Quantitative Easing (Economic Affairs Committee Report)

Lord Tunnicliffe Excerpts

Monday 15th November 2021 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I am grateful to the Economic Affairs Committee for undertaking this inquiry and to the noble Lord, Lord Forsyth, for introducing the final report. It is wide-ranging in nature, but at its core is the concern that quantitative easing is now widely used by the Bank of England and must be carefully managed. The committee argues, quite reasonably, that QE’s short-term benefits to liquidity need to be balanced with concerns around inflation, wealth inequalities, risk-taking in markets and general long-term economic performance. Colleagues are particularly concerned about the potential inflationary impact of QE. With that in mind, it is worth acknowledging that we are debating the Bank of England’s monetary policy against a very different economic backdrop from that which existed when the committee’s inquiry began.

All these points and concerns are valid and they deserve a detailed response from the Government. However, as with topics such as poverty, I worry that technical discussions about policy processes and outcomes inevitably become detached from broader considerations of people’s day-to-day lives. We find ourselves in the midst of a cost-of-living crisis. A perfect storm of rising costs, an energy crisis and one of the highest peacetime personal tax burdens has changed how people see and experience the UK economy.

The Bank expects inflation to reach 5% in the coming months, with some commentators warning that it may rise higher. As the report notes, the Bank views the current spike in inflation as

“a transitory, rather than a more long-lasting, problem.”

That will be of little comfort to households over the winter months. It also relies on the Government getting a grip on the various supply issues, which risk inflation becoming more embedded. Given the Office for Budget Responsibility’s recent warning that families are in for a hard time until 2023, I hope that the Treasury and the Bank will, where appropriate, make use of their collective toolkit to relieve the pressure on families.

Since its introduction in 2009 as a response to the global financial crisis, asset purchasing has become an important tool for the Bank. We have seen QE on a significant scale in recent times, with new rounds forming a key part of the Bank’s response to the economic impact of the pandemic. The artificial inflation of certain asset prices is one of the controversial elements of QE. While the Governor of the Bank may not agree, the committee notes that a body of evidence points to a QE-fuelled widening of wealth inequalities. This is a significant concern and, as I will return to shortly, one of the areas in which more research is required. Until then, can the Minister outline the Treasury’s views?

Looking at the bigger picture, it should also be acknowledged that the UK suffered a disproportionately large downturn at the height of the pandemic. We had the worst contraction of any G7 nation and are forecast to experience a comparatively weak recovery. Disappointing GDP figures last week suggest that we remain the furthest from recovery of any G7 nation. QE is neither the perfect nor the only solution to the UK’s current economic challenges, but it is undeniably a tool that should be used in times of need.

The Bank’s monetary policy has arguably mitigated some of the Treasury’s shortcomings over the past 18 months, whether its lack of urgency in announcing support schemes last spring or its failure to close gaping holes in them. I wonder whether the Minister has any thoughts on how much larger our recent downturn may have been without the Bank’s asset purchases, and what additional impact they may have on income distribution.

I raised the issue of wealth inequalities a few moments ago. It is important to note the committee’s identification of several “knowledge gaps” that, it argues, require urgent additional research. I was heartened by a section of the Bank’s 20-page response outlining a variety of ongoing workstreams that aim to improve the quality of its evidence base. The Chancellor, in his shorter response, noted the committee’s recommendations. It is disappointing that he made no firm commitments. While it is important for Mr Sunak to respect the operational independence of the Bank, he should not hide behind it. I was underwhelmed by the wider content and tone of his letter and I hope that the Minister will be more considered in his response to this debate.

Speaking of the Bank of England’s independence, it would be remiss of me not to acknowledge the importance of the last Labour Government’s decision back in 1997. Noble Lords need not take my word for it; Mr Sunak’s letter outlines the stark difference in the effectiveness of monetary policy during the 20 years before and after Gordon Brown’s decision.

We are proud of our role in giving the Bank its independence but, as with all public bodies, transparency is key. I was particularly interested in the report’s consideration of how the Bank makes and communicates its QE decisions. Openness and clarity are vital to maintaining both public trust and industry confidence. To its credit, the Bank has accepted that communication around QE can be improved. Its commitments around the accessibility of communications represent a step forward, as does the promise of changing how relevant parties are told about the adoption of new monetary policy tools.

Elsewhere, the committee made interesting recommendations about the Bank’s role in delivering the Government’s new net-zero ambition. Given the recent COP 26 summit, this could not have been more topical. The Chancellor does not believe it appropriate to update the Bank’s mandate in the manner suggested by the committee. Once again, he cites operational independence without providing any further information. Some may accuse me of cynicism, but it seems that the Chancellor’s appetite for talking about greening the economy is not matched by the political actions needed to deliver meaningful change. Following the Chancellor’s trip to Glasgow, with novelty green box in hand, I hope the Minister has been authorised to say more about how the Treasury and Bank might work together better to facilitate the transition to net zero.

The Economic Affairs Committee has come up with several important questions. There is little doubt that more needs to be done to understand the longer-term effects of QE, but the baby must not be thrown out with the bath-water. The question is not whether the Bank should make use of its monetary policy levers but whether such actions are backed up by the Government through sound fiscal policy decisions. The evidence of recent years and the Autumn Budget suggest not. We have become used to short-termism, rather than seeing evidence of a long-term vision for the economy. While I look forward to the Minister’s response, it seems to me that to get a grip on inflation and start delivering the sustainable, fair growth we so badly need, the Government need to change tack—and quickly.