up, if you're in an insulated home, your finances don't get worse in quite the same way as someone else does. And so it's actually just the job of the bank to understand how all these things play out.
Speaker 00:Honestly, this has been been so much fun like I've learned loads and I think it's really important to understand the role that the bank has on the economy how everything stems down from these decisions and like the level of depth that you're obviously taking to look at these and making sure that the British people are okay you know you have got our back at the end of the day and that's what something is like should be sort of spoken about a little bit more in my opinion because you know you can blame people in the role places sometimes and I think sometimes obviously the Bank of England can get a bad rep when they shouldn't and they should be much more positive light in my opinion but this has been so interesting thank you so much and where would you like people to go because I know the bank is now a little bit more active online aren't they
Speaker 01:yeah I mean so there's a website there's an Instagram page now and we've got a museum and the museum has an Instagram page too there's lots of fun stuff on there so yeah I guess check all those things out you can go and hold the gold you can yeah there's a you can it's a very small opening but you can you can fit your hand through and see how heavy gold is because gold is really heavy so yeah
Speaker 00:okay wicked well Jack thank you so much and yeah I look forward to chatting again soon
