Chapter 5: Conclusion
180.When quantitative easing was introduced it was envisaged that it would support the UK economy after a sharp fall in aggregate demand following the 2008–09 global financial crisis. However, over the last decade it has been deployed in various circumstances quite different from those of 2009 to tackle a range of different problems. This has had a ratchet effect, whereby the scale of quantitative easing has been increased repeatedly, with no subsequent attempts to reverse it. This has only served to exacerbate the challenges involved in unwinding the policy. The Bank insists that quantitative easing has been an essential response to extraordinary and fast-moving events and always in line with its price stability mandate. However, the effects of quantitative easing remain poorly understood and in recent years, particularly during the COVID-19 pandemic, the Bank has struggled to explain why it was the appropriate response to particular economic circumstances.
181.Trade-offs that may have been acceptable in a policy designed as a temporary measure have become increasingly controversial as the programme has persisted. While the scale of quantitative easing has increased substantially over the last decade, there has not been a corresponding increase in the Bank of England’s understanding of the policy’s effects on the economy in the short, medium and long term. While we recognise that quantitative easing has prevented economic crises from spiralling downwards, its effect on inflation and output is uncertain, and it may also have increased wealth inequality by raising the price of certain assets, benefitting those who own them. The Bank of England and HM Treasury must do more to acknowledge this uncertainty and to understand these effects.
182.Quantitative easing has also made Bank of England and HM Treasury policymaking more interdependent, blurring monetary and fiscal policy, and this has started to erode the perception that the Bank has acted wholly independently of political considerations. We are concerned that scepticism of the Bank’s stated reasons for quantitative easing grew significantly during the COVID-19 pandemic, when many market participants said that they believed the Bank of England had used quantitative easing primarily to finance the Government’s deficit spending. If such sentiments continue to spread, the effectiveness of the Bank’s policies will be threatened severely. A reappraisal of how the Bank communicates its reasons for quantitative easing is needed urgently, as is the need for the Bank to provide a way for the public and Parliament to judge the success of the programme to ensure that it can be held properly to account for its decisions.
183.Finally, we are concerned that the scale of quantitative easing exposes the Bank of England to political pressure not to raise interest rates if rising inflation does not prove to be short-term as is forecast by the Bank. The Bank must define more clearly what it means when it states that rising inflation will be “transitory”; and it must explain in more detail why it is appropriate to continue with previously announced asset purchases when the economy is growing and inflation is rising at a faster rate than the Bank expected. The design of the quantitative easing programme and the size of the Bank’s balance sheet—now equivalent to 40% of GDP—has increased the sensitivity of the public finances to a substantial rise in debt servicing costs if the Bank needed to raise interest rates to control inflation. This will test the Bank’s independence. If it does not respond to the inflation threat early enough, it may be substantially more difficult for the Bank to curb it later. Failure to pass this test would damage hard won trust in the Bank of England’s ability to achieve its mandate.
184.We sympathise with the Bank of England that it has had to meet its mandate in an economic environment in which its independence has been more difficult to define compared to when operational independence was granted in 1997. Dealing with the economic consequences of the COVID-19 pandemic means the Bank necessarily working more closely with HM Treasury to ensure policy is complementary. However, HM Treasury has not helped to clarify its relationship with the Bank in its ambiguous answers to us. Furthermore, adding additional roles to the Bank risks it losing focus on its primary responsibility to control inflation.