Lords criticise BoE’s approach to QE: Positive Money response

London, 16 July 2021

A report on quantitative easing (QE) by the House of Lords’ Economic Affairs Committee published on Friday concludes that the policy has exacerbated inequality while having little impact on boosting the economy.

The Committee finds that the Bank has not seriously engaged with the effects of QE on inequality, repeating accusations that the central bank has been “defensive” on these matters. The Lords therefore urge the Bank of England to publish more research on the effects of QE incorporating a range of views. They also recommend that the Treasury engage with such research, so that the government is equipped to mitigate any distributional  side effects with fiscal policy.

The Committee also calls for the Treasury to review proposals for the Bank of England to cease paying interest on excess commercial bank reserves, which would help reduce the costs of public spending.

Simon Youel, head of policy and advocacy at Positive Money, said: 

“Through quantitative easing the Bank of England has created hundreds of billions of pounds of new money, but until recently very little of it entered the real economy, instead staying stuck inside financial markets and property, boosting the wealth of the asset rich. In order for the Bank of England’s policies to be most effective, and to mitigate the unequal side-effects, we need coordination with fiscal policy from the Treasury.

“As the Bank of England’s own research shows, the first rounds of QE benefited the richest 10% of households by £350,000 each – over 100 times the benefit seen by the poorest. 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. 

“Decisions over how QE is done can’t take place in a vacuum removed from democratic oversight. Rather than just publishing studies aimed at justifying decisions retrospectively, the Bank must undertake thorough research comparing its policies with other viable alternatives such as overt monetary financing or helicopter money.”

On the EAC’s recommendation that the Treasury review proposals to stop paying interest on reserves:

“It is perfectly legitimate for the Bank of England to cease paying interest on excess commercial bank reserves, and the Treasury should examine how this can best be done. This would allow the costs of government spending to be kept low even if interest rates rise, while preventing additional transfers of public money to the banks, who have profited greatly even during the pandemic.”

Notes

1. House of Lords Economic Affairs Committee, “Quantitative easing: a dangerous addiction?”, Friday 16th July 2021: https://publications.parliament.uk/pa/ld5802/ldselect/ldeconaf/42/4202.htm 

2. “Quantitative Easing ‘turbocharges’ inequality: Positive Money’s evidence to the House of Lords Committee, 19th February 2021: https://positivemoney.org/2021/02/quantitative-easing-turbocharges-inequality-our-evidence-to-the-house-of-lords/ 

3. Bank of England working paper, “The distributional impact of monetary policy easing in the UK between 2008 and 2014”, 27th March 2018: https://www.bankofengland.co.uk/working-paper/2018/the-distributional-impact-of-monetary-policy-easing-in-the-uk-between-2008-and-2014 

4. Positive Money is a research and campaign organisation working towards a money and banking system which supports a fair, democratic and sustainable economy. Set up in the aftermath of the financial crisis, Positive Money is a not-for-profit company funded by charitable trusts and foundations, as well as small donations from its network of over 65,000 supporters. www.positivemoney.org.

5. For more information from Positive Money or to arrange a briefing/interview with a spokesperson, please contact press@positivemoney.org.uk or Anna Pick on 07948802104.