Heres the conclusion
Conclusion
21. When quantitative easing was introduced it was envisaged that it would
support the UK economy after a sharp fall in aggregate demand following
the 2008–09 global financial crisis. However, over the last decade it has
been deployed in various circumstances quite different from those of
2009 to tackle a range of different problems. This has had a ratchet effect,
whereby the scale of quantitative easing has been increased repeatedly, with
no subsequent attempts to reverse it. This has only served to exacerbate
the challenges involved in unwinding the policy. The Bank insists that
quantitative easing has been an essential response to extraordinary and fast-
moving events and always in line with its price stability mandate. However,
the effects of quantitative easing remain poorly understood and in recent
years, particularly during the COVID-19 pandemic, the Bank has struggled
to explain why it was the appropriate response to particular economic
circumstances. (Paragraph 180)
22. Trade-offs that may have been acceptable in a policy designed as a temporary
measure have become increasingly controversial as the programme has
persisted. While the scale of quantitative easing has increased substantially
over the last decade, there has not been a corresponding increase in the
Bank of England’s understanding of the policy’s effects on the economy
in the short, medium and long term. While we recognise that quantitative
easing has prevented economic crises from spiralling downwards, its effect
on inflation and output is uncertain, and it may also have increased wealth
inequality by raising the price of certain assets, benefitting those who own
them. The Bank of England and HM Treasury must do more to acknowledge
this uncertainty and to understand these effects. (Paragraph 181)
23. Quantitative easing has also made Bank of England and HM Treasury
policymaking more interdependent, blurring monetary and fiscal policy,
and this has started to erode the perception that the Bank has acted wholly
QUAnTITATIVE EASIng: A DAngEROUS ADDICTIOn 59
independently of political considerations. We are concerned that scepticism
of the Bank’s stated reasons for quantitative easing grew significantly during
the COVID-19 pandemic, when many market participants said that they
believed the Bank of England had used quantitative easing primarily to
finance the government’s deficit spending. If such sentiments continue to
spread, the effectiveness of the Bank’s policies will be threatened severely. A
reappraisal of how the Bank communicates its reasons for quantitative easing
is needed urgently, as is the need for the Bank to provide a way for the public
and Parliament to judge the success of the programme to ensure that it can
be held properly to account for its decisions. (Paragraph 182)
24. 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. (Paragraph 183)
25. We sympathise with the Bank of England that it has had to meet its mandate in
an economic environment in which its independence has been more difficult
to define compared to when operational independence was granted in 1997.
Dealing with the economic consequences of the COVID-19 pandemic means
the Bank necessarily working more closely with HM Treasury to ensure
policy is complementary. However, HM Treasury has not helped to clarify
its relationship with the Bank in its ambiguous answers to us. Furthermore,
adding additional roles to the Bank risks it losing focus on its primary
responsibility to control inflation. (Paragraph 184)