Quantitative easing: a dangerous addiction? Contents

Chapter 3: QE and the COVID-19 pandemic

Independence and accountability

71.The COVID-19 pandemic caused an economic shock that was unprecedented in peacetime. Between April and June 2020, when many businesses were closed as part of a UK-wide lockdown, GDP contracted by 19.5%. In response, the Bank of England cut interest rates to 0.1% and announced several rounds of quantitative easing.65 We heard that the rapid enlargement of the quantitative easing programme, and the Bank of England’s growing role and influence in the economy, had reopened debates over whether the policy had compromised the Bank’s operational independence, and whether adequate accountability mechanisms are in place, commensurate with the expanded mandate of the Bank.66

Allegations of deficit financing

72.In 2020, the Bank of England conducted three rounds of quantitative easing, which raised the total amount of Government debt owned by the Bank from £425 billion to £875 billion (an increase of £450 billion). Minutes published by the Monetary Policy Committee set out the Bank of England’s explanations for each round of quantitative easing since March 2020:

73.Some witnesses said that quantitative easing was not an appropriate tool for supporting the economy and employment through sector specific lockdowns. Professor Tim Congdon, Founder and Chairman of the Institute of International Monetary Research, said, “In my view, you should not use a general macroeconomic demand instrument or approach to deal with sectoral-specific issues”.70 Sir Paul Tucker, Research Fellow at Harvard Kennedy School and former Deputy Governor of the Bank of England, said he had questioned why the Bank of England wished to “stimulate aggregate demand just as aggregate supply is closing down”.71

74.On 5 January 2021, the Financial Times published a survey which found the “overwhelming majority” of the 18 largest investors in Government debt believed that the Bank of England had bought gilts to keep the Government’s borrowing costs down. The article reported that many investors were sceptical of the Bank of England’s stated motivations for quantitative easing because of a correlation between the amount of gilts the Government had issued and the amount that the Bank of England had bought during the pandemic.72 We were told that such market sentiments, if sufficiently widespread, could be a danger to financial stability. Frances Coppola, an author and economics commentator, wrote, “if markets perceived that the Bank of England was effectively monetising the government deficit on anything more than a very short-term basis, there would be a risk of a run on sterling, potentially triggering out-of-control inflation and widespread economic distress.”73

Figure 6: Bank of England quantitative easing and Government borrowing requirements

Source: ‘Investors sceptical over Bank of England’s QE programme’, Financial Times (5 January 2021): available at https://www.ft.com/content/f92b6c67-15ef-460f-8655-e458f2fe2487

75.Liam Halligan, Senior Economics Commentator at the Telegraph Media Group, referred to the Financial Times survey, telling us that quantitative easing “is now almost entirely about buying government debt. The Bank tries to portray the idea that quantitative easing is about increasing inflation to stave off deflation, but no one in the market believes that.”74

76.Other witnesses said the use of quantitative easing during the COVID-19 pandemic was consistent with the Bank of England’s mandate. Lord Darling of Roulanish, a former Chancellor of the Exchequer, said, “You can perfectly argue that what the Bank is doing now is entirely in keeping with the mandate that it has at present.”75 Rupert Harrison, Portfolio Manager and Chief Macro-Strategist at BlackRock, said the independence of the external members of the Monetary Policy Committee was a protection against the Bank acting beyond its mandate. He said, “I am absolutely confident that decisions of the Bank are made by the Bank in the context of its inflation remit.”76

77.We heard that, while the latest rounds of quantitative easing did not constitute direct monetary financing, the result was effectively the same. Lord Turner of Ecchinswell, Senior Fellow and Grantee at the Institute for New Economic Thinking, said:

“The quantitative easing that we are seeing is de facto financing the fiscal deficits that the Government are running, but the decision to do that quantitative easing was made by the Monetary Policy Committee in its independent judgment that, given that the Government would run this larger fiscal deficit, it would be more stimulative if it also did a quantitative easing operation to finance it, and that without that quantitative easing operation, inflation would have fallen further below target.”77

78.Anjalika Bardalai, Chief Economist for TheCityUK, said that the rounds of quantitative easing since March 2020 had not constituted direct monetary financing as there had been no intention from the Bank of England to take such action. However, “notwithstanding the importance of the intention, the end result, you could argue, has been the same. That end result, as we have discussed, is a lowering of the cost of sovereign borrowing.”78

79.The Governor of the Bank of England rejected suggestions that the Bank of England had acted beyond its mandate and denied that the correlation between debt issued and debt bought was significant. He said:

“Take yourself back to 19 March last year. Nobody knew at that point what the fiscal deficit was going to be. I do not think the Chancellor knew what it was going to be. I do not think the Treasury knew what it was going to be. The Bank of England certainly did not know what it was going to be. So, it is just impossible for us to have fixed [quantitative easing] at that point to have matched fiscal deficits and the borrowing requirement. Nobody knew what it was, because the major economic effects of COVID had not happened at that point.”79

80.The Governor said that the Bank of England’s judgment on the number of gilts to purchase was made through its “assessment processes” and deciding which number would best support the inflation target up to a three-year horizon. In addition, he said that decisions were based on how much “headroom”—the amount of gilts the Bank of England can purchase without exceeding its self-imposed limits—remained for asset purchases. He observed that for these reasons the Bank of England could not in November 2020 have purchased significantly more than £150 billion of gilts, although he acknowledged that these self-imposed limits could be reviewed.80

Clarity of communications

81.The Monetary Policy Committee minutes from March 2020 noted that quantitative easing was aimed to bring stability to the gilt market. Subsequent announcements on quantitative easing were intended to bring inflation to target and to support the economy. The Governor of the Bank of England made several statements to the media after the March 2020 announcement, some of which attracted public attention:

82.Dr Ben Broadbent, Deputy Governor for Monetary Policy at the Bank of England, delivered a speech on quantitative easing in September 2020 which set out its purpose and how it meets monetary policy objectives.84 Andrew Bailey and Sir Dave Ramsden, Deputy Governor for Markets and Banking at the Bank of England, also made speeches on quantitative easing in February 2021.85 Sir Dave Ramsden said:

“Some commentary that I have seen has suggested that in addressing market disorder the Monetary Policy Committee somehow broadened its objectives and used a monetary policy tool for financial stability purposes. I don’t see it like that at all. The Monetary Policy Committee took action in pursuit of its objectives, because further market dysfunction triggered by the COVID shock would have led to even worse outcomes for GDP and inflation. Their action had the welcome side effect of supporting financial stability, but it was taken for monetary policy purposes.”86

83.As a result we heard that the Bank of England’s communications since March 2020 had been “poor”.87 Philip Aldrick, Economics Editor of The Times, told us that communications had become “increasingly confused” and that it was unclear initially how the March 2020 market stability intervention fed into monetary policy objectives: “Understandably, the initial phases were not very transparent. I think that there was confusion in the Monetary Policy Committee, and that led to a lack of clarity … which then helped to spur the concerns about whether this is monetary financing.”88 Blonde Money said, “the very fact that [Sir Dave] Ramsden had to make such a speech almost a year after the programme began suggests a recognition that communication needs to be improved.”89

84.Chris Giles, Economics Editor at the Financial Times, said that the Bank had not been transparent about the size of gilt purchases, and referred to the announcement in November 2020 that there would be an additional £150 billion of quantitative easing:

“When we asked the senior officials at the Bank of England, “Why £150 billion? Why not £200 billion? Why not £100 billion? Why not zero? What is the effect of different amounts of quantitative easing?”, in the same way as you would normally ask the Bank those questions about interest rates, there was no reply … there is very little transparency over what the Bank of England thinks additional quantitative easing actually achieves.”90

85.Sir Paul Tucker, Research Fellow at Harvard Kennedy School and former Deputy Governor of the Bank of England, said the best way to dispel accusations of deficit financing would be for the Bank of England to publish a forecast which set out the difference that it expected each round of quantitative easing to make to growth and inflation over two to three years.91 Similarly, Adrian Grey, Global Chief Investment Officer at Insight Investment, said, “it would be helpful if in the whole communication strategy there was a little bit more about how the amount of quantitative easing mapped on to a growth or inflation target in the forecast period.”92 Blonde Money said in written evidence that the Bank of England should produce a “quantitative model” which sets out the extent to which quantitative easing programme had met its stated objectives.93

86.We heard that it would be challenging to create such a model. Blonde Money said, “such a model is only as good as its assumptions” and Lord Macpherson of Earl’s Court said, “there is not a huge amount of science yet in quantitative easing. It is very difficult to know the precise impact of an extra £10 billion or £20 billion of asset purchases.”94 Nevertheless, Chris Giles said, “We know that we cannot have accuracy in these things, but a little bit of additional transparency over what exactly they are thinking about and their judgment is entirely appropriate.”95

87.The Governor of the Bank of England told us that communicating effectively about quantitative easing in 2020 had been a challenge: “It was a most extreme challenge for us, unsurprisingly, during the second quarter of last year when activity in the economy was falling by 20% … [Communicating] quantitative easing is a challenge to us, and it is one we have to take on and maintain, but I am under no illusions that in explaining monetary policy in a world where quantitative easing is a tool it is harder to communicate.”96

88.There is a widespread perception, including among large institutional investors in Government debt, that financing the Government’s deficit spending was a significant reason for quantitative easing during the COVID-19 pandemic. By its nature, quantitative easing lowers the cost of Government borrowing; this makes it difficult to disentangle monetary policy and deficit financing.

89.Perceptions that the Bank of England had acted primarily to finance the Government’s deficit were entrenched because the Bank of England’s gilt purchases aligned closely with the speed of issuance by HM Treasury. Furthermore, statements made by the Governor in May and June 2020 on how quantitative easing helped the Government to borrow lacked clarity and were likely to have added to the perception that recent rounds of asset purchases were at least partially motivated to finance the Government’s fiscal policy. If this perception continues to spread, the Bank of England’s ability to control inflation and maintain financial stability could be undermined significantly.

90.The level of detail published by the Bank of England on how quantitative easing will affect the economy is not sufficient to enable Parliament and the public to hold it to account. This has bred distrust. The Bank of England should be more open about its “assessment processes” for calculating the amount of asset purchases needed to achieve a stated objective. In its public communications, including Monetary Policy Committee minutes, the Bank should publish its assumptions, along with its assessment processes and analyse the breakdown the effect of quantitative easing at each stage of the programme and examine the extent to which it has achieved the Bank of England’s stated targets. We recognise that the quality of data on the effects of quantitative easing is limited but we believe that greater transparency will lead to improvements over time.

Bank of England mandate

91.On 3 March 2021, the Chancellor updated the Bank of England’s mandate so that it reflected the Government’s “economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net zero economy.”97 The update confirmed that the economic policy of the Government, which the Monetary Policy Committee is required to support as a secondary objective, includes supporting the transition to net zero emissions.98

92.For several years, central banks have been conducting work on managing climate risk to the financial sector and exploring their role in the transition to net zero. For example, in December 2017 eight central banks, including the Bank of England, and supervisors established the Network of Central Banks and Supervisors for Greening the Financial System. It now has 92 members.99

93.One of the implications of the update is that the Bank of England will need to change its approach to buying corporate bonds as part of its Corporate Bond Purchase Scheme. Under the Scheme, the Bank of England has purchased £20 billion of corporate bonds, which accounts for 6.5% of the sterling corporate bond market.100 As Andrew Hauser, Executive Director for Markets at the Bank of England, said in a speech on 21 May 2021, large companies which use the bond market for finance are more likely on average to have large carbon footprints. To fulfil its updated mandate, the Bank of England will need to adjust the composition of the Corporate Bond Purchase Scheme, without compromising its monetary policy objectives.

94.Several witnesses said that the update to the mandate risked politicising the Bank of England. Christina Parajon Skinner, Assistant Professor of Legal Studies and Business Ethics at the Wharton School of the University of Pennsylvania, told us:

“In connection with the green mandate, it puts the central bank in the position of choosing and making value judgments about green winners and losers. Deciding what is and is not in the green perimeter seems like a difficult task to take on with objectivity. The genie is out of the bottle at this point, but the discretion at least is a bit unhelpful to independence.”101

95.Christina Skinner said that Parliament and the public would benefit from further insight as to why using the Asset Purchase Facility to make the financial system greener is monetary and not fiscal policy. “After all, that will have the direct effect of skewing the £20 billion programme towards certain kinds of green sectors, and potentially the secondary impact of raising the cost of credit for fossil fuel producers and similar corporates via a signalling channel.”102

96.Some witnesses warned of the risks of giving central banks too many objectives which may bring them into conflict. Otmar Issing, President of the Center for Financial Studies and former Chief Economist at the European Central Bank, said, “Too many targets make it almost impossible to focus monetary policy on maintaining price stability.”103 Daniel Gros, Distinguished Fellow at the Centre for European Policy Studies, said, “The more independent a central bank is, the narrower its mandate has to be.”104 Lord Macpherson of Earl’s Court thought that it was not clear whether the update to the mandate represented a significant change but said, “if we overload the Bank with objectives—bear in mind that it only has so many instruments—we risk dragging it into political areas where it will be criticised unnecessarily.”105

97.Several witnesses said the Bank of England should largely limit climate change considerations to financial stability risks. Charles Goodhart said the Bank had a role in climate change policy because of its financial stability remit “but I would not go further”.106 Lord Turner of Ecchinswell said, “I would not like to see in the corporate bond portfolio a lot of playing around and saying, “I am going to buy the corporate bonds of this renewable energy company and not that”.107 Lord Darling of Roulanish said the Bank of England should consider financial stability risks from climate change but “where you get into difficulties is if the Government asks it to make decisions to lend to one person or one group of people or others when it does not really have the means of assessing whether something is carbon neutral”.108

98.On 21 May 2021, Andrew Hauser, Executive Director for Markets at the Bank of England, launched a Discussion Paper setting out several challenges to ‘greening’ the Banks portfolio and how the Bank might overcome them. Challenges included the difficulty of not penalising carbon emitters with credible carbon reduction strategies and the risk of the Bank selling the bonds it currently holds to investors with the least interest in emissions reductions.109 The Discussion Paper set out that changes to the Scheme:

The Discussion Paper said the Bank was considering setting particular climate targets for the Bank’s portfolio; making eligibility for the Corporate Bond Purchase Scheme conditional on climate-related actions by issuers; rebalancing bond purchases towards eligible issuers which have made stronger relative progress in achieving net zero; and implementing a strategy to make requirements for inclusion in the Corporate Bond Purchase Scheme progressively more stringent.110

99.The Governor of the Bank of England said the Bank’s initial approach to greening the Corporate Bond Purchasing Scheme is to adapt the definition of market neutrality so that it takes “the direction of the change towards net zero” into account. He said that judging whether companies were adopting policies consistent with net zero was “not straightforward”. The Governor said that the Bank of England aimed to have adapted the Corporate Bond Purchasing Scheme before it needed to rebalance its corporate bond portfolio in the autumn.111

100.On 26 May 2021, we wrote to the Chancellor to ask whether HM Treasury had provided any guidance or instructions to the Bank of England on how it should interpret and implement the update to its mandate. We asked how he expected the update to affect the Bank of England’s Corporate Bond Purchasing Scheme. On 9 June 2021, he responded:

“The Treasury gave no guidance or instruction to the Bank of England on how it should implement the update to the mandate, as it is for the independent MPC to judge how it can support the Government’s green and other economic objectives whilst achieving its primary objective of price stability.”

The Chancellor would not comment on how the update might affect the Corporate Bond Purchase Scheme and referred us to the Bank of England’s 21 May 2021 Discussion Paper.112 On 15 June 2021, we wrote to the Chancellor to request a fuller answer on the implications for the Corporate Bond Purchase Scheme.113 In his response, the Chancellor declined to do so.114

101.Any changes to the Bank of England’s mandate must be considered carefully. HM Treasury has updated the mandate to reflect environmental sustainability and the transition to net zero. These are important issues, but HM Treasury’s instruction is ambiguous, and its interpretation has been left to the discretion of the Bank of England. Without some clarification from the Government, the Bank risks being forced into the political arena, exposing it to criticism unnecessarily. The Chancellor should write to the Governor to clarify the Government’s expectations.


65 See Figure 4 in introduction for indication of scale of new asset prices.

66 Lord Tyrie submitted a proposal for enhanced Parliamentary scrutiny body to examine the work and policies of the Bank of England and other regulators in written evidence. See written evidence from Lord Tyrie (QEI0022). See also, European Parliament, Accountability Mechanisms of the Bank of England and of the European Central Bank (September 2020): https://www.europarl.europa.eu/cmsdata/211623/1_LASTRA-final.pdf [accessed 5 July 2021]

67 Minutes were published on 26 March 2020, alongside those of the regularly scheduled meeting ending on 25 March 2020. See, Bank of England, Minutes of the special Monetary Policy Committee meeting on 19 March 2020 and the Monetary Policy Committee meeting ending on 25 March 2020

69 Bank of England, Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 4 November 2020. At subsequent meetings of the Monetary Policy Committee, it voted to continue with asset purchases previously announced. For example, on 17 March 2021 it confirmed that it expected it to complete asset purchases “by around the end of 2021.” See, Bank of England, Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 17 March 2021 (18 March 2021): https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-summary-and-minutes/2021/march-2021.pdf [accessed 5 July 2021]

70 Q 33 (Prof Tim Congdon)

71 Q 12 (Sir Paul Tucker)

72 ‘Investors sceptical over Bank of England’s QE programme’, Financial Times (5 January 2021): available at https://www.ft.com/content/f92b6c67-15ef-460f-8655-e458f2fe2487

73 Written evidence from Frances Coppola (QEI0010)

74 Q 22 (Liam Halligan)

75 Q 75 (Lord Darling of Roulanish)

76 Q 56 (Rupert Harrison)

77 Q 98 (Lord Turner of Ecchinswell)

78 Q 137 (Anjalika Bardalai)

79 Q 197 (Andrew Bailey)

80 QQ 184, 190 (Andrew Bailey)

81 ITV, ‘Bank of England’s Andrew Bailey explains how he is helping the government avoid austerity’ (13 May 2020): https://www.itv.com/news/2020–05-13/governor-of-bank-of-england-andrew-bailey-robert-peston

82 ‘BoE is financing UK’s coronavirus measures, Bailey acknowledges’, Financial Times (14 May 2020): available at https://www.ft.com/content/ad63e45c-ad55-41a2-ae2e-8d550ff0ac92

83 ‘UK government almost ran out of funds, says BoE governor’, Financial Times (22 June 2020): available at https://www.ft.com/content/1945b708-a1d0-4960-9cb2-7238a3c8cd89

84 Ben Broadbent, speech on Government debt and inflation, 2 September 2020: https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/government-debt-and-inflation-speech-by-ben-broadbent.pdf [accessed 5 July 2021]

85 Andrew Bailey, speech on Modern challenges for the modern central bank: perspectives from the Bank of England, 5 February 2021: https://www.bankofengland.co.uk/speech/2021/february/andrew-bailey-lse-event-german-symposium [accessed 5 July 2021]

86 Dave Ramsden, speech on QE as an economic policy tool - what does it do and how should we use it?, 17 February 2021: https://www.bankofengland.co.uk/-/media/boe/files/speech/2021/february/qe-as-an-economic-policy-tool-what-does-it-do-and-how-should-we-use-it-speech-by-dave-ramsden.pdf [accessed 5 July 2021]

87 Written evidence from Blonde Money (QEI0012)

88 Q 2 (Philip Aldrick)

89 Written evidence from Blonde Money (QEI0012)

90 Q 2 (Chris Giles)

91 Q 14 (Sir Paul Tucker)

92 Q 50 (Adrian Grey)

93 Written evidence from Blonde Money (QEI0012)

94 Q 165 (Lord Macpherson of Earl’s Court)

95 Q 2 (Chris Giles)

96 Q 184 (Andrew Bailey)

97 Letter from the Chancellor of the Exchequer to the Governor of the Bank of England (3 March 2021): https://committees.parliament.uk/publications/3958/documents/39777/default/

98 The Bank of England has, for several years, considered the potential effects of climate change on the financial sector as part of its regulatory and financial stability responsibilities. See, Bank of England, ‘Climate change’: https://www.bankofengland.co.uk/climate-change [accessed 5 July 2021].

99 NGFS, ‘Membership’: https://www.ngfs.net/en/about-us/membership [accessed 5 July 2021]

100 Bank of England, Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 5 May 2021 (6 May 2021): https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-summary-and-minutes/2021/may-2021.pdf [accessed 5 July 2021] See also Andrew Hauser, speech on It’s not easy being green – but that shouldn’t stop us: how central banks can use their monetary policy portfolio to support orderly transition to net zero, 21 May 2021: https://www.bankofengland.co.uk/-/media/boe/files/speech/2021/may/its-not-easy-being-green-but-that-shouldnt-stop-us-speech-by-andrew-hauser.pdf [accessed 5 July 2021]

101 Q 145 (Christina Parajon Skinner)

102 Q 144 (Christina Parajon Skinner)

103 Q 173 (Otmar Issing)

104 111 (Daniel Gros)

105 Q 166 (Lord Macpherson of Earl’s Court)

106 Q 100 (Charles Goodhart)

107 Q 100 (Lord Turner of Ecchinswell)

108 QQ 76, 83 (Lord Darling of Roulanish)

109 Andrew Hauser, speech on It’s not easy being green – but that shouldn’t stop us: how central banks can use their monetary policy portfolio to support orderly transition to net zero, 21 May 2021: https://www.bankofengland.co.uk/-/media/boe/files/speech/2021/may/its-not-easy-being-green-but-that-shouldnt-stop-us-speech-by-andrew-hauser.pdf

110 Bank of England, Options for greening the Bank of England’s Corporate Bond Purchase Scheme (May 2021): https://www.bankofengland.co.uk/-/media/boe/files/paper/2021/options-for-greening-the-bank-of-englands-corporate-bond-purchase-scheme-discussion-paper.pdf [accessed 5 July 2021]

111 Q 198 (Andrew Bailey)

112 Letter from the Chancellor of the Exchequer to the Chair of the Economic Affairs Committee (10 June 2021): https://committees.parliament.uk/publications/6260/documents/69153/default/

113 Letter from the Chair of the Economic Affairs Committee to the Chancellor of the Exchequer (15 June 2021): https://committees.parliament.uk/publications/6608/documents/71317/default/

114 Letter from the Chancellor of the Exchequer to the Chair of the Economic Affairs Committee (2 July 2021): https://committees.parliament.uk/publications/6609/documents/71318/default/




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