Quantitative Easing (Economic Affairs Committee Report)

Lord Monks Excerpts

Monday 15th November 2021 Grand Committee

[Lord Monks (Lab)]

My Lords, quantitative easing is a very big deal. As the noble Lord, Lord Forsyth, said in a characteristically challenging speech, it represents 40% of the UK’s GDP—a huge figure. Yet if you were to ask the modern equivalent of the man on the Clapham omnibus—or to level up a bit, the woman or man on the Sheffield tram—what QE is, you would be almost certain to draw a blank. That would not just be on the Sheffield tram; it would be just about everywhere else. If truth be told, members of the Economic Affairs Committee, of which I am one—with some notable exceptions, particularly the noble Lord, Lord King of Lothbury—did not know too much about it until we embarked on this inquiry and it got well under way. In fact, for most of us, it was a voyage of discovery into what had been a murky corner of the UK’s economic policy—and to some extent still is.

We were very much helped by an excellent secretariat and a galaxy of star witnesses, as the noble Lord, Lord Fox, said, from this country and overseas, including from the US, the EU and Japan. Utilising Zoom to whizz around the world, we were able to hear from a much wider range of economists than would have been the case had we been relying on physical presence in Westminster, where we could not do that; we probably benefited from it in this case.

At the start of the inquiry, I for one read up about the disasters of the Weimar Republic in 1923. We all know what happened there: they opened up the printing presses, followed by hyperinflation—or was it the other way round? I am not sure which. I also looked at contemporary experience in Zimbabwe and Venezuela, where hyperinflation has accompanied a surge in the monetary supply. Could the same thing happen here? Would QE lead to, or risk, a surge in inflation? It did not, and our central conclusion has had to be that the Bank of England needs some congratulation on the success of QE so far—it may have got away with it. The inflationary effect that we are experiencing at present has not been down to QE.

The first tranche of QE, in 2009, helped stabilise the economy after the severe financial crisis at that time. The evidence is much less clear-cut in relation to the later and larger tranches of QE—first, in 2016, to cope with Brexit-related shocks, and, secondly, in 2021, to smooth the impacts of the pandemic. At minimum, QE did not lead to surges in inflation, and even though inflation is now rising—temporarily, we all hope—the root causes lie elsewhere, in fuel shortages, supply chain difficulties and so on. Yet, as our report points out, QE poses risks, problems and dangers.

I want first to comment briefly on the independence of the Bank of England. It strains credulity to say that there is no relation between the Government’s burgeoning fiscal deficit and the amount of QE that has been issued. The two amounts correspond almost exactly, fuelling suspicion that the Bank is financing the deficit. Such suspicion is widespread in the City; we did not share it too strongly in the end, but we know that it is a strongly held view that that is the case.

The Bank argues in a spirited response to our report that the current easing of monetary policy and increased debt issuance is

“entirely consistent with fiscal and monetary policymakers independently pursuing their objectives”.

Well, okay. While I again applaud the Bank and the Treasury for having worked closely and sensitively together, which is crucial in a crisis, the Bank needs to be very careful in guarding its independence in this relationship and project. So far, it just about gets the benefit of the doubt, but the next test is coming, as the noble Lord, Lord Forsyth, pointed out, if, as is forecast, it has to make a judgment shortly on raising interest rates, which we already know is supported by a minority on the Monetary Policy Committee. What will this do to the Government’s borrowing costs? How will the Treasury react? I will be very interested in the Minister’s response to that scenario. It is a big task that is coming, unless we get lucky and inflation subsides quickly.

The other issue that I want to address briefly is a question that was in the committee’s mind all the way through the inquiry. The figure of £875 billion has been, or is being, issued. We know where it came from, but where did it go? “Follow the money” is always a good principle in assessing financial matters. There is general agreement, as has been said, that an inflated asset price has benefited those who own property and shares—that is, the already wealthy. The Bank and the Treasury, in response, argue that QE, by providing money to the financial system, helps avoid economic shocks that would otherwise have hit jobs and living standards hard, so hitting disproportionately the poorer sections of society. Maybe that is so, but that itself raises other questions, particularly about the future of QE, if indeed it is to be used any further—if it is going to be used again after the current programme ends shortly.

The Chancellor has already included the transition of a net-zero economy in the Bank’s adjusted terms of reference. As our report points out, the Bank will presumably need to change its approach to buying corporate bonds, perhaps favouring those consistent with the net-zero objective and steering clear of sectors such as fossil fuels and some forms of mining—metal mining in particular. Our committee was, frankly, nervous about extending the Bank’s mandate, which risks it being given a more political role, perhaps forcing it to select bonds to purchase that were in line with the Government’s fiscal and other policy objectives.

We now have to consider the relationship of all this to the further use of QE. Will QE be targeted in future? Will there be government pressure to do that? If so, how would the confidence of financial markets be maintained? If it is deployed on the net-zero transition, will there be a temptation for Governments to use it on other vital subjects? That is a big question that needs to be thoroughly aired and debated before the Bank embarks on a further issuance of QE.

There is a great deal at stake and many questions still to be answered by the Treasury and the Bank. I look forward to the Minister’s responses on those questions.