Quantitative Easing (Economic Affairs Committee Report)

Baroness Morrissey Excerpts

Monday 15th November 2021 Grand Committee

[Baroness Morrissey (Con)]

My Lords, I congratulate the Economic Affairs Committee on its excellent and highly insightful report, which, in my opinion, needs not just to be noted by the House but shouted about from the rooftops until someone at the Bank of England actually takes heed of its recommendations and takes action.

The Bank’s dismissive initial response suggests perhaps a degree of complacency or a tendency towards wishful thinking. Other equally concerning explanations are that the Bank may at this point be either too afraid by the extent of what it realises it does not know to take on the challenges or too dulled by its addiction to quantitative easing to act on the report’s very sensible and very practical recommendations. In particular, I highlight its recommendations that the Bank prioritises and shares its research into the effectiveness of QE’s transmission mechanisms into the real economy, and how its effects are distributed, and the impact of QE on the outlook for inflation, which is clearly rapidly changing.

Of course, as other noble Lords have said, the Bank needs to be much more transparent about the interactions between monetary and fiscal policy at this point. The connection between the level of rates and debt servicing costs and the need to finance deficit spending risk fiscal dominance and so threaten the Bank’s independence. That is not an accusation; it is just fact. There is a blatant contradiction between the Bank’s abrupt “This is incorrect” response to comments that the objective of the Bank’s asset purchases has been to ensure that financing conditions remain favourable for the Government and the governor’s own assertion in June last year:

“I think we would have a situation where in the worst element, the Government would have struggled to fund itself in the short run.”


We would all, I am sure, be sympathetic to the difficulties faced by the Bank—no one has all the answers here—but there is no merit at all in shutting down discussion or pretending that things are different from how they really are.

It is becoming absolutely critical, not merely for the Bank of England’s credibility but more importantly for the economic prosperity of this country and its people, that the Bank changes its tune, and quickly, and that it takes the report’s points seriously and focuses its efforts on trying to better understand the implications of what has become, without question, the biggest monetary policy experiment of all time, both nationally and globally.

One explanation for possible complacency is that the first big round of QE—the £375 billion in response to the global financial crisis—did not appear to have any major adverse effects on inflation. Along with many others, however, including the noble Lord, Lord Fox, I think that it had a big impact on wealth inequality. But of course there were massive deflationary pressures in the 2010s: exploding supply; the rapid adoption of online shopping, making it much easier for consumers and businesses to compare prices; the offshoring of labour in an increasingly globalised economy driving down manufacturing costs; and heightened competition in many sectors that had previously been almost oligopolies—for example, between energy suppliers—benefiting end consumers.

That has all now changed, and changed suddenly, with a surge in demand following lockdowns, well-documented supply chain problems, more nationalistic policies—including over energy supplies—rising geopolitical tensions, increasing awareness on the part of consumers about the need for fair treatment of and fair pay for labour, and the mismatch of skill sets that businesses need with those who are unemployed. Demand may settle down but many of the other factors are not going to reverse any time soon, making it highly unlikely that inflationary pressures will indeed prove “transitory”.

In the space of less than two years, we have gone from a deflationary backdrop to an inflationary one, yet the Bank is still pursuing the same hyper-loose monetary policies; it is actually a doubled-down version, following the massive £450 billion—or £460 billion, if you include corporate bonds—QE in response to the economic threats caused by the pandemic. What is more, this is true throughout the western world, with the EAC reminding us in the report that central banks around the globe have expanded their balance sheets by some $5.5 trillion since the onset of the pandemic.

One of the key lessons that I learned from 15 years as a bond fund manager was the critical importance of actively looking out for inflexion points, watching for those moments when the past would not extrapolate into the future and there would be a sudden dislocation. This tended to happen when everyone was looking the other way—complacent, relaxed or just enjoying “dancing to the music”, as former CEO of Citibank, Chuck Prince, infamously said ahead of the financial crisis. Focusing my energies and analysis on deliberately looking for the next thing proved the making of my career when, having persuaded my colleagues early in 1997 that the risks of a Labour Government’s tax and spend policy were already in the price and we should buy the very longest-dated gilts, and as many as we could, the newly elected Labour Government’s first action was to make the Bank of England independent. Of course, I made a lot of less good calls in my time as a fund manager, but that one taught me so much about the need for courage and to stand back from the crowd and hold steady, even when everyone seemed to have a well-reasoned set of arguments on the other side.

In his leaving speech in June, entitled “Thirty years of hurt, never stopped me dreaming”, former Bank of England chief economist, Andy Haldane, put it more eloquently, when he said:

“This is the ‘dreaming’ bit—looking around corners to judge not only what is coming but how to reshape it, seeking out the biggest issues not just of today but tomorrow. It is the Wayne Gretzky”—


a famous Canadian ice hockey player—

“approach to public policy—skating to where the puck is going, not where it is … it is, for me, the essence of effective policymaking.”

Unfortunately, in its approach to policy and to this report, the Bank of England is not adopting Andy Haldane’s essential rule of policy-making. Its analysis, or at least what it shares with the rest of the world, is perfunctory; its representatives defensive and dismissive of challenge. Yet it and other central banks are increasingly out on a limb. As the report points out,

“central banks take a more positive view of quantitative easing than independent analysts.”

Today, market practitioners are truly worried that, first, the current spike in inflation may well not prove transitory; secondly, that central bankers, for whatever reason, may move too late to tighten policy, either through rate rises or unwinding QE; and, thirdly—though this terror is scarcely mentioned—that a loss of confidence in monetary policy catalyses an unaffordable spike in the cost of servicing vast government debts. In that situation, given the extremes of both fiscal and monetary policy today, policymakers run out of options.

It is not too late to do something to mitigate that risk, although it is getting urgent that action is taken. As noble Lords know, US CPI inflation hit 6.2% last week—the biggest inflation surge in more than 30 years. Even stripping out volatile, although rather essential, food and energy costs, the US inflation rate was still 4.6% last month—much higher than expected. The US 10-year bond yield has trebled since August last year, reflecting growing concerns. Here in the UK, the 10-year break-even rate between index-linked and conventional or fixed-rate gilts has topped 4%, a level last seen over a decade ago. That means that inflation needs to be more than 4% over 10 years for the inflation-linked bond to outperform, which is the highest break-even rate across the G7.

The market knows that we have reached a tipping point and that the policy response needs to change. Sadly, the Bank is way behind the curve, and seemingly refuses to listen. Let us keep shouting off the rooftops until it responds properly to the actions recommended in this report.