Lord Barnett
To ask Her Majesty’s Government why the Chancellor of the Exchequer agreed the latest increase in quantitative easing.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the independent Monetary Policy Committee has operational responsibility for monetary policy. The MPC judged in February 2012 that without further monetary stimulus it was more likely than not that inflation would undershoot the 2 per cent target in the medium term. The Chancellor agreed that an increase in the asset purchase ceiling would provide the MPC with the scope to meet the inflation target in the medium term and gave his authorisation to proceed.
Lord Barnett
My Lords, I thank the Minister for that Answer. That increase was initiated by the Monetary Policy Committee but, under the terms of the original agreement in 2009, the Chancellor had to give his consent—which I assume he did. The current Chancellor took over that policy. As I understand it, he said at the time that it was a “leap in the dark”, designed because all other government policy had failed. Does he still feel that that is the case, or has he changed his mind? What does he now expect from QE?
Lord Sassoon
My Lords, I reiterate that the MPC has operational control and freedom here. The Government, on behalf of the taxpayer, indemnifies the Bank against losses, so of course any increase in the limit of the asset purchase facility has to be authorised by the Treasury. As to what people’s quotes might be, I know that I get into trouble if I start questioning whether the noble Lord, Lord Barnett, has correctly quoted my right honourable friend. I am sure that he did, but in completely different circumstances. The situation now is that we have tight fiscal policy. Against that discipline, the monetary policy of the Bank of England can be conducted with confidence. Tight fiscal discipline and loose money is the policy prescription. I suspect that that was not the policy prescription when my right honourable friend made that quote.
Lord Bilimoria
My Lords, can the Minister tell us of the effect of QE in helping lending flow through to SMEs? We hear about feast and famine with regard to lending to SMEs. Has QE really helped in banks lending to SMEs?
Lord Sassoon
My Lords, the estimate of the effect of QE was set out in the Bank’s Q3 quarterly bulletin in 2011. The Bank estimates that quantitative easing raised real GDP by around 1.5 to 2 percentage points, so it has had a very significant impact on the real economy. As to the flow of credit to SMEs, that is not the purpose of quantitative easing. The purpose of quantitative easing, as I have attempted to explain, is for the Bank of England to meet the 2 per cent medium-term inflation target. Credit easing is a government policy and, in the next few days, details of the £20 billion national loan guarantee scheme will be unveiled. It is targeted at credit easing for SMEs, which is still a very important issue.
Lord Newby
My Lords, will the Minister underscore his last comment in that credit easing is now seen as crucially important in getting funding into SMEs? Can he confirm reports in the papers yesterday that the overall impact or scope of credit easing might not be the £20 billion which he has just mentioned but might increase over time to £40 billion?
Lord Sassoon
My Lords, I am certainly not going to pre-empt any announcements this week of that kind or any other, or I may not be here to answer the next Question at the Dispatch Box. I think that the £20 billion, which has already been announced, and reducing the interest rate that SMEs would otherwise have to pay by the order of 1 per cent would be a very good start.
Lord Peston
My Lords, can I ask the Minister whether he agrees—which he seemed to say—that quantitative easing is part of monetary policy? If it is part of monetary policy, what business is it of either the previous Chancellor or the present one to claim that they have a decision-making role in this matter, since the Bank of England Act makes it absolutely clear, when discussing the reserved powers of the Treasury, that they can intervene only if they lay before both Houses of Parliament an order authorising them to intervene? Have not the Chancellor of the Government whom I supported and the present Chancellor both been acting illegally?
Lord Sassoon
No, my Lords, even the previous Chancellor, I am happy to say, was not acting illegally in this matter and the current Chancellor certainly is not. As I have already explained to the noble Lord, Lord Barnett, the only reason for the Chancellor having to authorise this is because HM Government indemnify the Bank for any losses that it may suffer by exercising purchases under the asset purchase facility.
Lord Pearson of Rannoch
My Lords, does the noble Lord agree that over history printing money has usually, if not always, led to inflation? If he does agree, can he tell your Lordships why quantitative easing will not do so this time?
Lord Sassoon
No, my Lords, I certainly will not. It has actually led to inflation already. In the estimates made by the Bank of England in the third quarter bulletin in September last year, it was estimated that quantitative easing had raised UK inflation by around 0.75 to 1.5 per cent. I firmly believe that the greater benefit of raising real GDP by around 1.5 to 2 per cent was what really mattered in the economic circumstances in which we find ourselves. Then the question is what happens to the unwinding of QE? The stock will be held and sold back into the market in due course.
Lord Eatwell
My Lords, the noble Lord’s reference to growth of GDP is rather odd, since that is no responsibility of the Monetary Policy Committee. Its responsibility is for inflation and, as he said, it added to inflation last year which, as noble Lords will remember, was already at 5 per cent. How does the noble Lord judge the success of QE and how is it to be balanced against the decimation of the annuities of hundreds of thousands of pensioners as a result?
Lord Sassoon
My Lords, first it continues to be the judgment of the MPC that if it had not acted on this operation under the asset purchase facility inflation would undershoot the 2 per cent target in the medium term. I remind this House that inflation has already come down from 5.2 per cent on a CPI measure last September to 3.6 per cent in January and is expected by the Bank, and most other commentators, to fall very considerably during this year. The success of QE will be measured on the performance of inflation.
As to the question of savers and pensions, as the deputy governor, Charlie Bean, said on 21 February:
“While annuity rates have fallen, that is only part of the story. Those pension funds will typically have been invested in a mix of bonds and equities, with perhaps a bit of cash too. The rise in asset prices as a result of quantitative easing consequently also raises the value of the pension pot, providing an offset to the fall in annuity rates”.