Quantitative Easing (Economic Affairs Committee Report)

Lord Fox Excerpts

Monday 15th November 2021 Grand Committee

[Lord Fox (LD)]

My Lords, the committee’s report was published in mid-July and I am pleased that the responses from the Bank of England and Her Majesty’s Treasury came fairly rapidly—coincidentally on the same day. I commend the Bank for the thoroughness of its response. However, the Treasury’s two-side letter is less comprehensive. I think that this reflects a desire to convey its message that quantitative easing is the business of the Bank and the MPC, not the Chancellor. That is all well and good but, as our report makes clear, the fact is that the Treasury is underwriting this process with huge potential swings; the fact is that QE could and does have far-reaching effects on the economy and people’s lives. This means that the Chancellor and the Government have a lot of skin in this game.

I echo the thanks that the chair gave to committee staff and all the witnesses, who did a fantastic job. I also congratulate the chair on his speech. This topic has a tendency to drift into the arcane, so this debate needs to address why on earth anyone but central bankers should care about quantitative easing. I hope that the noble Lord, Lord Forsyth, has started that process.

In my view, the central flaw in most of the analyses is that the data gathered during the response to the economic crisis in 2009, and some of the data in 2011 and 2012, are being conflated to refer to quantitative easing as it is now. By the Bank of England’s own reckoning, there were five distinct QE interventions, the last of which was the Covid one in 2020. As the noble Lord, Lord Forsyth, set out, this tranche totals £450 billion and exceeds the others combined. Given its scale and the different public policy backdrop, QE 5, as we can call it, is substantially different from what went before, yet the data that the Bank is using refers to the previous generations.

Even taking the data that it has, the Bank admits that it is not possible to measure the macroeconomic effects with any great precision—or, I would say, at all. Continuing the pharma vein taken by the noble Lord, Lord Forsyth, if QE were a new drug, it would not get approval based on the data that we have so far. The Bank’s central defence is consistently to deploy the counterfactual: the future without it would be worse. Given that we do not know what the future with QE is, I find this response very hubristic.

One of the dangers identified in the report is that QE is perceived to erode the independence of the Bank from government. This fear of co-dependence, as was just set out, is largely fuelled by evidence that money raised closely matches the money that the Government needed. The Bank asserts that this is not the case. It also deploys a curious technical response as to why this cannot be true. Seeking to refute the suggestion that the Monetary Policy Committee was seeking to lower the Government’s financing costs, it says in its response that, were this perception real,

“expectations of future inflation would … drift upwards, and inflation risk premia in sterling assets would increase causing gilt yields to rise.”

That was written in September and I find the response absolutely incredible. First, no scientist would choose these two parameters; they are both so open to a wide range of influences that they could prove any specific point. Secondly, at the time of writing, both parameters were moving in the opposite direction from that by which the Bank could prove its point. In the report, as we have heard, we highlight the Bank’s poor communication. I suggest that this is just another example of really poor communication—and, I would say, misplaced communication, because it is wrong.

Of course, inflation is subject to widespread upward pressure, as we heard from the noble Lord. In another communications master class, the Bank points to it being transitory. Do Her Majesty’s Government now have a settled view on what “transitory” means and how they believe inflation will move over the next years?

This is relevant because inflation is where monetary and fiscal policy meet. As we heard from the noble Lord, Lord Forsyth, with inflation rising, interest rates eventually may rise too, and this is the point at which Her Majesty’s Government and the Treasury will have to start to pay out money. As we also heard, the Chancellor will then rapidly lose any headroom that currently exists. This is the point at which the Chancellor should be more responsive to the concerns around QE and why I was surprised that the Treasury response was so light.

I will close on the point about inequality. In this respect, it seems that the committee and the Bank are more or less agreed: QE is making the poor relatively poorer and the asset-bearing rich relatively richer in terms of absolute cash—although the Bank deploys the phrase,

“the absolute impact will have been more varied.”

We know that, as inflation rises, the pressure on the poorest will be disproportionately worse and that QE offers little or nothing to help their cash position. We also know that, as inflation rises, we will see interest rates go up and that this will cost the Treasury big money —money that will not be available to mitigate the plight of the least well off. Does the Minister agree that this would make things very difficult for the Chancellor? Does he agree that we should all be concerned about the trajectory of the economy?

QE1 was deployed in response to the 2009 crisis. Thereafter, each tranche—from QE2 right up to the current QE5—has been justified by a different sort of necessity. Each justification has been different, yet the response has been exactly the same, except larger. As such, QE has become regarded as the go-to monetary response, or at least that is how it seems—an addiction, to use the parlance of our report. Yet we still do not know where we are heading and an exit, even from QE1, may be years in the future, if ever. The country is in grave danger of being ratcheted on to some monetary moving staircase designed by Maurits Escher; ahead of us, there are only rising steps, with no progress being made and no end in sight. We need a better idea of where we are going, backed up by a rigorous approach to data, and we need to know how this all ends.