Quantitative Easing (Economic Affairs Committee Report)

Lord Griffiths of Fforestfach Excerpts

Monday 15th November 2021 Grand Committee

[Lord Griffiths of Fforestfach (Con)]

My Lords, it is a great pleasure to take part in this debate. It is an excellent report: it is well worth reading and the evidence is of very high quality. Some Members of your Lordships’ Committee may well feel that it is a very technical subject, all about the details of monetary policy and central banking. I believe that, as has been said by the noble Lord, Lord Monks, my noble friend Lord Forsyth and others, nothing could be further from the truth.

What we are discussing today is at the heart of the problem of controlling inflation and the effect that inflation is having on our economy and society. As has been mentioned already, it is also to do with the financing of government borrowing and the national debt. There is also the issue of perception. My noble friend Lord Forsyth is absolutely correct that the Bank of England is not challenged with blurring monetary and fiscal policy; the report says it is the perception of it that raises questions about its independence. The fact is that, after three decades of being anchored at 2%, inflation is now rising. The Bank of England expects it to rise, and I think it would be a very brave person who said that inflation will remain anchored at 2%.

I will raise two issues today. In raising them, I should say that the committee says it is sympathetic to the Bank because of the environment in which it has carried out its mandate: the path of Covid; the large swings in expectations—first of the worst recession since the 1700s and then of a tremendous recovery, which was unexpected; the fact that the Bank has more objectives placed on it from decade to decade; and, of course, the knock-on effects of Brexit.

The first question I put to the Minister is this: does he accept that the £450 billion of debt purchases by the Bank from the market over the last 18 months to two years has had little impact on rising inflation? As far as the Bank is concerned, QE seems to play little role in inflation. In the short term, the Bank explains inflation through a simple Phillips curve—if unemployment is reduced, inflation rises; if unemployment rises, inflation falls—but if you read the MPC reports, it explains inflation by way of energy costs, wage costs, supply-side shortages, input costs, tax changes and so on, but pays very little attention to what it does in its own back yard. As the noble Lord, Lord King of Lothbury, has pointed out, in the longer term the Bank has very little explanation of what leads to inflation. He said that

“Forecasts of inflation made by central banks always tend to revert to the target in the medium term … they assume rather than explain inflation in the long term”.


If you read the evidence to the committee and its report, it is clear that QE supported the economy following the financial crisis by avoiding deflation. Andy Haldane said that it was

“necessary to support the economy and hit the inflation target”—

that is, no deflation. Coppola said that it was

“an effective tool for arresting a deflationary collapse”

and Congdon said that QE in 2009 prevented a deflationary collapse and that money stock would have fallen “rapidly” without it. The Bank of England evidence said that QE has provided “monetary stimulus” to help the MPC to meet its inflation target. The committee concludes that QE

“prevented a recurrence of the Great Depression”.

I recognise the difficulties of disentangling the effects of QE, lower interest rates and fiscal policy in preventing the recurrence of deflation, but if QE has been effective in avoiding deflation, which I think everyone accepts, is it not also effective in creating inflation, when you are in an upswing instead of a downswing? I think that that is exactly the position we are in today. Businesses are finding it easy to pass on prices. We have a million unfilled vacancies in the UK—judged by the ratio of jobseekers to unfilled vacancies, that is the highest for 40 years. We already have strikes in places such as Weetabix and Clarks, and formerly in Glasgow as COP was starting. I would like the Minister to explain this contradiction. The noble Lord, Lord Burns, presented them as alternatives, but I see deflation and inflation as two sides of one coin.

The second issue that I would like to raise has been mentioned by the noble Lord, Lord Monks, and others: the implication of the perception of blurring monetary and fiscal policy. The Bank has been under great pressure since Covid to support overall government policy and to be seen as a team player. It has stated on many occasions that the time is not yet right to raise interest rates. After the 2008 crisis, the mandate of the Bank was not only expanded to much greater regulation, apart from controlling inflation, but extended to climate change. I do not think that the Bank would ever bow to explicit political pressure, but I am impressed by the views of three central bankers, two of whom I have known and one I have talked to but do not really know, namely Paul Volcker, Mervyn King and Otmar Issing. I worked for 15 years as an adviser to an investment bank and got to know Otmar Issing well. I was impressed with his evidence to the committee. He said:

“Exit from the zero interest rate policy will bring central banks into conflict with their Governments. It will be a very hard test for the central bank to withstand political pressure and I see a great risk that exit, once needed to”


wipe out

“inflationary development in the bud, might be delayed because central banks have come closer to political decisions during the financial crisis and now in the context of the pandemic.”

I close with my second question to the Minister: are we not imposing subtle but intolerable pressures on the Bank of England in giving it responsibilities and objectives that conflict with each other and undermine fundamentally its target of low and stable inflation?