Bank of England must spell out risks of quantitative easing, according to new report
The House of Lords Economic Affairs Committee has published its report on the policies of the Bank of England. An academic at Queen Mary University of London acted as Special Advisor to the group, providing expert evidence, which informed the findings.
The Bank of England must explain in more detail why it believes rising inflation will be a short-term phenomenon, and why continuing with its quantitative easing (QE) programme until the end of 2021 is the right course of action, according to the report.
It also found that while the precise effect of quantitative easing on inflation is unclear, the latest round could be inflationary. It coincides with a growing economy, substantial Government spending, high levels of personal savings, and a recovery in demand after the Covid-19 pandemic.
Potential for difficulties ahead
If the Bank does not act to curb inflation, it will be much more difficult to rein in later. Sustained inflation, combined with stalling economic growth, would risk a significant increase in the cost of servicing Government debt. This is because QE makes the cost of servicing Government debt vulnerable to increases in interest rates.
The Bank of England may be required to raise interest rates to control inflation. The Committee is concerned that the Bank may come under political pressure not to take action to maintain price stability, undermining its hard-won independence.
Professor Rosa Lastra is Sir John Lubbock Chair in Banking Law at Queen Mary’s Centre for Commercial Law Studies, and was Special Advisor to the House of Lords in this inquiry. She said: “The House of Lords Economic Affairs Committee published on July 16 its report with the findings of the inquiry into the QE program of the Bank of England under the title: Quantitative Easing: A Dangerous Addiction?
“The Economic Affairs Committee took evidence from renowned economists, senior officials and central bankers on the consequences of QE, questioning inter alia its distributional aspects – the impact on wealth inequality, the effects on financial market stability, the risks to public finances, and the return of inflation.”
The Economic Affairs Committee is the House of Lords permanent investigative committee charged with considering economic affairs.
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