Growth and Regulation in the UK

In a recent speech, Bank of England Governor Andrew Bailey argued that well-designed regulation is not an obstacle to economic growth but a prerequisite for it, and set out the Bank's thinking across three policy areas: bank capital, payments, and AI.

On growth, Bailey noted that UK potential supply growth has fallen from 2.8% annually before the financial crisis to 1.3% since, with productivity the principal casualty. He argued that regulation, properly designed around clear positive objectives, can correct market failures, reduce transaction costs, and support innovation. He added that the debate should move away from abstract arguments about “too much/too little” regulation toward questions about whether regulatory objectives are actually being met.

Bailey rejected the notion that capital is a fixed resource that regulation must simply redistribute. Banks earning returns above the cost of capital, as UK banks now are at 15.4%, are better positioned to retain earnings, build capital, and extend credit. “Effective regulation which is proportionate will support a lower cost of capital, while weak and ineffective regulation will tend to raise the cost of capital,” he argued.

He described ongoing work to modernize payment infrastructure, including tokenized bank deposits, systemic sterling stablecoin rules, and the UK’s first digital gilt. He framed these developments as enabling innovation while preserving the assured nominal value of money and settlement finality.

Bailey identified AI as the most likely next general-purpose technology and called for proactive public policy responses to two pressing challenges: resource allocation trade-offs around clean power for data centers, and the unresolved legal questions surrounding agentic AI. On frontier AI and cyber risk specifically, he argued for internationally coordinated testing of models before wide deployment and stronger recovery capabilities across critical national infrastructure.

“Economic growth is hugely important and regulation — done right — can play a hugely important role,” Bailey concluded. “Growth will come from innovation on the supply side of the economy. I believe technology is a source of growth, and AI is the most likely next big contributor. Inevitably, very big issues come with such change, ones that must be solved with a strong input from public policy and regulation.”