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Economy: Quantitative Easing

Volume 715: debated on Monday 14 December 2009


Asked By

To ask Her Majesty’s Government what assessment they have made of the conclusion of the Governor of the Bank of England on the level of quantitative easing.

My Lords, monetary policy and its assessment are matters for the Bank of England. There is uncertainty about the impact of the asset purchase facility, but a number of developments are consistent with its expected effects. Corporate bond and gilt yields fell significantly following the APF announcement. Issuance of bonds by UK non-financial companies rose sharply in the first half of 2009.

My Lords, I think I thank my noble friend for the Answer. He quoted the Bank of England. Does he accept that its powers of independence are heavily circumscribed under the Bank of England Act and if the unpredictable governor sought to stop quantitative easing too soon, it would be disastrous? Will my noble friend use the Bank of England Act to make sure that he does not?

My Lords, it is a pleasure to see my noble friend Lord Barnett back in his place and up to his usual form.

The Treasury has the highest confidence in the Governor of the Bank of England and, no doubt, through the interplay of the price of money—interests rates have fallen from 5 per cent in October 2008 to 0.5 per cent at the moment—and the quantity of money, as affected through the APF, the Bank of England will continue to target an inflation rate of 2 per cent. The move to introduce quantitative easing was to ensure that we headed off the risk of deflation. There is increasing evidence that the Bank has been successful in that respect. I am sure it will continue to be successful in other decisions in future.

My Lords, can the Minister explain why the Monetary Policy Committee of the Bank of the England was not informed about the covert support given to RBS and Lloyds HBOS when that information, had it been available to it, would have affected its views on the introduction of quantitative easing? Secondly, can he say what proportion of government debt outstanding is now owned by the Bank of England? Does he see any theoretical or practical upper limit to that?

My Lords, there are several questions there. The majority of members of the Monetary Policy Committee were aware of the action that the Bank of England had taken under the Banking (Special Provisions) Act 2008 to provide emergency liquidity support to HBOS and the Royal Bank of Scotland. Accordingly, they would have been aware of that matter when it came to deliberations and discussions in the MPC. The content of those discussions is not known to me and therefore I am not in a position to know what information was given to the MPC. Nor would it be appropriate for me to know because the MPC has independent responsibility for the management of interest rates and the price and quantity of money.

As for the second part of the noble Lord’s question, quantitative easing is targeted at about 12 per cent of GDP so the proportion of government debt owned under the APF can be deduced from that. I am afraid that my mathematics are not quick enough to carry out the calculation, but I am sure that the noble Lord, Lord Lamont, is able to do so.

The third part of the noble Lord’s question was about an upper limit. The MPC will form a view on how much more quantitative easing is required to achieve a 5 per cent nominal GDP target and a 2 per cent inflation target. If it judges it necessary to continue the programme beyond its present limitations, it will no doubt seek the agreement of the Chancellor of the Exchequer to do so.

The liquidation of the existing APF through exchange, holding to maturity and selling back into the market in co-operation with the DMO should not in itself set an upper limit for these operations that is anywhere close to where we are at the moment.

My Lords, does the Minister believe that quantitative easing has been a success? If so, what indicators can be used to measure such success?

I have already referred to the significant increase in equity and bond issuance. Unfortunately, proving that there has been a contraction of credit spreads over gilt-edged spreads and in the movement in gilt-edged yields, is, as Charlie Bean, the deputy governor, said in a speech in October, extremely difficult because one is trying to prove a counterfactual. The Bank of England’s judgment at the moment is that quantitative easing is having the effect that it anticipated, but Mr Bean went on to say that it may be several decades before academics have reached a firm conclusion.

My Lords, does the Minister accept that if the Bank stops quantitative easing, as is predicted, in February next year, private sector purchases of government debt will have to rise sevenfold next year, and that that will inevitably lead to a significant increase in interest rates? Will he assure the House that in those circumstances the Government will resist the temptation to put pressure on the Bank to keep quantitative easing going purely to reduce their own interest costs?

The Government would put no pressure on the Bank in respect of any aspect of monetary policy decision-making, be it interest rates or quantitative easing. I will not comment on when the quantitative easing programme might come to a close because only the members of the MPC are authorised to determine that matter. If the observation made by the noble Lord, Lord Newby, was correct, the fact that quantitative easing will come to an end at some time is already priced into the markets, because, not surprisingly, he is not the only one to have that view.

My Lords, confining ourselves to, say, the past 200 years, the British Government have never reneged on either principal or interest on any bit of the national debt. Is that not a reason for believing that the Government’s monetary, and more broadly asset, policy is entirely correct?

I am grateful to my noble friend for reminding us of 200 years of history. That gives the markets considerable assurance, as does the PBR statement and the very firm commitment to halve the public sector financing requirement within four years of the recovery commencing.

My Lords, the Minister rightly links quantitative easing with interest rate policy. This is particularly relevant to what the noble Lord, Lord Peston, said about funding the Government’s debt, because that may well depend on changes in interest rates. How, therefore, did the Prime Minister manage to offer an extra £1.5 billion to encourage the third world on the subject of global warming? The figure of £1.5 billion is apparently based on the need to show that we are more generous than the French and the Germans. Do we really have that sort of money, or will it come out of the aid budget?

I think we have strayed some distance from quantitative easing, but I am sure that the House endorses the action that the UK Government are taking to show our firm and real commitment to address the horrifying scale of the risks attached to global warming.