Quantitative Easing (Economic Affairs Committee Report)

Lord Lamont of Lerwick Excerpts

Monday 15th November 2021 Grand Committee

[Lord Lamont of Lerwick (Con)]

My Lords, I congratulate the noble Lord, Lord Forsyth, and the committee on the report. I hope the Committee will forgive me for intervening. I am just as much an amateur in this subject as anybody else, never having had to deal with it in my days as Chancellor of the Exchequer. I just wanted to ask four questions that occurred to me; I had not intended to speak in this debate when I came in, but four points occurred to me which I, as an amateur, would be very interested to know the answers to.

The first relates to deficit financing. The noble Lord, Lord Forsyth, said that the committee had found that the Bank of England was not indulging in deficit financing. If that is the case, why in his Budget speech did the Chancellor of the Exchequer express the total stock of debt minus Bank of England purchases? It seems to me that the two are not consistent if we are avoiding deficit financing. What do the Government see as the dividing line between intervening to ensure orderly markets and deficit financing? Some of the occasions that Mr Bailey cited when he talked about the fact that there would have been a very large spike in interest rates if he had not intervened seem, with the sums of money involved, to come close to deficit financing.

Secondly, the noble Lord, Lord Forsyth, referred to reversing or unwinding QE. How is this to be done? Are the Government content for the Bank of England to hold securities that it purchases all the way to maturity or do they think that unwinding as a process involves selling more debt into the market to compensate for the purchases?

Thirdly, I read somewhere relating to the report that the Treasury can refuse an application by the Bank of England for a tranche of QE. If it cannot refuse, that seems to me an extraordinary position for the Treasury to be in, particularly when it is underwriting the indemnity to the Bank of England. Today, with QE as the main means of—if I can use the old-fashioned phrase—steering the economy, if the Government cannot have a say in that it seems to me that we are in an entirely new situation for the Bank of England. It is going well beyond its remit, which is to do with inflation.

My fourth question is a very simple one about sequencing of policy. Should not asset purchases be ended before the Bank of England puts up rates? Otherwise, it seems to me that the Bank of England would be doing contradictory things at the same time. Surely the one should precede the other.

The only other point I would make is that, listening to this debate, it seemed that the most obvious point about QE was not really made very often, and that is the massive distortion in pricing that has occurred because of QE. People may be a bit sceptical about how far that is true of the stock market and of housing but there can be very little doubt that, in the fixed interest market, where the Bank has been intervening directly, this has had a massive distorting effect. A man cannot be drunk for ever. At some point this has got to end: at some point the hangover will come and at some point the crash will come.

I very much agree with what the noble Lord, Lord Griffiths, said: that if we believe that QE has been effective in preventing negative inflation surely, with the amount of liquidity in the economy and the banking system, it is likely to have an effect on prices in an upward direction from a positive base. I fear that, because of the issue of fiscal dominance and the need for Governments to be able to finance their programmes, central banks—not just the Bank of England but everywhere—will put up interest rates to counter inflation only in baby steps because that is going to have such a devastating effect, not just on the economy but on government finances as well. I would be very grateful if the Minister could answer those four questions.