Quantitative Easing (Economic Affairs Committee Report)

Lord Bridges of Headley Excerpts

Monday 15th November 2021 Grand Committee

[Lord Bridges of Headley (Con)]

My Lords, thank you for allowing me to speak in the gap. I will keep this brief, not least because so many topics have been touched on. I draw your Lordships’ attention to my entry in the register as an adviser to Banco Santander. First, let me say what an honour and privilege it was to serve on this committee under the chairmanship of my noble friend Lord Forsyth. I express my thanks to our clerks and to all who made such a great report.

Quantitative easing is obviously a complex topic. In that complexity lies a real danger that simple questions go unanswered—perhaps even unasked—and actions are taken that affect us all without proper, meaningful debate. The questions are really very simple, and I hope that the report answers them: what is the purpose of QE, what might its impact be on the economy as a whole, how is it to be unwound and how might it affect the Bank’s independence?

In the heat of the financial crisis all those years ago, it is quite understandable that there was not the time to give answers to these questions and to have a full debate about them. As my noble friend Lord Forsyth and others have mentioned, QE was begun as an unconventional tool to deal with an exceptional crisis. But as time has passed, these questions have not been clearly answered, while our reliance on this magical money tree has grown, first to meet the impact of Brexit and then the shock of Covid. Meanwhile, as the Bank itself admits, too little has been done to understand its impact, especially on inflation, as my noble friend Lord Griffiths said. This matters for a whole host of reasons that have been touched on. Indeed, when you look at it, all the roads lead back to a core point: are we able to maintain the Bank’s independence in fulfilling its primary aim of price stability?

As our report states, the Bank’s credibility rests

“on the strength of the Bank’s reputation for operational independence from political decision-making in the pursuit of price stability. This reputation is fragile, and it will be difficult to regain if lost.”

I would add that the perception of independence, which my noble friend Lady Morrissey touched on, matters immensely. Those perceptions are shaped by transparency and honesty. The lack of transparency and clarity about the purpose of QE has led a number of investors to perceive the Bank as pursuing deficit financing. This has not been helped by opaque answers from the Bank to basic questions about the process of calculating the amount of asset purchases undertaken.

Now, as we look ahead, and as we have discussed, the design of the quantitative easing programme and the size of the Bank’s balance sheet have increased the sensitivity of the public finances to a substantial rise in debt servicing costs if the Bank needed to raise interest rates to control inflation. As the committee put it, this exposes the Bank to political pressure not to raise rates. The Bank of England is not alone. My noble friend Lord Griffiths was right to highlight what Otmar Issing told us. As the ECB’s former chief economist, his words are definitely worth heeding. All central banks now face a test: whether they can withstand political pressure and raise rates to nip inflation in the bud. The Bank of England is now in the exam hall and it is sitting that test.

Obviously, the impact of Covid has created an extraordinary set of circumstances, which others have touched on. There is indeed a risk that premature raising of rates could choke off the fragile economy, but there is also a risk that the tiger of inflation is let loose and, once out of its cage, we know how difficult it is to grab it by the tail. Once again, I fear that the Bank is making life harder for itself with mixed messages. Just a few weeks back, the governor argued that the Bank of England had to act to tackle inflation but then voted against a rise. He says he “won’t bottle it” when he needs to raise rates. I fear that he needs to beware of protesting too much.

Let me end where I began. QE is a complex issue but, if over the last decade we had had more clarity on its purpose, execution and impact, our concerns about QE’s threat to the Bank’s independence may not have been as great as they are today.