Andrew Bailey has told the Chancellor that he would be "open to a review" of the Bank of England's mandate, following Liz Truss's criticism of its approach to inflation, The Telegraph can disclose.
In a telephone call with Nadhim Zahawi, the Bank of England's Governor acknowledged that the agreement had not been subject to a formal review since the body became independent in 1997. A source familiar with the call said that, in response to the issue being raised by Mr Zahawi, Mr Bailey acknowledged that such a move was "probably the right thing".
Mr Bailey's concession came a little more than a fortnight after The Telegraph revealed that Ms Truss intended to review the Bank’s mandate if she became prime minister - sparking an ongoing row with Rishi Sunak, her rival for the Conservative leadership.
At the time, Ms Truss told The Telegraph that she would “look again" at the mandate agreed with the Government "to make sure it is tough enough on inflation". “I would also have a very clear direction of travel on monetary policy,” she added.
Kwasi Kwarteng, the Business Secretary, who is thought to be a frontrunner to be chancellor under Ms Truss, has pointed to the Bank's existing target to keep inflation at 2 per cent, saying: "Now inflation is getting [into] double digits. So clearly, something’s gone wrong.”
But Rishi Sunak has accused Ms Truss of threatening the Bank’s independence.
Now it can be revealed that on a telephone call with Nadhim Zahawi, Mr Sunak’s replacement as Chancellor, on August 4, Mr Bailey said: "We would be open to a review".
The source added: "[He said] that he would be open to a review, independence is important, but we haven't had a review since independence and therefore it is probably the right thing."
The Bank of England declined to comment. Mr Bailey has already indicated that he would stay in his post if Ms Truss became prime minister.
A Treasury source said: "Given the crisis that we are in, it’s encouraging to see that Zahawi has already had four meetings with the Governor. The Chancellor sees that a mandate review is a sensible move and getting the Governor to agree to it is both a good step in tackling this issue and a vindication for Truss’ approach."
A day after the call with Mr Zahawi, Mr Bailey said: “We will discuss with the Government a number of issues, some of them monetary policy, some in the new financial regulatory regime. But it’s very important for the Bank that it’s clear there is this stability in the term of the governor.”
The Treasury's official statement on the August 4 call said that Mr Zahawi and Mr Bailey had discussed "the Bank of England's new forecast for the UK economy, how they will work to bear down on inflation, and the impact of rising prices on households." It added: "They discussed the actions they are taking to bear down on inflation and overcome the economic challenges we face."
Last week, The Telegraph revealed that, under one plan being floated by allies of Ms Truss, the Bank could be ordered to target nominal GDP - the size of the economy in cash terms - instead of seeking to keep inflation at 2 per cent. Nominal GDP growth effectively takes into account both an expansion in economic output and inflation.
Mr Sunak has suggested that Ms Truss wants to scrap the Bank's independence saying: "That would be a massive mistake for our country, and international investors would really not look very kindly on it at all." But Mr Kwarteng insisted that the Bank would remain independent.
A Treasury spokesman said: “We remain fully committed to Bank of England independence, and the Bank have a good track record with inflation averaging their 2 per cent target since they became independent."