Select committee: Economic Affairs Committee

Conclusion 24

1st Report - Quantitative easing: a dangerous addiction? Published 16 Jul 2021 Paragraph 183

Economic Affairs Committee Quantitative Easing All items in this report Report on parliament.uk ↗ Inquiry on parliament.uk ↗

Conclusion (the committee's words)

Finally, we are concerned that the scale of quantitative easing exposes the Bank of England to political pressure not to raise interest rates if rising inflation does not prove to be short-term as is forecast by the Bank. The Bank must define more clearly what it means when it states that rising inflation will be “transitory”; and it must explain in more detail why it is appropriate to continue with previously announced asset purchases when the economy is growing and inflation is rising at a faster rate than the Bank expected. The design of the quantitative easing programme and the size of the Bank’s balance sheet—now equivalent to 40% of GDP—has increased the sensitivity of the public finances to a substantial rise in debt servicing costs if the Bank needed to raise interest rates to control inflation. This will test the Bank’s independence. If it does not respond to the inflation threat early enough, it may be substantially more difficult for the Bank to curb it later. Failure to pass this test would damage hard won trust in the Bank of England’s ability to achieve its mandate.

From: Economic Affairs Committee, 1st Report - Quantitative easing: a dangerous addiction?, paragraph 183, 16 July 2021

Government response

Bank of England's response to the report, Quantitative easing: a dangerous addiction?

The government responded to the whole report on 17 September 2021 (deadline 16 September 2021).

Summary written by Accountability Index from the government's response. It is not the government's own words.

The Bank of England sets out where it agrees with the Committee's report on quantitative easing and where it does not, including disagreement with the Committee's conclusions on independence perceptions, growth impact and wealth inequality.

On independence, the Bank says the suggestion that asset purchases aimed to finance the government deficit is "incorrect", and that the perception claimed by the Committee is "unsubstantiated".
On effects, the Bank says the literature "does not support the EAC’s conclusion" that QE has had a limited impact on growth and aggregate demand, and says QE has benefited asset holders "in proportion to their asset holdings" rather than disproportionately.
On research and communication, the Bank says its research agenda includes QE priority topics, "consistent with the EAC’s recommendation", and "intends to publish" a document summarising its latest thinking on QE.
On tightening, the MPC "intends to begin reducing the stock of purchased assets when Bank Rate has reached 0.5%, if appropriate given the economic circumstances", and "intends to review the unwind process no later than two years after it has begun".

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Government's response to report, Quantitative easing: a dangerous addiction?

Published 17 September 2021.

Summary written by Accountability Index from the government's response. It is not the government's own words.

HM Treasury responds to six recommendations, saying it is not considering ceasing interest payments on reserves, will not publish the Deed of Indemnity, and would not instruct the MPC on how to support its green objectives.

On distributional effects, the government says all public policy, including monetary policy, has distributional impacts, and that the Bank's research "forms part of this evidence base".
On the Bank's mandate, the government says it "would not be appropriate" to instruct the MPC on supporting green objectives, as this "may interfere with the operational independence of the Bank".
On debt management, HM Treasury "is not considering a policy of ceasing paying interest on reserves". The decision not to publish the Indemnity was "carefully considered" and is consistent with the approach since the Asset Purchase Facility began.
On uncertainty over QE's effects, the Chancellor states only "I note the Committee's recommendations". On the remit, he reaffirms the 2 per cent inflation target, saying the commitment to price stability "remains absolute".

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