Quantitative Easing (Economic Affairs Committee Report)

Viscount Chandos Excerpts

Monday 15th November 2021 Grand Committee

[Viscount Chandos (Lab)]

My Lords, I join other speakers in thanking the noble Lord, Lord Forsyth, for securing this debate and for his powerful introduction. The committee’s inquiry into QE reflects the noble Lord’s foresight and leadership, and its timely relevance owes much to him. I was privileged to be a member of the committee. I declare my interest, as disclosed in the register, as the paid chair of the Credit Services Association. I strongly endorse the report and its recommendations and, in the time available, will pick out a couple of points for more detailed comment.

When the inquiry was established, the committee agreed that, despite the exceptional economic expertise of at least some members, we would not seek a collective Nobel Prize by trying to come to definitive conclusions about the inflationary impact of QE here in the UK, let alone globally, but would focus on the implications for the Bank’s independence and governance and the transparency or not with which the programme has been pursued over the past 12 years. In light of the sharp increase in inflation in recent months already referred to, particularly in the US and UK, it would be wrong not to make some comment on this. Of course, issues of governance and transparency go to the heart of how the Bank of England is positioned to respond to that increase in inflation, particularly if it proves more than transitory.

The report is supportive of the principle and much of the practice of QE since its establishment in 2009. With that I also strongly concur. It is clear that the impact of QE, as the noble Lord, Lord Forsyth, said, is greatest at times of severe dislocation in the financial markets, so the periods from, say, 2009 to 2012 following the global financial crisis and then the early months of the pandemic of March to May 2020 were when the interventions were clearly most effective.

It is also clear that the contribution of QE to maintaining economic activity and hence achieving the target level of inflation is harder to judge. The contractionary fiscal policy of the coalition Government, from 2010 to 2015, left too much of a burden on monetary policy to generate growth during less stressed, but still challenging, conditions. The level of QE that has been pursued since mid-2020, even after the immediate crisis in the financial markets caused by the pandemic had been averted, is also questionable.

For all that, I am not an advocate of immediate rises in interest rates or reversal of QE. The driving forces behind the current inflationary surge are primarily a combination, blended according to your Lordships’ individual tastes, of the pandemic aftermath, global supply chain friction, Brexit, stubbornly poor productivity growth, labour market failures and so on. The question that we should ask is: does the balance sheet position that the Bank of England now finds itself in, with nearly £1 trillion of predominantly government bonds, potentially inhibit it in honouring the “primacy of price stability”, as the Chancellor wrote in its mandate? In theory, at least, it should not, but so much hangs on how well the Bank of England’s independence is maintained and protected.

There was a widespread view in bond markets that it was more than a coincidence that QE amounts so closely followed the borrowing requirement at the time. There were unconfirmed reports of exceptional pressure on the Bank of England senior executives from the Treasury. When the governor gave evidence to us, he said, “Yes, I talked to the Chancellor daily”, in March and April 2020. “What did we talk about? Covid.” Yes, it was hard for any of us to talk about anything else at that time or subsequently, but the question is how much the Government’s pandemic-driven need to fund its deficit has been allowed to influence the Bank of England’s executives’ views and, hence, their positions within the MPC. We may not know for 30 years, if ever, but the independence of the Bank of England is not just a theoretical concern.

The noble Lord, Lord Forsyth, highlighted the challenge of unwinding QE and the potential accentuated impact of interest rate rises on future funding costs for the Government. Like the noble Lord, I deplore the refusal of the Chancellor to publish the deed of indemnity. This makes it hard to analyse some potential scenarios. For instance, in the Chancellor’s terse response to the report, he said:

“As it relates to the cash transfer part of that deed, there is sensitive information in there.”


Cash transfers? Under the terms of the deed of indemnity, the Bank of England has paid £112.5 billion to Her Majesty’s Treasury in the period between April 2013 and February 2021, with £13.7 billion in the last 12 months of that period.

The Government have been pursuing what the Chancellor, as a former hedge fund manager, would recognise as a giant carry trade and, so far, very profitably. Think how much worse the deficits would have looked without those transfers. However, every trade carries risk and there is the risk in QE not just of running losses when interest rates rise but the possibility of capital losses if the fair value of the bonds were to fall.

The Bank of England does not have to crystallise any of those losses, but it must not be inhibited from so doing if it believes that the control of inflation requires it. I believe that the deed of indemnity would protect the Bank from any loss, but the positive effect of QE on the Government’s accounts would be reversed. How relaxed would this or any future Chancellor be to see that happen? In giving evidence to the committee, the noble Lord, Lord Macpherson, suggested that any tensions in the relationship between the Treasury and the Bank of England so far will be as nothing when QE comes to be unwound.

The Chancellor wrote in his response to the report:

“Independent monetary policy has been successful in delivering low and stable inflation.”


This Government have shown themselves casual, to put it mildly, towards the independence of so many institutions. I urge them to defend and promote the Bank’s independence unequivocally and to do nothing to breach that principle.