Quantitative Easing (Economic Affairs Committee Report)

Viscount Younger of Leckie Excerpts

Monday 15th November 2021 Grand Committee

[Viscount Younger of Leckie (Con)]

My Lords, I am pleased to have the opportunity to conclude this debate for the Government, and I thank the committee and its chairman for this report. I welcome my noble friend Lord Forsyth to this Committee for his debut opening a debate. I feel as if I should call him a new boy but, of all Peers in this House, he is no new boy. I am aware of the considerable number of experienced and knowledgeable Peers contributing on this subject today, including a certain former Chancellor who remains as sharp as ever, I am pleased to see.

I will begin by setting out how monetary policy operates, before turning to QE specifically. Noble Lords will know that monetary policy is the responsibility of the MPC, the Monetary Policy Committee of the Bank of England, and I reiterate the Government’s commitment to independent monetary policy. Several Peers have made this clear too, as an indisputable fact. I was pleased to hear the noble Lord, Lord Tunnicliffe, refer to the decision made in 1997. The Government set the objectives, but the policy choices and the tools used to meet them are up to the MPC. This includes decisions on bank rate and, more recently, unconventional policies such as quantitative easing, which we are debating today.

As the Bank set out in its response to this report, monetary policy is most effective when its objectives are clear, and the independence of the MPC is paramount to its effectiveness. As the noble Lord, Lord Burns, pointed out and my noble friend Lord Bridges touched on, this helps to ensure that the Bank meets its price stability objective—the 2% CPI inflation target. It has a strong track record of doing so. Since independence, inflation has averaged close to 2% whereas, in the 20 years prior, inflation fluctuated between 1% and 22%—a point also alluded to by the noble Lord, Lord Tunnicliffe.

Over the past 18 months we have seen just how important independent monetary policy is, playing a critical role in supporting the economy through the Covid-19 pandemic. The MPC took unprecedented action, reducing bank rate to a historic low of 0.1% and extending its QE programme to a target stock of £895 billion to support households and businesses. I note that Andrew Bailey, the governor, has said that the economic response has been designed to ensure that long-term damage to the economy has been

“as small as can be.”

As your Lordships know, this crisis is not the first time that the Bank of England and central banks around the world have used QE. It was first used in the UK in 2009, in response to the financial crisis, providing additional stimulus to the economy when bank rate reached what were then record lows. The Bank of England purchased an initial £200 billion worth of assets.

The next round of QE took place in 2012, when an additional £175 billion of assets was purchased to provide additional support to the economy during the eurozone debt crisis. This took the total stock of assets to £375 billion. To support the economy after the EU referendum, the MPC increased the stock of QE to £445 billion in August 2016. As your Lordships will be aware, the MPC has undertaken a further three rounds of QE since the start of the pandemic, bringing the target stock of assets purchased to £895 billion—of which £20 billion is corporate bonds.

The UK was not alone in turning to QE to support monetary policy objectives, as the noble Lord, Lord Burns, and my noble friends Lord Griffiths and Lord Bridges said. The Fed, the ECB, the Bank of Japan and many other central banks across the world also expanded their QE programmes during the pandemic. The UK’s QE programme is now close to 40% of GDP, as was mentioned in the debate—in line with many of our international peers. QE has lasted longer than originally expected for a variety of reasons, but the Bank—alongside many other central banks around the world—deems it to be an important part of its toolkit.

I turn to the issues raised in the report, which, as a good few Peers have said, are indeed complex and wide ranging. Many of the recommendations are for the Bank to take forward, and it has responded thoroughly —as the noble Lord, Lord Fox, said. Recommendations for the Bank were focused on four issues: the Bank’s independence, the effects of QE, communicating decisions on QE and unwinding QE. I will turn to the fourth issue—unwinding QE—nearer the end of my speech, as I know it is of interest to your Lordships here today and was raised by many Peers, including my noble friend Lord Forsyth.

The Bank responded in full to these recommendations in September. The Chancellor has also responded to the five recommendations for the Treasury, as set out in his letter to the committee in September. I will outline his response, which I am sure will be familiar to members of the committee.

First, the report asked the Chancellor to clarify his expectations as to how the Bank should help to achieve the transition to a net-zero economy, following from the update to the remit to reflect the Government’s aim to transition to an environmentally sustainable and resilient net-zero economy.

The Bank has already started work on this, setting out in November how it will green its corporate bond holdings to help to achieve net zero. It is for the Bank to make these decisions, given its independence, and it would not be right for the Government to instruct it in any way.

The report stated that Her Majesty’s Treasury has not helped to clarify its relationship with the Bank and noted that adding additional objectives for the Bank risks the MPC losing its focus on price stability. This issue was raised by my noble friend Lord Griffiths, and several Peers raised the relationship between the Treasury and the Bank.

The Chancellor reaffirmed the remit for the MPC at the Budget on 27 October 2021, reconfirming the inflation target for the MPC as 2%, as measured by the 12-month increase in the consumer prices index, reflecting the primacy of price stability and the forward-looking inflation target in the UK monetary policy framework. When reaffirming the MPC remit, the Chancellor also confirmed that the Government’s commitment to price stability, and the Bank of England’s operational independence, remained absolute.

Thirdly, and responding to a point raised by the noble Lord, Lord Tunnicliffe, the report noted that monetary policy has distributional effects and invited the Treasury to reply to any research that the Bank produces on these effects. A few Peers, including the noble Lord, Lord Davies of Brixton, have noted the potential impact on wealth and pensions; that was the main subject of his speech. Of course, all public policies have distributional incomes, including monetary policy. The Government consider a wide range of research and consult a wide range of stakeholders when making policies, and the Bank’s research forms part of this evidence base.

Fourthly, the report requested the publication of the deed of indemnity of the asset purchase facility and queried the potential policy of ceasing to pay interest on the Bank’s reserves. My noble friend Lord Forsyth also raised this point. I point to the Chancellor’s response to the report in this area, where he reiterated that the Treasury is not considering a policy of ceasing to pay interest on reserves and that the decision not to publish the indemnity is in line with the approach taken since the inception of the APF.

Finally, the report noted the uncertainties surrounding QE, specifically regarding its impact on inflation and output, and that the Treasury should do more to acknowledge this. As previously stated, since independence, monetary policy has been successful in delivering low and stable inflation, but the Treasury will not comment on monetary policy conduct or effectiveness to ensure operational independence is upheld.

I now turn to the final recommendation made to the Bank. The report called for the Bank of England to set out a strategy of how to unwind QE; my noble friend Lord Lamont also raised this question. Alongside its August Monetary Policy Report, the MPC outlined guidance for the conditions needed to reduce its balance sheet. The response from the Bank of England stated that the MPC’s view is that the recent rise in inflation, while likely to continue over the short term, is likely to be transitory. The MPC further said that it intends to

“begin to reduce the stock of purchased assets, by ceasing to reinvest maturing”

assets

“when Bank Rate has risen to 0.5% and if appropriate given the economic circumstances.”

Then the MPC stated that it

“envisages beginning the process of actively selling assets … only once Bank Rate has risen to at least 1%, and depending on economic circumstances at the time.”

The MPC also stated that

“Any asset sales would be conducted in a predictable manner over a period of time so as not to disrupt the functioning of financial markets.”


Monetary policy has played a critical role in supporting the economy through the Covid-19 pandemic, and the monetary policy framework remains a central pillar of the Government’s macroeconomic strategy. The noble Lord, Lord Monks, asked how the Treasury would respond to rising inflation and interest rates. As the Office for Budget Responsibility set out in its most recent economic and fiscal outlook, a rise in inflation and interest rates will directly increase debt interest rates. This is why the Government have taken action to ensure that the public finances return to a sustainable footing. The fiscal rules seek to tackle the risk associated with the increased sensitivity of the public finances to changes in interest rates and inflation. Of course, this may put further pressure on household incomes, as several Peers alluded to in the debate.

The noble Lord, Lord Fox, asked for our views on inflation, and several other Peers, including my noble friend Lady Morrissey, also raised this. As the Chancellor said at the Budget, the majority of this rise is due to two global forces: demand, which has increased more quickly than supply chains can meet, and a surge in energy demand. I should emphasise what the Bank has said about this. It thinks that these global pressures are transitory and takes decisions to target inflation in the medium term, which is an interesting point. As the Chancellor noted, these are shared global problems which we cannot address on our own, but where the Government can ease these pressures, they are acting to do so.

The noble Lord, Lord Fox, asked about the outlook. The latest data show that, by September, the economy was just 0.6% below its pre-pandemic level, and we are forecast to have the fastest growth in the G7 this year. This means that 2 million fewer people will be out of work than had previously been feared.

At Budget, the Chancellor set out targeted actions to support living standards: cutting the universal credit taper rate and raising the national living wage; helping with essentials through the energy price cap, the warm home discount and frozen fuel duty; and supporting the most vulnerable families through our £500 million household support fund. Matters relating to poverty were raised by the noble Lords, Lord Tunnicliffe and Lord Sikka, among others. The Bank has a strong record in ensuring price stability, and the Government are taking action where appropriate. The extraordinary policy responses from both the Government and the Bank of England have been vital in continuing to support businesses and households through this period of disruption.

My noble friend Lord Lamont raised at least four questions. I may not be able to answer them all, but his question on whether QE will be held to maturity is of course a decision of the Bank. Quantitative easing is its tool, and it is for the Bank to set out how it will unwind it. Indeed, it has set that out, as I mentioned earlier. He also raised a question about whether the Chancellor can refuse QE. The expansion of the maximum size of the asset purchase facility, which is the vehicle that delivers QE, as he knows, requires authorisation from the Chancellor. I am afraid I am not able to say anything on his question about sequencing.

I will just give one example of the transparency of the Bank of England and the MPC. At 2.30 pm today, the governor, Andrew Bailey, and other members of the MPC attended the Treasury Select Committee to discuss the November monetary policy report. This answers a few questions about transparency and accountability.

The noble Baroness, Lady Kramer, asked why the Government excluded QE from PSND. QE is included in PSND, but it is excluded from the PSND excluding Bank of England measure. This measure is used to better reflect the Government’s decisions.

There may be some other questions that I have not answered, but I will look at Hansard with great care. The Committee knows that, because of the independence of the MPC, I have been unable to give opinions on everything—that is rather obvious—but I hope that I have given some sort of round-up, and I now invite my noble friend to respond.