Is continued Quantitative Easing stoking the inflationary fire?

By George Esmond

Easing coronavirus restrictions may be the country’s main concern, but there is a monetary worry that is the primary cause of unease for a number of senior economists.

This week the Economic Affairs Committee for the House of Lords released its latest report under the pejorative headline - Quantitative Easing (QE): A Deadly Addiction.

The report, a first of its kind on Quantitative Easing, and Chaired by the former Cabinet Minister Lord Michael Forsyth, posed several policy questions to the Bank of England surrounding the impartiality and objectivity of the banks' economic policy - as well as its plan to prevent inflation rising further.

The level of inflation has surged from 0.5 per cent in March to 2.5 per cent recorded last month, significantly above the Bank of England’s two per cent forecast, as the coronavirus restrictions ease and pent-up spending causes retail and wholesale prices to continue to rise.

However, with the Bank of England scheduled to release another £50bn through Quantitative Easing over the next few months, many are wondering whether this policy is fuelling an inflationary fire that could reach levels not seen since the 1970s.

The report notes that since the financial crisis, the Bank of England has been using Quantitative Easing – the process of rapidly expanding the amount of money in the economy – at an unprecedented rate.

The policy was originally intended to be a temporary liquidity emergency measure to stop the banking system from collapsing in 2008. But the process has never ceased with the Bank of England pumping £420bn into the economy in the last decade.  

The Committee’s report has now asked the Bank to explain why an extra £50bn is again needed, with too much money already chasing too few goods.

Up until now, the Bank of England said it has implemented Quantitative Easing to keep the economy going, aiming for inflation levels of 2 per cent, and to increase the price of goods high enough to prevent deflation.

But the report calls for further clarity following suggestions the Bank of England is now using the money it is creating to buy Treasury bills to finance the government spending, rather than through taxation. Lord Forsyth said such an approach, engaging in the process of monetary financing, cannot come from a bank built on financial impartiality, adding: “The Bank will risk losing credibility and find itself in a disastrous position as inflation levels increase”.

Both the US and the UK have said this level of inflation is temporary and will act decisively if it gets out of control. But the economic solution - increasing interest rates to combat inflation - will only increase debt levels for the Treasury, imposing more pain.

The Bank of England, nor the central banks of any other major economy, has yet explained how they plan to wind down QE. Its response to the Committee will surely tell whether it has a plan to finally curb this luxury policy or we must all brace ourselves for higher inflation and, as Labour Prime Minister James Callaghan famously said, much higher unemployment.