Motion to Take Note
My Lords, in 21 years in this House, this is the first time I have ever spoken in Grand Committee. That may be because I am attracted to controversial subjects. I would just like to say, not in any kind of disobliging way, that I am disappointed that a report of this importance to our country is not being debated on the Floor of the House, and even more disappointed that the debate on the Budget was not taken on the Floor of the House. I know we are restricted in what we can do in respect of the financial affairs of our country, but that does not mean that they should be relegated to this Committee, important as it is.
I would like to introduce the report from the Economic Affairs Committee: Quantitative Easing: A Dangerous Addiction? By the end of 2021, the Bank of England will own an eye-watering £875 billion of government bonds and another £20 billion in corporate bonds, which is equivalent to 40% of GDP. Given these sums, it is now difficult to remember that QE was intended to be a temporary measure, like income tax. The first round of QE in 2009 initially amounted to a mere £50 billion and was sanctioned when the economy was in danger of tanking in the aftermath of the global financial crisis. Over a decade later, the unconventional has become conventional, temporary appears to have become permanent, and £50 billion has become £895 billion.
It seems extraordinary to me that the bank has faced little scrutiny for a tool that could have enormous implications for inflation, wealth inequality and the public finances. Our report, which was agreed unanimously, was the first major parliamentary inquiry on any central bank QE programme and has attracted international attention as a result. It is a step forward in increasing the bank’s accountability to Parliament. “Trust us, the man in Threadneedle Street knows best” will no longer do.
Before I explain our conclusions, I thank the committee staff: Adrian Hitchins, Dr William Harvey and Mithula Parayoganathan, and the committee’s special adviser, Professor Rosa Lastra, who did a fantastic job for the committee.
Allow me to begin by tackling one of the most pressing issues facing the global economy: inflation. First, we were told as recently as May this year that inflation may rise temporarily above the Bank’s 2% target. Next, we were told that it may exceed 4%. Now we are told by the governor, amidst warnings from the Bank’s new chief economist, that inflation is likely to rise
“close to or even slightly above 5 per cent”
and that the bank “won’t bottle it” if interest rate rises are necessary to curb inflation.
We raised concerns that the ongoing round of quantitative easing could pour fuel on the fire as it coincides with a growing economy, substantial government spending, bottlenecks in supply and a recovery in demand. That was in July 2021. Since then, bottlenecks have got worse, shortages have increased, wages have risen and prices have rocketed. We asked the Bank to outline in greater detail why it thought inflation would prove to be transitory. It did so shortly after our report was published, but apparently not by way of response to the committee’s recommendations.
We also expressed concern that the Bank has not explained why continuing its asset purchases until the end of 2021 is the right course of action. The MPC itself is increasingly divided, with three members voting to end the current asset purchase now at its most recent meeting. The Bank is yet to fully explain why QE is always the answer to the country’s economic ills, regardless of their cause. Its communications remain mismanaged, with only uncertainly left in its wake. If and when the governor’s delphic hints on rate rises materialise, there is a risk that the cost of servicing government debt could rise significantly.
QE makes the cost of serving government debt more vulnerable to increases in interest rates. Having chosen not to increase rates so far, when the Bank has to hit the brakes there could be a significant increase in the cost of servicing government debt. We heard that a 1% rise in interest rates could increase debt interest spending by £20.8 billion in 2025-26. To put this into perspective, the head of the OBR has said that just a 1% interest rate rise could easily wipe out the Chancellor’s headroom. In other words, a 1% rise would mean that the Treasury failed to meet its new fiscal rules.
We raised concern that if inflation continues to rise, the Bank may come under political pressure not to take the necessary action to maintain price stability. Given the current context, that concern seems to be at the forefront of most people’s minds. During the course of our inquiry, the committee found that the deed of indemnity—the contractual document between the Treasury and the Bank of England governing taxpayer liability for QE—had not been published. Despite assurances from the governor of the Bank that the document is benign, the Chancellor has still refused to make the document public, telling us that it contains some information that has operational sensitivity. There is no convincing argument for concealing this document from public and parliamentary scrutiny. It is astonishing that the document has not been published, and our report calls for the Chancellor to do so.
On the question of transparency and credibility, perhaps I could just take a moment to clarify the committee’s examination of allegations that the Bank has acquiesced in deficit financing. The committee did not, in contrast to the governor’s reported criticisms, conclude that the Bank used QE to engage in deficit financing. We took evidence on the perceptions that had developed during the pandemic and called for the Bank to explain the purpose of QE, including the publication of its assessment processes for calculating the amount of asset purchases needed to achieve a stated objective.
In monetary policy, perception is everything, and we raised our concerns that the Bank ran the risk of losing its credibility if its communication did not improve and it was unable to put these perceptions to bed once and for all. The strength of the Bank’s reputation rests on its ability to operate independently from political decision-making. We urged it to improve and clarify its communication to demonstrate its independence.
The Bank has now been using QE for over a decade and in a variety of situations, but we concluded that it had limited impact on growth and aggregate demand. It has been effective at stabilising financial markets during periods of economic turmoil, but its impact on the real economy has been negligible. There is little evidence to show that QE increased bank lending, investment or consumer spending by asset holders. We did, however, conclude that it has inflated asset prices artificially and exacerbated wealth inequalities.
In its response, the Bank said that
“what literature there is does not support”—
our conclusion that
“quantitative easing has had a limited impact on growth and aggregate demand”.
Yet, as we noted in our report, that is contested.
The fact that it is contested, and contested after a decade and £895 billion, makes it all the more remarkable that, faced with any problem or piece of bad news, the Bank’s default answer is to do more QE without sufficient justification or public engagement about its side-effects. During the inquiry, the committee thought that we might call it “monetary aspirin”, but we decided that that would be unfair to aspirin, but this is why the word “addiction” is included, with a question mark, in our title.
All this brings us to the question of whether the Bank will ever be able to unwind QE. No central bank has successfully managed to reverse QE over the medium to long term. At the time of our report, it was unclear whether, when the Bank decided to tighten monetary policy, it intended to raise interest rates or unwind QE first. We called for the Bank to expedite its review into the order in which policy is tightened and recommended that it publish a road map demonstrating how it intends to unwind QE under different economic scenarios. The Bank has since updated and published its policy, making clear that it intends first to raise interest rates, then begin to reduce its stock of purchased assets when the bank rate has reached 0.5%. We welcome the clarity that the Bank has provided but remain wary of the fact that the ratchet effect in which central banks engage in QE in response to adverse events, only to be unable to reverse the policy subsequently, exacerbates the challenges involved in unwinding QE.
Our response examines a policy that could have far-reaching implications for inflation, wealth inequality and the public finances. It is a crucial first step towards rectifying the lack of scrutiny that the Bank has faced on quantitative easing. I beg to move.
My Lords, the committee’s report was published in mid-July and I am pleased that the responses from the Bank of England and Her Majesty’s Treasury came fairly rapidly—coincidentally on the same day. I commend the Bank for the thoroughness of its response. However, the Treasury’s two-side letter is less comprehensive. I think that this reflects a desire to convey its message that quantitative easing is the business of the Bank and the MPC, not the Chancellor. That is all well and good but, as our report makes clear, the fact is that the Treasury is underwriting this process with huge potential swings; the fact is that QE could and does have far-reaching effects on the economy and people’s lives. This means that the Chancellor and the Government have a lot of skin in this game.
I echo the thanks that the chair gave to committee staff and all the witnesses, who did a fantastic job. I also congratulate the chair on his speech. This topic has a tendency to drift into the arcane, so this debate needs to address why on earth anyone but central bankers should care about quantitative easing. I hope that the noble Lord, Lord Forsyth, has started that process.
In my view, the central flaw in most of the analyses is that the data gathered during the response to the economic crisis in 2009, and some of the data in 2011 and 2012, are being conflated to refer to quantitative easing as it is now. By the Bank of England’s own reckoning, there were five distinct QE interventions, the last of which was the Covid one in 2020. As the noble Lord, Lord Forsyth, set out, this tranche totals £450 billion and exceeds the others combined. Given its scale and the different public policy backdrop, QE 5, as we can call it, is substantially different from what went before, yet the data that the Bank is using refers to the previous generations.
Even taking the data that it has, the Bank admits that it is not possible to measure the macroeconomic effects with any great precision—or, I would say, at all. Continuing the pharma vein taken by the noble Lord, Lord Forsyth, if QE were a new drug, it would not get approval based on the data that we have so far. The Bank’s central defence is consistently to deploy the counterfactual: the future without it would be worse. Given that we do not know what the future with QE is, I find this response very hubristic.
One of the dangers identified in the report is that QE is perceived to erode the independence of the Bank from government. This fear of co-dependence, as was just set out, is largely fuelled by evidence that money raised closely matches the money that the Government needed. The Bank asserts that this is not the case. It also deploys a curious technical response as to why this cannot be true. Seeking to refute the suggestion that the Monetary Policy Committee was seeking to lower the Government’s financing costs, it says in its response that, were this perception real,
“expectations of future inflation would … drift upwards, and inflation risk premia in sterling assets would increase causing gilt yields to rise.”
That was written in September and I find the response absolutely incredible. First, no scientist would choose these two parameters; they are both so open to a wide range of influences that they could prove any specific point. Secondly, at the time of writing, both parameters were moving in the opposite direction from that by which the Bank could prove its point. In the report, as we have heard, we highlight the Bank’s poor communication. I suggest that this is just another example of really poor communication—and, I would say, misplaced communication, because it is wrong.
Of course, inflation is subject to widespread upward pressure, as we heard from the noble Lord. In another communications master class, the Bank points to it being transitory. Do Her Majesty’s Government now have a settled view on what “transitory” means and how they believe inflation will move over the next years?
This is relevant because inflation is where monetary and fiscal policy meet. As we heard from the noble Lord, Lord Forsyth, with inflation rising, interest rates eventually may rise too, and this is the point at which Her Majesty’s Government and the Treasury will have to start to pay out money. As we also heard, the Chancellor will then rapidly lose any headroom that currently exists. This is the point at which the Chancellor should be more responsive to the concerns around QE and why I was surprised that the Treasury response was so light.
I will close on the point about inequality. In this respect, it seems that the committee and the Bank are more or less agreed: QE is making the poor relatively poorer and the asset-bearing rich relatively richer in terms of absolute cash—although the Bank deploys the phrase,
“the absolute impact will have been more varied.”
We know that, as inflation rises, the pressure on the poorest will be disproportionately worse and that QE offers little or nothing to help their cash position. We also know that, as inflation rises, we will see interest rates go up and that this will cost the Treasury big money —money that will not be available to mitigate the plight of the least well off. Does the Minister agree that this would make things very difficult for the Chancellor? Does he agree that we should all be concerned about the trajectory of the economy?
QE1 was deployed in response to the 2009 crisis. Thereafter, each tranche—from QE2 right up to the current QE5—has been justified by a different sort of necessity. Each justification has been different, yet the response has been exactly the same, except larger. As such, QE has become regarded as the go-to monetary response, or at least that is how it seems—an addiction, to use the parlance of our report. Yet we still do not know where we are heading and an exit, even from QE1, may be years in the future, if ever. The country is in grave danger of being ratcheted on to some monetary moving staircase designed by Maurits Escher; ahead of us, there are only rising steps, with no progress being made and no end in sight. We need a better idea of where we are going, backed up by a rigorous approach to data, and we need to know how this all ends.
My Lords, quantitative easing is a very big deal. As the noble Lord, Lord Forsyth, said in a characteristically challenging speech, it represents 40% of the UK’s GDP—a huge figure. Yet if you were to ask the modern equivalent of the man on the Clapham omnibus—or to level up a bit, the woman or man on the Sheffield tram—what QE is, you would be almost certain to draw a blank. That would not just be on the Sheffield tram; it would be just about everywhere else. If truth be told, members of the Economic Affairs Committee, of which I am one—with some notable exceptions, particularly the noble Lord, Lord King of Lothbury—did not know too much about it until we embarked on this inquiry and it got well under way. In fact, for most of us, it was a voyage of discovery into what had been a murky corner of the UK’s economic policy—and to some extent still is.
We were very much helped by an excellent secretariat and a galaxy of star witnesses, as the noble Lord, Lord Fox, said, from this country and overseas, including from the US, the EU and Japan. Utilising Zoom to whizz around the world, we were able to hear from a much wider range of economists than would have been the case had we been relying on physical presence in Westminster, where we could not do that; we probably benefited from it in this case.
At the start of the inquiry, I for one read up about the disasters of the Weimar Republic in 1923. We all know what happened there: they opened up the printing presses, followed by hyperinflation—or was it the other way round? I am not sure which. I also looked at contemporary experience in Zimbabwe and Venezuela, where hyperinflation has accompanied a surge in the monetary supply. Could the same thing happen here? Would QE lead to, or risk, a surge in inflation? It did not, and our central conclusion has had to be that the Bank of England needs some congratulation on the success of QE so far—it may have got away with it. The inflationary effect that we are experiencing at present has not been down to QE.
The first tranche of QE, in 2009, helped stabilise the economy after the severe financial crisis at that time. The evidence is much less clear-cut in relation to the later and larger tranches of QE—first, in 2016, to cope with Brexit-related shocks, and, secondly, in 2021, to smooth the impacts of the pandemic. At minimum, QE did not lead to surges in inflation, and even though inflation is now rising—temporarily, we all hope—the root causes lie elsewhere, in fuel shortages, supply chain difficulties and so on. Yet, as our report points out, QE poses risks, problems and dangers.
I want first to comment briefly on the independence of the Bank of England. It strains credulity to say that there is no relation between the Government’s burgeoning fiscal deficit and the amount of QE that has been issued. The two amounts correspond almost exactly, fuelling suspicion that the Bank is financing the deficit. Such suspicion is widespread in the City; we did not share it too strongly in the end, but we know that it is a strongly held view that that is the case.
The Bank argues in a spirited response to our report that the current easing of monetary policy and increased debt issuance is
“entirely consistent with fiscal and monetary policymakers independently pursuing their objectives”.
Well, okay. While I again applaud the Bank and the Treasury for having worked closely and sensitively together, which is crucial in a crisis, the Bank needs to be very careful in guarding its independence in this relationship and project. So far, it just about gets the benefit of the doubt, but the next test is coming, as the noble Lord, Lord Forsyth, pointed out, if, as is forecast, it has to make a judgment shortly on raising interest rates, which we already know is supported by a minority on the Monetary Policy Committee. What will this do to the Government’s borrowing costs? How will the Treasury react? I will be very interested in the Minister’s response to that scenario. It is a big task that is coming, unless we get lucky and inflation subsides quickly.
The other issue that I want to address briefly is a question that was in the committee’s mind all the way through the inquiry. The figure of £875 billion has been, or is being, issued. We know where it came from, but where did it go? “Follow the money” is always a good principle in assessing financial matters. There is general agreement, as has been said, that an inflated asset price has benefited those who own property and shares—that is, the already wealthy. The Bank and the Treasury, in response, argue that QE, by providing money to the financial system, helps avoid economic shocks that would otherwise have hit jobs and living standards hard, so hitting disproportionately the poorer sections of society. Maybe that is so, but that itself raises other questions, particularly about the future of QE, if indeed it is to be used any further—if it is going to be used again after the current programme ends shortly.
The Chancellor has already included the transition of a net-zero economy in the Bank’s adjusted terms of reference. As our report points out, the Bank will presumably need to change its approach to buying corporate bonds, perhaps favouring those consistent with the net-zero objective and steering clear of sectors such as fossil fuels and some forms of mining—metal mining in particular. Our committee was, frankly, nervous about extending the Bank’s mandate, which risks it being given a more political role, perhaps forcing it to select bonds to purchase that were in line with the Government’s fiscal and other policy objectives.
We now have to consider the relationship of all this to the further use of QE. Will QE be targeted in future? Will there be government pressure to do that? If so, how would the confidence of financial markets be maintained? If it is deployed on the net-zero transition, will there be a temptation for Governments to use it on other vital subjects? That is a big question that needs to be thoroughly aired and debated before the Bank embarks on a further issuance of QE.
There is a great deal at stake and many questions still to be answered by the Treasury and the Bank. I look forward to the Minister’s responses on those questions.
My Lords, if my memory serves me correctly, I was a member of the committee when the decision was made to undertake this inquiry, although I was rotated off it before the inquiry began. We knew at the outset that it was going to be very complex and difficult, and I congratulate the committee and its chairman on producing a ground-breaking report. As has been said, a lot of us have learned a lot in that process.
I turn to the point that has been made about bringing together this remarkable group of people who gave evidence. The witness sessions are really worth reading in detail; so many really exceptionally good sessions were undertaken. What they highlighted for me was that there was a debate between two opposing views on recent developments with QE. That debate is important and has been going on in financial circles for some months.
The first approach argues that the Bank of England has been funding the Government’s borrowing requirement by expanding its balance sheet and avoiding upward pressure on longer-term interest rates that might otherwise have happened. Those who take this view highlight the consequences for the growth of money supply, the risks to inflation and the enormous puzzle of how to unwind this behaviour. They also worry that the episode might obscure and compromise the Bank of England’s independence.
The second view, including that of the Bank itself, is that the amount of QE was a direct result of implementing a policy of seeking to maintain inflation at 2%. They argue that, in the absence of scope to reduce short-term interest rates, which were regarded as already being at the lower band, this intervention was necessary to achieve the inflation objective and that, without QE, inflation would have been below target. They argue that the appearance that the Bank has been financing the Government’s borrowing is illusory and simply a by-product of targeting inflation and insist that the amount and profile of the asset purchases were not undertaken with an eye on the Government’s borrowing.
There is a stark difference in these two views. Personally, I am reluctant to get into a debate about intentions and whether the Bank is sacrificing some of its hard-won independence by giving the Treasury an easy way out. In my experience, the Bank has never been easy to politicise on these matters, and surely that is even more the case with the MPC.
However, it must be faced that, whatever the motivation, what is agreed by both groups is that there has been a close alignment between the Government’s borrowing requirement and the Bank’s purchases of the gilts that were issued to fund it. The subsequent growth in money supply has received much less attention. Far from the MPC’s fear that inflation might fall below target, we now have a situation in which inflation is running well ahead of target. Of course, we cannot know what the counterfactual would have been in the absence of that amount of QE, but I must say that having to justify inflation well above target at a time when you are defending an action that was taken to prevent inflation falling below target must be, to say the least, a rather uncomfortable position for the MPC. Rather than debating the motivation, I am more concerned about the lessons that should be learned from this latest episode. I very much agree with the committee that, if the Bank is to be convincing in dismissing the charge of deficit financing, it will need to be much more explicit about the analysis that justifies the amount of QE that is undertaken.
In the world I remember, the Government’s ability to fund the deficit from the gilt market was an important constraint on government behaviour. I remember Eddie George saying on many occasions, “And if you do that, we will never sell another gilt.” It turned out that he was often exaggerating, but it was a threat that carried a good deal of resonance. Having that constraint was never popular with Governments, but it was always there as a reminder of the danger of going too far. It would be a matter of real concern if we gave the impression of having switched off this important control mechanism by making QE an everyday instrument of policy. There is still a lot of confidence that the MPC is working to meet its remit, but we need greater transparency about the decisions on QE and the analysis that lies behind its decisions if we are to reassure markets that this important control mechanism has not been switched off.
I agree with the committee’s concerns about the risks we face. The exit process faces several risks and hazards, which the report makes very clear. QE has had an important impact in shortening the age profile of government debt, and thus the Exchequer costs of higher short-term interest rates in future. I am also conscious of the impact on the value of the purchased assets if long-term interest rates return to a more normal level.
I also caution the Bank about using the defence that we have not been alone in using QE. The Bank’s response notes that QE has been deployed in other parts of the world. However, we are also seeing increases in inflation in other countries, particularly the US, one of the largest users of QE. This morning, the FT reports a warning from the head of the Bundesbank about the need for countermeasures against rising inflation. I must say that drawing attention to the use of QE elsewhere may not be that much of a reassuring message.
I know from bitter experience that unexpected outcomes are a regular challenge in setting monetary policy. During much of the pandemic, many economic commentators have worried that, in the process of returning to something closer to normal, we would face a significant problem of deficient demand. However, in reality, at present, around the world we are suffering from an acute problem of deficient supply. Following the pandemic, we have had a major supply-side shock: key transportation networks have been severely disrupted, ports are congested, and truck drivers are in short supply. In consequence, many production lines are in difficulty. For the moment, demand remains strong. It is supported by a catch-up of required maintenance in all walks of life, plus a desire to fulfil postponed purchases across a range of sectors. I believe we need to question the view that was evident to me in the early stages of this bout of QE—that, somehow or other, deficient demand is always around the corner and that measures to support demand are the automatic solution to that.
I have retired from the forecasting business and must emphasise that I have no wish to return to that activity; I do not wish to make comments about the future. After all, none of us knows when the supply problems will disappear or whether demand will stagnate once the catch-up effects of the pandemic work their way through. But given what we know now, it is likely that questions will continue to be asked about whether the scale of the Bank’s QE policy was excessive for too long and whether the correction has been too slow. However, I am confident that the Economic Affairs Committee will continue to ask those very questions. I look forward to seeing the answers it receives to those questions in time.
My Lords, it is a great pleasure to take part in this debate. It is an excellent report: it is well worth reading and the evidence is of very high quality. Some Members of your Lordships’ Committee may well feel that it is a very technical subject, all about the details of monetary policy and central banking. I believe that, as has been said by the noble Lord, Lord Monks, my noble friend Lord Forsyth and others, nothing could be further from the truth.
What we are discussing today is at the heart of the problem of controlling inflation and the effect that inflation is having on our economy and society. As has been mentioned already, it is also to do with the financing of government borrowing and the national debt. There is also the issue of perception. My noble friend Lord Forsyth is absolutely correct that the Bank of England is not challenged with blurring monetary and fiscal policy; the report says it is the perception of it that raises questions about its independence. The fact is that, after three decades of being anchored at 2%, inflation is now rising. The Bank of England expects it to rise, and I think it would be a very brave person who said that inflation will remain anchored at 2%.
I will raise two issues today. In raising them, I should say that the committee says it is sympathetic to the Bank because of the environment in which it has carried out its mandate: the path of Covid; the large swings in expectations—first of the worst recession since the 1700s and then of a tremendous recovery, which was unexpected; the fact that the Bank has more objectives placed on it from decade to decade; and, of course, the knock-on effects of Brexit.
The first question I put to the Minister is this: does he accept that the £450 billion of debt purchases by the Bank from the market over the last 18 months to two years has had little impact on rising inflation? As far as the Bank is concerned, QE seems to play little role in inflation. In the short term, the Bank explains inflation through a simple Phillips curve—if unemployment is reduced, inflation rises; if unemployment rises, inflation falls—but if you read the MPC reports, it explains inflation by way of energy costs, wage costs, supply-side shortages, input costs, tax changes and so on, but pays very little attention to what it does in its own back yard. As the noble Lord, Lord King of Lothbury, has pointed out, in the longer term the Bank has very little explanation of what leads to inflation. He said that
“Forecasts of inflation made by central banks always tend to revert to the target in the medium term … they assume rather than explain inflation in the long term”.
If you read the evidence to the committee and its report, it is clear that QE supported the economy following the financial crisis by avoiding deflation. Andy Haldane said that it was
“necessary to support the economy and hit the inflation target”—
that is, no deflation. Coppola said that it was
“an effective tool for arresting a deflationary collapse”
and Congdon said that QE in 2009 prevented a deflationary collapse and that money stock would have fallen “rapidly” without it. The Bank of England evidence said that QE has provided “monetary stimulus” to help the MPC to meet its inflation target. The committee concludes that QE
“prevented a recurrence of the Great Depression”.
I recognise the difficulties of disentangling the effects of QE, lower interest rates and fiscal policy in preventing the recurrence of deflation, but if QE has been effective in avoiding deflation, which I think everyone accepts, is it not also effective in creating inflation, when you are in an upswing instead of a downswing? I think that that is exactly the position we are in today. Businesses are finding it easy to pass on prices. We have a million unfilled vacancies in the UK—judged by the ratio of jobseekers to unfilled vacancies, that is the highest for 40 years. We already have strikes in places such as Weetabix and Clarks, and formerly in Glasgow as COP was starting. I would like the Minister to explain this contradiction. The noble Lord, Lord Burns, presented them as alternatives, but I see deflation and inflation as two sides of one coin.
The second issue that I would like to raise has been mentioned by the noble Lord, Lord Monks, and others: the implication of the perception of blurring monetary and fiscal policy. The Bank has been under great pressure since Covid to support overall government policy and to be seen as a team player. It has stated on many occasions that the time is not yet right to raise interest rates. After the 2008 crisis, the mandate of the Bank was not only expanded to much greater regulation, apart from controlling inflation, but extended to climate change. I do not think that the Bank would ever bow to explicit political pressure, but I am impressed by the views of three central bankers, two of whom I have known and one I have talked to but do not really know, namely Paul Volcker, Mervyn King and Otmar Issing. I worked for 15 years as an adviser to an investment bank and got to know Otmar Issing well. I was impressed with his evidence to the committee. He said:
“Exit from the zero interest rate policy will bring central banks into conflict with their Governments. It will be a very hard test for the central bank to withstand political pressure and I see a great risk that exit, once needed to”
“inflationary development in the bud, might be delayed because central banks have come closer to political decisions during the financial crisis and now in the context of the pandemic.”
I close with my second question to the Minister: are we not imposing subtle but intolerable pressures on the Bank of England in giving it responsibilities and objectives that conflict with each other and undermine fundamentally its target of low and stable inflation?
My Lords, I join other speakers in thanking the noble Lord, Lord Forsyth, for securing this debate and for his powerful introduction. The committee’s inquiry into QE reflects the noble Lord’s foresight and leadership, and its timely relevance owes much to him. I was privileged to be a member of the committee. I declare my interest, as disclosed in the register, as the paid chair of the Credit Services Association. I strongly endorse the report and its recommendations and, in the time available, will pick out a couple of points for more detailed comment.
When the inquiry was established, the committee agreed that, despite the exceptional economic expertise of at least some members, we would not seek a collective Nobel Prize by trying to come to definitive conclusions about the inflationary impact of QE here in the UK, let alone globally, but would focus on the implications for the Bank’s independence and governance and the transparency or not with which the programme has been pursued over the past 12 years. In light of the sharp increase in inflation in recent months already referred to, particularly in the US and UK, it would be wrong not to make some comment on this. Of course, issues of governance and transparency go to the heart of how the Bank of England is positioned to respond to that increase in inflation, particularly if it proves more than transitory.
The report is supportive of the principle and much of the practice of QE since its establishment in 2009. With that I also strongly concur. It is clear that the impact of QE, as the noble Lord, Lord Forsyth, said, is greatest at times of severe dislocation in the financial markets, so the periods from, say, 2009 to 2012 following the global financial crisis and then the early months of the pandemic of March to May 2020 were when the interventions were clearly most effective.
It is also clear that the contribution of QE to maintaining economic activity and hence achieving the target level of inflation is harder to judge. The contractionary fiscal policy of the coalition Government, from 2010 to 2015, left too much of a burden on monetary policy to generate growth during less stressed, but still challenging, conditions. The level of QE that has been pursued since mid-2020, even after the immediate crisis in the financial markets caused by the pandemic had been averted, is also questionable.
For all that, I am not an advocate of immediate rises in interest rates or reversal of QE. The driving forces behind the current inflationary surge are primarily a combination, blended according to your Lordships’ individual tastes, of the pandemic aftermath, global supply chain friction, Brexit, stubbornly poor productivity growth, labour market failures and so on. The question that we should ask is: does the balance sheet position that the Bank of England now finds itself in, with nearly £1 trillion of predominantly government bonds, potentially inhibit it in honouring the “primacy of price stability”, as the Chancellor wrote in its mandate? In theory, at least, it should not, but so much hangs on how well the Bank of England’s independence is maintained and protected.
There was a widespread view in bond markets that it was more than a coincidence that QE amounts so closely followed the borrowing requirement at the time. There were unconfirmed reports of exceptional pressure on the Bank of England senior executives from the Treasury. When the governor gave evidence to us, he said, “Yes, I talked to the Chancellor daily”, in March and April 2020. “What did we talk about? Covid.” Yes, it was hard for any of us to talk about anything else at that time or subsequently, but the question is how much the Government’s pandemic-driven need to fund its deficit has been allowed to influence the Bank of England’s executives’ views and, hence, their positions within the MPC. We may not know for 30 years, if ever, but the independence of the Bank of England is not just a theoretical concern.
The noble Lord, Lord Forsyth, highlighted the challenge of unwinding QE and the potential accentuated impact of interest rate rises on future funding costs for the Government. Like the noble Lord, I deplore the refusal of the Chancellor to publish the deed of indemnity. This makes it hard to analyse some potential scenarios. For instance, in the Chancellor’s terse response to the report, he said:
“As it relates to the cash transfer part of that deed, there is sensitive information in there.”
Cash transfers? Under the terms of the deed of indemnity, the Bank of England has paid £112.5 billion to Her Majesty’s Treasury in the period between April 2013 and February 2021, with £13.7 billion in the last 12 months of that period.
The Government have been pursuing what the Chancellor, as a former hedge fund manager, would recognise as a giant carry trade and, so far, very profitably. Think how much worse the deficits would have looked without those transfers. However, every trade carries risk and there is the risk in QE not just of running losses when interest rates rise but the possibility of capital losses if the fair value of the bonds were to fall.
The Bank of England does not have to crystallise any of those losses, but it must not be inhibited from so doing if it believes that the control of inflation requires it. I believe that the deed of indemnity would protect the Bank from any loss, but the positive effect of QE on the Government’s accounts would be reversed. How relaxed would this or any future Chancellor be to see that happen? In giving evidence to the committee, the noble Lord, Lord Macpherson, suggested that any tensions in the relationship between the Treasury and the Bank of England so far will be as nothing when QE comes to be unwound.
The Chancellor wrote in his response to the report:
“Independent monetary policy has been successful in delivering low and stable inflation.”
This Government have shown themselves casual, to put it mildly, towards the independence of so many institutions. I urge them to defend and promote the Bank’s independence unequivocally and to do nothing to breach that principle.
My Lords, I congratulate the Economic Affairs Committee on its excellent and highly insightful report, which, in my opinion, needs not just to be noted by the House but shouted about from the rooftops until someone at the Bank of England actually takes heed of its recommendations and takes action.
The Bank’s dismissive initial response suggests perhaps a degree of complacency or a tendency towards wishful thinking. Other equally concerning explanations are that the Bank may at this point be either too afraid by the extent of what it realises it does not know to take on the challenges or too dulled by its addiction to quantitative easing to act on the report’s very sensible and very practical recommendations. In particular, I highlight its recommendations that the Bank prioritises and shares its research into the effectiveness of QE’s transmission mechanisms into the real economy, and how its effects are distributed, and the impact of QE on the outlook for inflation, which is clearly rapidly changing.
Of course, as other noble Lords have said, the Bank needs to be much more transparent about the interactions between monetary and fiscal policy at this point. The connection between the level of rates and debt servicing costs and the need to finance deficit spending risk fiscal dominance and so threaten the Bank’s independence. That is not an accusation; it is just fact. There is a blatant contradiction between the Bank’s abrupt “This is incorrect” response to comments that the objective of the Bank’s asset purchases has been to ensure that financing conditions remain favourable for the Government and the governor’s own assertion in June last year:
“I think we would have a situation where in the worst element, the Government would have struggled to fund itself in the short run.”
We would all, I am sure, be sympathetic to the difficulties faced by the Bank—no one has all the answers here—but there is no merit at all in shutting down discussion or pretending that things are different from how they really are.
It is becoming absolutely critical, not merely for the Bank of England’s credibility but more importantly for the economic prosperity of this country and its people, that the Bank changes its tune, and quickly, and that it takes the report’s points seriously and focuses its efforts on trying to better understand the implications of what has become, without question, the biggest monetary policy experiment of all time, both nationally and globally.
One explanation for possible complacency is that the first big round of QE—the £375 billion in response to the global financial crisis—did not appear to have any major adverse effects on inflation. Along with many others, however, including the noble Lord, Lord Fox, I think that it had a big impact on wealth inequality. But of course there were massive deflationary pressures in the 2010s: exploding supply; the rapid adoption of online shopping, making it much easier for consumers and businesses to compare prices; the offshoring of labour in an increasingly globalised economy driving down manufacturing costs; and heightened competition in many sectors that had previously been almost oligopolies—for example, between energy suppliers—benefiting end consumers.
That has all now changed, and changed suddenly, with a surge in demand following lockdowns, well-documented supply chain problems, more nationalistic policies—including over energy supplies—rising geopolitical tensions, increasing awareness on the part of consumers about the need for fair treatment of and fair pay for labour, and the mismatch of skill sets that businesses need with those who are unemployed. Demand may settle down but many of the other factors are not going to reverse any time soon, making it highly unlikely that inflationary pressures will indeed prove “transitory”.
In the space of less than two years, we have gone from a deflationary backdrop to an inflationary one, yet the Bank is still pursuing the same hyper-loose monetary policies; it is actually a doubled-down version, following the massive £450 billion—or £460 billion, if you include corporate bonds—QE in response to the economic threats caused by the pandemic. What is more, this is true throughout the western world, with the EAC reminding us in the report that central banks around the globe have expanded their balance sheets by some $5.5 trillion since the onset of the pandemic.
One of the key lessons that I learned from 15 years as a bond fund manager was the critical importance of actively looking out for inflexion points, watching for those moments when the past would not extrapolate into the future and there would be a sudden dislocation. This tended to happen when everyone was looking the other way—complacent, relaxed or just enjoying “dancing to the music”, as former CEO of Citibank, Chuck Prince, infamously said ahead of the financial crisis. Focusing my energies and analysis on deliberately looking for the next thing proved the making of my career when, having persuaded my colleagues early in 1997 that the risks of a Labour Government’s tax and spend policy were already in the price and we should buy the very longest-dated gilts, and as many as we could, the newly elected Labour Government’s first action was to make the Bank of England independent. Of course, I made a lot of less good calls in my time as a fund manager, but that one taught me so much about the need for courage and to stand back from the crowd and hold steady, even when everyone seemed to have a well-reasoned set of arguments on the other side.
In his leaving speech in June, entitled “Thirty years of hurt, never stopped me dreaming”, former Bank of England chief economist, Andy Haldane, put it more eloquently, when he said:
“This is the ‘dreaming’ bit—looking around corners to judge not only what is coming but how to reshape it, seeking out the biggest issues not just of today but tomorrow. It is the Wayne Gretzky”—
a famous Canadian ice hockey player—
“approach to public policy—skating to where the puck is going, not where it is … it is, for me, the essence of effective policymaking.”
Unfortunately, in its approach to policy and to this report, the Bank of England is not adopting Andy Haldane’s essential rule of policy-making. Its analysis, or at least what it shares with the rest of the world, is perfunctory; its representatives defensive and dismissive of challenge. Yet it and other central banks are increasingly out on a limb. As the report points out,
“central banks take a more positive view of quantitative easing than independent analysts.”
Today, market practitioners are truly worried that, first, the current spike in inflation may well not prove transitory; secondly, that central bankers, for whatever reason, may move too late to tighten policy, either through rate rises or unwinding QE; and, thirdly—though this terror is scarcely mentioned—that a loss of confidence in monetary policy catalyses an unaffordable spike in the cost of servicing vast government debts. In that situation, given the extremes of both fiscal and monetary policy today, policymakers run out of options.
It is not too late to do something to mitigate that risk, although it is getting urgent that action is taken. As noble Lords know, US CPI inflation hit 6.2% last week—the biggest inflation surge in more than 30 years. Even stripping out volatile, although rather essential, food and energy costs, the US inflation rate was still 4.6% last month—much higher than expected. The US 10-year bond yield has trebled since August last year, reflecting growing concerns. Here in the UK, the 10-year break-even rate between index-linked and conventional or fixed-rate gilts has topped 4%, a level last seen over a decade ago. That means that inflation needs to be more than 4% over 10 years for the inflation-linked bond to outperform, which is the highest break-even rate across the G7.
The market knows that we have reached a tipping point and that the policy response needs to change. Sadly, the Bank is way behind the curve, and seemingly refuses to listen. Let us keep shouting off the rooftops until it responds properly to the actions recommended in this report.
My Lords, we must thank the Economic Affairs Committee for its authoritative report on quantitative easing, and the noble Lord, Lord Forsyth, for securing this debate. It has been enlightening to hear the earlier speeches from noble Lords and the noble Baroness.
My remarks will refer to the impact of quantitative easing on pensions, an issue touched on in the report but not dealt with in any detail. That is odd, perhaps, because the explanation of quantitative easing in the introduction refers specifically to the important role played by pension funds in its operation. Initially, I was going to express some disappointment, but we cannot blame the committee, because there is a general lack of information. Those of us who have worked in pensions for the last 10 or 15 years will be aware that there has been a lot of discussion of quantitative easing and its effect on pension funds. We all have views; what we do not really have is any hard information or evidence, and that is inevitably reflected in the committee’s report.
I will not resolve that situation in today’s debate, but it suggests that there is a need for some harder studies on how quantitative easing has impacted on pension funds. You will hear the views but, when you seek the evidence, there is a conspicuous lack. However, I am never afraid to express views, even with a shortfall in evidence, and there are a couple of things that I would like to say.
The committee refers in a couple of places in its report to the impact that quantitative easing has on pension provision. There is a reference to the important evidence from the Pensions and Lifetime Savings Association. I very much agree with its statement that
“on balance … quantitative easing had benefitted pension funds due to the support it had provided to the economy, which it said helped businesses which sponsor and contribute to pension schemes”.
However, the association also mentioned the downside, which is that
“quantitative easing had resulted in ‘significant increases in deficits’—
that is, the deficits of pension funds—
“that have had to be filled through higher employer contributions or greater investment returns”.
While that provides a partial picture of the impact of quantitative easing on pension funds, it fails to explain what would have happened without quantitative easing. What is the counterfactual in a pensions world without quantitative easing? That is why the committee’s conclusion—that the use of quantitative easing in 2009
“in conjunction with expansionary fiscal policy, prevented a recurrence of the Great Depression”—
is so important. It would be wrong to point to the reduction in yields that has undoubtedly taken place without also considering what would have happened to investments in general had the policy not been introduced.
As Charlie Bean explained back in 2012, when he was Deputy Governor for monetary policy at the Bank of England, while the policy has led to an increase in deficits,
“the impact of QE is nevertheless small compared to the movement in the deficit associated with other factors, such as the collapse in equity prices as a result of the financial crisis and the recession”.
That conclusion has stood the test of time. He went on to say that higher equity yields were as much a purpose of the policy as lower fixed-interest yields.
The report also refers to the submission received from Professor Davis, who said that there is “some evidence” of pension funds engaging in a “search for yield” through investment in leveraged alternative assets, structured products, private equity and derivatives. Whatever we think of such investments, whether they are problematic depends on their scale and their suitability to match pension liabilities. There is no a priori reason to rule them out.
More generally, the search for yield is surely what pension funds need to do. They should look for investments to provide a decent return on the assets set aside to secure future pensions. The idea that the best, most secure and most appropriate investment for pension funds is government debt has been massively oversold and has led to a poor outcome for those funds.
Coincidentally, I would refer the Committee to the Financial Times and an article by Martin Wolf, the newspaper’s chief economic commentator, who refers to the need to have a sensibly invested pension fund, which he defines as one invested predominantly in equities. It is important to understand, therefore, that the greater the extent to which pension funds follow this sage advice, the less significant will be the adverse effects of quantitative easing.
Equity yields have not suffered from the same effect and, as argued by Charlie Bean, they have benefited from the policy compared to what would have happened in its absence. It is also important to question the extent to which the decline in yields—which has undoubtedly taken place, with the inevitable impact on pension fund liabilities—is due to quantitative easing as compared to other factors. I think that issue was considered by the committee.
Given this reduction in yield, I do not want to paint too rosy a picture of the effect of quantitative easing on pension funds, but the underlying problem is not quantitative easing itself but the utter failure of the Government to address the productivity crisis. Quantitative easing provided a respite during which we could have got to grips with these long-running economic issues. I am sure that we would have a variety of views about how the benefits of increased productivity might be used, but adequate pensions must be a leading candidate. I am sure we all agree that this is at the heart of the financial problems we face as a country—not quantitative easing but the failure to grow productivity.
I agree with the chair of the committee that the Bank has not been subject to sufficient scrutiny in pursuing this policy, but there is a greater question about what objectives the Bank should follow. The report correctly highlights the adverse distributional impact of quantitative easing. The right conclusion is that the Bank should take this more into account by understanding those effects.
My Lords, this is an excellent report, excellently introduced by the chairman, the noble Lord, Lord Forsyth. At this late hour and with little time, let me revert to being a teacher—which is about all I can do. Quantitative easing is not new. It used to be called open market operations when I was young. The scale was rather small, and it was used mainly to stabilise the market, rather than fundamentally affect the level of interest rates.
Around the time this report came out in July, I was in Delhi. I had not read the report. I was having a shower and suddenly had a lightning flash—a revelation, or at least a question. There are asset markets and goods markets. In asset markets we love inflation, but in goods markets we hate inflation. QE more or less operates on the asset markets. The question I conjectured was this: does money put into the asset market roll over into the goods market? The noble Lord, Lord Monks, asked: where did all the money go? I conjectured that the money that the central bank puts into the asset market stays in the asset market; people just buy other assets. They sell their bonds or whatever it is, interest rates come down, then they take that money and buy equity—so equities are happy, and so on. I conjectured that very little of that money flows into the goods market to cause inflation.
It was never argued that the 2009 quantitative easing caused any inflation. It was meant to compensate for the collapse of equity prices—not to do anything about the interest rate but just to revive equity prices and avoid large-scale bankruptcy. The 2008-09 quantitative easing succeeded in reviving the equity markets, and then the economy did or did not revive, depending on what happened with fiscal policy—but we shall leave that aside.
Remember that quantitative easing comes from Milton Friedman’s work. The man who fought inflation all his life said that the great depression had happened because the Federal Reserve had not expanded money supply. It was necessary to expand monetary supply to avoid the great depression, and nobody did. Ben Bernanke, who did a PhD on that, used that example to launch quantitative easing, which is supposed to act on the asset markets and to revive asset prices. No wonder inequality goes up—because people who hold these assets get richer. Interest rates fall and, as I said, equity is revived.
How did I test this? Basically, I did a very crude test, comparing asset price increases and goods prices. It turned out that they were not cointegrated, to put it technically: there was no correlation between asset prices and goods prices. It is unlikely that quantitative easing by itself causes inflation, unless you add some other things. At least until about September, almost October, there had been no inflation in the market. Now, of course, it is still possible to say that supply-side shocks are causing the inflation and not so much the quantitative easing, which has been going on for a while. We have borrowed 40% of GDP or whatever it is, and in November inflation starts. I am too old to take 4% inflation seriously—I have lived through a time when it was 22% and the Labour Government had frozen academic salaries, and can tell you that that hurt.
We need to make a proper distinction between what the Bank does in the asset markets when it is intervening with quantitative easing and when it is financing the government deficit. These are two different operations and, as many noble Lords have said, they have different effects.
The 2020 quantitative easing was qualitatively different from that in 2008, because the economy had suffered a much bigger shock from the pandemic—a shock that we have never seen before, in which both aggregate demand and aggregate supply collapsed simultaneously. It was not a Keynesian crisis, in which aggregate demand collapses and people are unemployed but ready to go to factories—people could not go to factories as suppliers and consumers could not go to restaurants. That had some strange monetary effects because savings went up for people who had jobs.
Quantitative easing and the parallel fiscal policy interventions, such as furloughs and so on, had very different effects. Normally, we say that, when the Government print money, it goes into the market and causes an inflationary shock. We need—maybe the Economic Affairs Committee could do this—a proper study of exactly what happened during the pandemic around the demand and supply shocks, how we survived them and how we recovered.
On the narrow question of quantitative easing, we should welcome it as a new weapon for economic policy which works much faster than fiscal policy. In the old days, we used to teach that fiscal policy is effective and fast and monetary policy is slow—you cannot push on a string or whatever it is. A central bank can act quickly because markets are deep and it can go and buy billions of dollars of bonds. That is fine, but it will affect interest rates and exacerbate inequalities.
One thing I take away from this excellent report is that real work needs to be done on precisely what happened with quantitative easing and how it is an effective instrument of policy, provided the timing is right and the thinking is subtle.
My Lords, I thank all members of the Economic Affairs Committee for their report into this vital topic. I suspect this is the beginning of many reports into this.
To me, quantitative easing is part of a welfare programme operated by the state for the benefit of corporations and the financial industry. The first big instalment was the 2007-08 bailout, which added up to £1,162 billion, consisting of £1,029 billion-worth of guarantees and a cash outlay of £133 billion. The next instalment was £895 billion-worth of quantitative easing.
Today, the Bank of England holds corporate bonds issued by tax abusers, such as Apple, Rio Tinto and Thames Water. It also holds corporate bonds issued by entities that have a minimal presence in the UK. These include US telecom companies Verizon and AT&T. There is no convincing explanation from the Bank of England for its choice of these corporate bonds.
Central bankers are now handing out large sums of money to private banks and speculators to create endless opportunities for market manipulations and asset bubbles, but without adequate checks, balances, controls, safeguards and accountability. Through QE, the Government have rewarded the banks, financial markets and speculators that caused the 2007-08 crash and are still involved in numerous scandals. A combination of ultra-low interest rates and vast monetary expansion has encouraged speculation at an epic scale, where gamblers are basically using public money to create bubbles in the housing, securities, commodities and other markets.
The Bank of England’s October 2021 financial stability report says,
“the prices of some financial assets appear high relative to historical norms.”
So what will the Government do when the asset bubble pops? With a vast amount of QE, low interest rates, record government debt, record levels of taxation and never-ending austerity, they will have little room to manoeuvre. I hope the Minister will be candid today and offer us his analysis of where we are heading with QE.
Successive Governments have boosted liquidity in the financial markets, which has enriched holders of marketable securities, as others have said, but there is little tangible benefit to ordinary people. There has been no trickle-down. More people are living in poverty and reliant on food banks than ever before. Wages have barely exceeded pre-crash levels. Even as stock markets gained from QE, it did not really benefit Brits. Only 13.5% of UK-listed company shares are held by UK-resident individuals; 54.9% of shares are held by individuals resident abroad. Who has actually become richer from this vast expansion of QE?
QE and low interest rates have also caused a debt explosion, as households, corporations and financial institutions have taken on more debt, which dwarfs the level of government debt. Rather than investing in real assets, corporations are investing in the QE-driven financial market because it is offering higher returns. The Bank of England’s July 2021 financial stability report warned that the rising levels of debt pose a growing threat to the UK economy.
QE has not delivered economic renaissance but has helped to widen economic inequalities, as has been mentioned. Again, it will be helpful to see the Government’s analysis of the distributional effects of QE, although I note that the Bank of England is somewhat reluctant to do so.
Much of the money released by QE has been used to shore up bank balance sheets. A large part has also escaped into shadow banks, such as private equity and hedge funds—a sector that is now as big as retail banking, if not bigger, and is posing new dangers, especially as it is not regulated. There are no capital adequacy requirements or stress tests on their balance sheets.
Banks have not used the QE money to support businesses or hard-pressed households. Pre-Covid statistics show that lending to businesses has remained stagnant. In the post-Covid world of government loans, a recent survey—barely three weeks ago—showed that more than half of small and medium-sized enterprises say that they are holding back from investing to grow for the future as funds are taken up by debt repayments. Banks are not stepping up to support SMEs at all. In the era of QE, low interest rates, low corporate tax rates and low inflation, we have not seen any great investment in productive assets in the UK, either. The UK invests around 16.9% of its GDP in productive assets, compared to the average of 20.1% in the EU countries. Among major European countries, only Greece and Portugal have invested less.
QE should have been people-centred and used directly to improve people’s lives. Just imagine what we could have done if £895 billion of QE had been used for the green new deal, building social infrastructure, creating energy self-reliance, clearing slums, writing off debts for graduates, starting production of generic drugs to prevent abuses by pharmaceutical companies, and much more. Life would have been transformed.
That is not what the Government chose to do. Instead, they chose to give money to speculators. QE did not cause an increase in inflation, as we have heard, so using it to rebuild the economy and help hard-pressed households perhaps would not have caused inflation either, but we would have had an entirely different country from what we have today.
Finally, QE has sent a signal to the finance industry that, no matter how reckless it is, the state will always come to its aid. We have handed it an £895 billion subsidy, which has not only seen the bankers avoid punishment for numerous scandals but actually entrenched their financial advantage even more. Is that fair?
My Lords, the noble Lords, Lord Bridges of Headley and Lord Lamont, will speak very briefly in the gap.
My Lords, thank you for allowing me to speak in the gap. I will keep this brief, not least because so many topics have been touched on. I draw your Lordships’ attention to my entry in the register as an adviser to Banco Santander. First, let me say what an honour and privilege it was to serve on this committee under the chairmanship of my noble friend Lord Forsyth. I express my thanks to our clerks and to all who made such a great report.
Quantitative easing is obviously a complex topic. In that complexity lies a real danger that simple questions go unanswered—perhaps even unasked—and actions are taken that affect us all without proper, meaningful debate. The questions are really very simple, and I hope that the report answers them: what is the purpose of QE, what might its impact be on the economy as a whole, how is it to be unwound and how might it affect the Bank’s independence?
In the heat of the financial crisis all those years ago, it is quite understandable that there was not the time to give answers to these questions and to have a full debate about them. As my noble friend Lord Forsyth and others have mentioned, QE was begun as an unconventional tool to deal with an exceptional crisis. But as time has passed, these questions have not been clearly answered, while our reliance on this magical money tree has grown, first to meet the impact of Brexit and then the shock of Covid. Meanwhile, as the Bank itself admits, too little has been done to understand its impact, especially on inflation, as my noble friend Lord Griffiths said. This matters for a whole host of reasons that have been touched on. Indeed, when you look at it, all the roads lead back to a core point: are we able to maintain the Bank’s independence in fulfilling its primary aim of price stability?
As our report states, the Bank’s credibility rests
“on the strength of the Bank’s reputation for operational independence from political decision-making in the pursuit of price stability. This reputation is fragile, and it will be difficult to regain if lost.”
I would add that the perception of independence, which my noble friend Lady Morrissey touched on, matters immensely. Those perceptions are shaped by transparency and honesty. The lack of transparency and clarity about the purpose of QE has led a number of investors to perceive the Bank as pursuing deficit financing. This has not been helped by opaque answers from the Bank to basic questions about the process of calculating the amount of asset purchases undertaken.
Now, as we look ahead, and as we have discussed, the design of the quantitative easing programme and the size of the Bank’s balance sheet have 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. As the committee put it, this exposes the Bank to political pressure not to raise rates. The Bank of England is not alone. My noble friend Lord Griffiths was right to highlight what Otmar Issing told us. As the ECB’s former chief economist, his words are definitely worth heeding. All central banks now face a test: whether they can withstand political pressure and raise rates to nip inflation in the bud. The Bank of England is now in the exam hall and it is sitting that test.
Obviously, the impact of Covid has created an extraordinary set of circumstances, which others have touched on. There is indeed a risk that premature raising of rates could choke off the fragile economy, but there is also a risk that the tiger of inflation is let loose and, once out of its cage, we know how difficult it is to grab it by the tail. Once again, I fear that the Bank is making life harder for itself with mixed messages. Just a few weeks back, the governor argued that the Bank of England had to act to tackle inflation but then voted against a rise. He says he “won’t bottle it” when he needs to raise rates. I fear that he needs to beware of protesting too much.
Let me end where I began. QE is a complex issue but, if over the last decade we had had more clarity on its purpose, execution and impact, our concerns about QE’s threat to the Bank’s independence may not have been as great as they are today.
My Lords, I congratulate the noble Lord, Lord Forsyth, and the committee on the report. I hope the Committee will forgive me for intervening. I am just as much an amateur in this subject as anybody else, never having had to deal with it in my days as Chancellor of the Exchequer. I just wanted to ask four questions that occurred to me; I had not intended to speak in this debate when I came in, but four points occurred to me which I, as an amateur, would be very interested to know the answers to.
The first relates to deficit financing. The noble Lord, Lord Forsyth, said that the committee had found that the Bank of England was not indulging in deficit financing. If that is the case, why in his Budget speech did the Chancellor of the Exchequer express the total stock of debt minus Bank of England purchases? It seems to me that the two are not consistent if we are avoiding deficit financing. What do the Government see as the dividing line between intervening to ensure orderly markets and deficit financing? Some of the occasions that Mr Bailey cited when he talked about the fact that there would have been a very large spike in interest rates if he had not intervened seem, with the sums of money involved, to come close to deficit financing.
Secondly, the noble Lord, Lord Forsyth, referred to reversing or unwinding QE. How is this to be done? Are the Government content for the Bank of England to hold securities that it purchases all the way to maturity or do they think that unwinding as a process involves selling more debt into the market to compensate for the purchases?
Thirdly, I read somewhere relating to the report that the Treasury can refuse an application by the Bank of England for a tranche of QE. If it cannot refuse, that seems to me an extraordinary position for the Treasury to be in, particularly when it is underwriting the indemnity to the Bank of England. Today, with QE as the main means of—if I can use the old-fashioned phrase—steering the economy, if the Government cannot have a say in that it seems to me that we are in an entirely new situation for the Bank of England. It is going well beyond its remit, which is to do with inflation.
My fourth question is a very simple one about sequencing of policy. Should not asset purchases be ended before the Bank of England puts up rates? Otherwise, it seems to me that the Bank of England would be doing contradictory things at the same time. Surely the one should precede the other.
The only other point I would make is that, listening to this debate, it seemed that the most obvious point about QE was not really made very often, and that is the massive distortion in pricing that has occurred because of QE. People may be a bit sceptical about how far that is true of the stock market and of housing but there can be very little doubt that, in the fixed interest market, where the Bank has been intervening directly, this has had a massive distorting effect. A man cannot be drunk for ever. At some point this has got to end: at some point the hangover will come and at some point the crash will come.
I very much agree with what the noble Lord, Lord Griffiths, said: that if we believe that QE has been effective in preventing negative inflation surely, with the amount of liquidity in the economy and the banking system, it is likely to have an effect on prices in an upward direction from a positive base. I fear that, because of the issue of fiscal dominance and the need for Governments to be able to finance their programmes, central banks—not just the Bank of England but everywhere—will put up interest rates to counter inflation only in baby steps because that is going to have such a devastating effect, not just on the economy but on government finances as well. I would be very grateful if the Minister could answer those four questions.
My Lords, I am so glad that I am not the Minister. If the noble Lord, Lord Lamont, is the amateur, I am afraid that I am back in primary school. I know how to lend you money and make very sure you pay it back to me, but I am not an economist by training, as will become very evident. That leads me to thank in particular the staff to the committee, who took people like me by the hand and through this incredibly complex topic. I also want to thank our chairman, the noble Lord, Lord Forsyth, because this report is a good example of a willingness to speak truth to power and to hold the powerful accountable to Parliament, which is at the core of what we do. I suspect that this report, because it is so challenging, deals with such complexity and is so critical, will be one of the most used and most remembered of the reports that the Economic Affairs Committee has brought forward.
There have been many comments about the contents of the report, and they tended to echo one another, so I shall focus on the issues that most exercised me. I was somewhat tempted to take apart the replies that came from the Bank of England and the Treasury, which were both inadequate to the circumstance. I hope that, in future committees and in various other venues, they will be held to account and required to answer fully and properly, because this issue matters greatly.
I take the position, as I think do many—not all of us but many—that QE is a powerful and appropriate tool in times of panic in the financial markets, especially when liquidity is compromised. To my mind, the Bank was absolutely right and very much on target in using QE in the immediate aftermath of the 2008 financial crisis, when the banking system seized up almost completely, and again in the spring of 2020, when Covid undermined market confidence and, frankly, the Treasury was uncertain that it could complete its gilts issue.
But throughout the whole time that we have been working on this report we have heard evidence that makes it clear that QE is not a solution for general economic woes and, particularly, that it does not drive growth. The noble Lord, Lord Sikka, and I often do not see things in exactly the same way, but it seems to me absolutely self-evident that, in the period following the 2009 crash, when QE was almost constantly in play, we did not see growth coming through in the economy—those numbers have not been there. Even though I cannot describe and explain all the various mechanisms and why they worked or did not, I can see the end result and it seems to be a lesson that we have to learn.
I can understand that people might have thought that QE would contribute to growth because—and I pick up the issue raised by the noble Lord, Lord Davies —it tended to push investors along the yield curve and to take greater risk, but, again, we did not see the output of that. This is the UK. When people are forced to move their money into riskier assets, they turn towards property once again, rather than putting it into the productive economy.
I am concerned by the asset inflation that happened —we have talked about that extensively—which benefited primarily the existing asset-rich. In this country, the last thing we need is more unequal distribution, creating real political tension, not just in the narrow sense but in the broad sense of wider political stability.
I am also concerned that, because QE by definition converts fixed-rate debt to floating-rate debt, it can significantly drive up the cost of servicing public service net debt in times of rising interest rates. There will be inevitable fiscal consequences to that, and I wonder whether the Minister might talk about them when he replies.
If we accept that much of the current accumulation of QE did not particularly benefit the economy, the independence of the Bank of England comes into play. Many people take the view that the MPC’s recent decision not to raise interest rates was in large part influenced by its concern about the level of QE. As several speakers have said, including the noble Baroness, Lady Morrissey, and the noble Lords, Lord Forsyth and Lord Griffiths, inflation is now anticipated to go over 5% for a prolonged period; there is no definitive evidence that it will be only short term and temporary. When one looks ahead at the appalling GDP growth rate, which was part of the OBR forecast in the Budget, that combined with those inflationary pressures could lead us into stagflation. That is a situation that none of us wishes to see and which could fundamentally undermine the economy.
I join others in asking the question: can QE ever really be unwound? I take very much to heart Dr El-Erian’s evidence to us, when he said that there was no exit paradigm. My fear again is that it is another case of “Events happen, dear boy”. Have we broken a tool by using QE over and over, in inappropriate circumstances, and building up the size of the asset purchase facility? Have we broken a tool that we might need in the next financial crisis—and if it is not available to us then, what will the consequences be?
I want to pick up on an issue raised by the noble Lord, Lord Lamont. Perhaps the Minister could explain why the asset purchase facility was not included in the public sector net debt calculations at the time of the Budget. I tried to work my way through the OBR’s explanation, but it seemed to me that it left a distorted picture of the UK’s liabilities. I rather liken it to the distortion of a lot of the off-balance-sheet financing that we have seen in the past—PFI being one example—which eventually comes back to haunt the taxpayer. In our report, the committee bent over backwards, as the noble Lord, Lord Monks, said, to say that, despite the various perceptions, we accepted that the Bank of England was not using QE to fund the Budget deficit, but the decision not to include the APF in the PSND makes a convincing case that the OBR saw this as budget financing. Could the Minister respond to that issue?
We live in fast-changing times and it is very possible that fiat digital currencies, the subject of our next report, and stablecoins will fundamentally change the monetary landscape. A retail CBDC, as many have pointed out, would for example make helicopter money very easy. We need to understand the effect of QE and its purpose. The noble Lord, Lord Bridges, raised all the relevant points and they are deeply embedded in this report, but we need to get the answers. I think that we would all concede that there is a great deal more work to do, but I feel privileged to have been part of the work that the committee has done.
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.
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”
“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.
My Lords, I am conscious of time. There is a message here. Over the weekend and today, I have been reading various comments from the likes of Andrew Neil, Mr Paxman and others about what a useless organisation the House of Lords is. I hope they listened to this debate and to the expertise that was apparent throughout.
I am grateful to everyone who participated, particularly to the Minister for having to read out that speech from the Treasury, in these circumstances, and also for being asked to say that a meeting of the Treasury Select Committee this afternoon showed accountability. Clearly, the messages that come from this report are about accountability, complacency and the risks that there are to inflation and to the Bank’s independence. I hope that my noble friend answers some of the specific questions that were raised during the debate, rather than telling us what we already know, in writing to members of the committee subsequently. But I am grateful to him for drawing the short straw, and to other members of the committee.
One point I should make is that every member of the committee declared their interests. I perhaps should have declared mine as the chairman of a rather small, quoted bank. These interests are declared and, with them, comes a degree of knowledge. I will single out one member of the committee, my noble friend Lady Morrissey, who explained what she thought after 15 years as a bond fund manager. If I were a Minister listening to this, I would go back and say to my officials, “We really have to do better than this”.