Bank Of England Must Halt QE Gilt-Buying
by Dr. Ros Altmann
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Buying gilts does not directly stimulate the economy – it distorts asset prices
QE is a policy experiment with damaging side-effects and Bank has no idea how to reverse it
The Bank of England should hold back from further gilt-buying measures at tomorrow’s MPC meeting.
QE is a policy experiment to fight depression, not stagflation: The Bank itself has always admitted that Quantitative Easing (QE) is a drastic policy experiment which is has introduced because ‘conventional’ policies had been exhausted. Creating new money to buy Government bonds may have been worth trying in 2009 to avoid deflation but the economic problem now is stagflation, not depression.
Bank should more carefully assess both costs and benefits of QE: In fact, even as the economy was recovering and inflation stayed above target, the Bank carried on buying more gilts. This has hampered its effectiveness. With inflation pressures rising again, the Bank should more carefully assess the effects of QE before instigating any more measures.
QE is a short-term fix, but not a solution: Buying gilts is interfering with the risk-free interest rate and distorting asset prices. This may feel good short-term, but carries significant longer-term dangers which the Bank has not even begun to address.
Bank has no exit strategy: It has no idea how it will reverse this policy experiment.
ONS has warned inflation created by QE has harmed economic wellbeing: Last month’s ONS National Economic Wellbeing report indicated that QE may actually have been responsible for a slower economic recovery than we experienced during both the 1979 and 1990 recessions. The ONS pointed out that the combination of low interest rates and high inflation had disastrous effects on disposable incomes and spending power of millions of households, which weakened economic growth.
QE has also damaged corporate pension funds: Worsening pension deficits have forced firms to plug their pension schemes rather than using money to create growth and new jobs.
Bank must carry out more detailed cost-benefit analysis of alternative policy options: A reassessment of the stance of monetary policy is urgently required and the Bank would do well to carry out more detailed analysis, as well as assessing other stimulus measures, before embarking on any more gilt-buying.”
Funding for Lending and pension fund construction or infrastructure spending are more direct stimulus: We clearly need more direct stimulus of economic activity. It would be wise to give ‘Funding for Lending’ a chance and also encourage using pension assets to fund construction and infrastructure projects. These are far more direct way of boosting growth and jobs – and will have much less damaging side effects, than relying on buying gilts that have already been pushed to extreme levels.