The Bank of England risks becoming addicted to creating money and needs to come clean about how it plans to unwind its £895bn bond-buying programme, the House of Lords has warned.
A report from a Lords committee – the members of which include the former Threadneedle Street governor Mervyn King – said there was a threat of quantitative easing (QE) leading to higher inflation and causing damage to the government’s finances.
The Bank started using QE, a process whereby it creates money by buying government and corporate bonds, in 2009 during the global financial crisis, but has stepped up its use during the coronavirus pandemic.
But the Lords economic affairs committee said the Bank had become too dependent on the use of QE, which it said was widening Britain’s wealth gap by boosting asset prices.
Michael Forsyth, the committee’s chairman, said: “The Bank of England has become addicted to quantitative easing. It appears to be its answer to all the country’s economic problems and by the end of 2021, the Bank will own an eye-watering £875bn of government bonds and £20bn in corporate bonds.”
Lord Forsyth said the scale and persistence of QE – which was now equivalent to 40% of the economy’s output – required the sort of “significant scrutiny” the Bank had not faced up until now.
“Going forwards, the Bank must be more transparent, justify the use of QE and show it’s working. The Bank needs to explain how it will curb inflation if it is more than just short term. It also needs to do more to mitigate widening wealth inequalities that have resulted from rising asset prices caused by QE.”
The committee said during the course of its inquiry, it had become apparent that the Bank of England was widely perceived to be using QE to finance the government’s record peacetime budget deficit during the pandemic.
“The Bank’s bond purchases were aligned closely with the speed of issuance by HM Treasury,” the peers’ report said. “If perceptions continue to grow that the Bank is using QE mainly to finance the government’s spending priorities, it could lose credibility destroying its ability to control inflation and maintain financial stability.”
In a statement, the Bank said the pandemic had posed an unprecedented threat.
“QE and the package of other measures announced over the past 18 months have lowered borrowing costs right across the economy, providing much needed support to all borrowers at a time of extreme economic stress. It is wrong to suggest that the MPC has pursued another policy, namely to finance the government’s borrowing during the crisis. The evidence does not support this assertion.”
Forsyth said his committee had taken evidence from a range of experts from around the world, including former central bankers from the US Federal Reserve, the European Central Bank and the Bank of Japan. “We found that central banks all over the world face comparable risks.
“QE is a serious danger to the long-term health of the public finances. A clear plan on how QE will be unwound is necessary, and this plan must be made public.”