BOE Asset-Buying Risks Stoking Prices, Inequality, Lords Say
The Bank of England’s asset-buying program risks stoking inflation, widening inequality and has done little to boost economic growth since it began over a decade ago, members of Parliament’s upper chamber concluded.
The House of Lords Economic Affairs Committee, which includes former BOE Governor Mervyn King, also said quantitative easing poses a “serious danger” to the public finances because debt held by the central bank is sensitive to the interest-rate increases that may be needed to stop prices rising too quickly.
The report -- “Quantitative Easing: a dangerous addiction?” -- fuels public divisions over a policy introduced in the aftermath of the 2008 financial crisis. Designed to aid the economy by keeping borrowing costs low, QE will see the central bank own 875 billion pounds ($1.2 trillion) of government bonds and 20 billion pounds of corporate debt by the end of 2021 if the current round of purchases is completed.
Critics say the program has inflated asset and property prices, benefiting the rich at the expense of the poor and young people who are now unable to afford to buy a home.
“The scale and persistence of QE -- now equivalent to 40% of GDP -— requires significant scrutiny and accountability,” said Michael Forsyth, chair of the committee. “However, the bank has faced few questions until now. Going forward, the bank must be more transparent, justify the use of QE and show its working.”
The report marks the conclusion of a six-month inquiry that questioned monetary policy experts and officials from the Federal Reserve, the European Central Bank and the Bank of Japan.
The panel also urged the BOE to explain how it will curb inflation if the current pickup is more than just short term. That plea has met with an answer in the last two days, with Deputy Governor Dave Ramsden and external policy maker Michael Saunders both signaling that the time to step off the stimulus pedal is fast approaching -- potentially as soon as next month.
In a statement responding to the Lords’ analysis, the BOE stressed its commitment to price stability and said tools including QE had provided “much-needed support to all borrowers at a time of extreme economic distress” during the pandemic.
It also dismissed a claim made in the report that the bank is widely perceived to be using QE to help finance the huge increase in government borrowing during the crisis. “The evidence does not support this assertion, nor has the Monetary Policy Committee ever suggested that this was its policy,” the BOE said.
Asset purchases have been effective at stabilizing financial markets during periods of economic turmoil but have had only limited impact on growth and aggregate demand over the last decade, the study argued. There is also little evidence that they increased bank lending and investment, or that asset holders had increased their spending.
“Instead of relying on discredited trickle down economics, the Bank of England’s money creation would have been much more effective if it was injected directly into the real economy, through being distributed directly to households or spent by the government,” said Simon Youel, head of policy and advocacy at the Positive Money campaign group.
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