BoE Governor Defends Pandemic QE, Says Mini-Budget Damaged UK’s Reputation

Screenshot from Parliament TV of Governor of the Bank of England Andrew Bailey speaking to the Treasury Select Committee on the bank's Monetary Policy Reports, at the Houses of Parliament, London, on Nov. 16, 2022. (Screenshot/House of Commons via PA Media)

The Bank of England’s (BoE) quantitative easing (QE) during the COVID-19 pandemic did contribute to soaring inflation in the UK, but the impact was hard to predict at the time, the central bank’s Governor Andrew Bailey said on Wednesday.

Bailey also said former Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng’s so-called mini-budget has damaged the UK’s reputation.

Bailey was grilled over the BoE’s role in current inflation when attending a hearing of Parliament’s Treasury Committee with his colleagues from the bank’s Monetary Policy Committee (MPC).

Asked about the bank’s forecast that the UK will enter a two-year recession—the longest since the Great Depression—the MPC panelists said the recession is not expected to be deep and the length could easily be longer or shorter.

On Nov. 8, the BoE’s Chief Economist Huw Pill said that with the benefit of hindsight, the bank’s £450 billion ($536 billion) QE in 2020 may have contributed to the 10.1 percent inflation rate seen in September.

Questioned about the role the pandemic QEs played on inflation, Bailey replied, “QE did contribute because that’s what it was designed to do.”

But when asked if Bailey would acknowledge that the bank’s “very, very loose monetary policy” and the government’s “very, very loose fiscal policy” at the time had stoked inflation, Bailey defended the BoE’s QE decisions, saying they would otherwise have had to “tighten monetary policy at the height of the pandemic.”

Bailey said the current inflation seen worldwide is the result of “a sequence of” supply shocks, arguing the MPC could not have foreseen Russia’s invasion of Ukraine and the tightness of the labour market.

BoE Deputy Governor Ben Broadbent, also present at the hearing, said the one thing “all central banks” could have reacted to earlier was the “inflationary effects of the pandemic for supply chains, where we did begin to see evidence, I would say, in early 2021,” but he said the particular source of inflation seems to have peaked now.

Broadbent also said that just after the bank made the last QE decision in November 2020, it was forecast the inflation rate in 2022 would average at 2 percent, which was the bank’s target, and that the financial market’s forecast was 3 percent, slightly above the bank’s target.

The Office for National Statistics on Wednesday published the latest inflation figures, showing an 11.1 percent inflation rate in the 12 months to October.

Broadbent said the differences do not mean the forecasts were wrong, but “we live in a highly uncertain world.”

Mini-Budget ‘Damaged Our Reputation’

The panelists told MPs that much of the effect on the market of Truss and Kwarteng’s mini-budget in September, which was followed by a period of market turmoil, has come off, but Bailey said the policy had damaged the UK’s reputation internationally, which he said had “lasting effects.”

The Sept. 23 budget included a two-year energy bill support package that would have cost £65 billion ($77 billion) during the first six months, with £45 billion ($53 billion) worth of tax cuts, and policies to boost growth.

Chancellor of the Exchequer Kwasi Kwarteng (L) and Prime Minister Liz Truss leave their hotel ahead of a local visit in Birmingham, England, on Oct. 4, 2022. (Leon Neal/Getty Images)

The announcement triggered a sell-off of gilts—British government bonds—prompting the BoE to buy bonds in a bid to save pension funds that were facing a liquidity crisis.

Bailey said individuals from the financial market told him that the market reacted negatively because the announcement was not accompanied by a forecast from the Office for Budget Responsibility, and they were sceptical about the removing of the top rate of income tax for the highest earners—a £2.4 billion ($2.9 billion) cut. They questioned whether it was the right thing to do under the circumstances of the cost-of-living crisis.

Bailey added that Truss and Kwarteng’s ideology of “trickle down economics,” which supporters would call “supply-side economics,” is “not a very large camp these days.”

Asked whether the October inflation rate would have been even higher without Truss’s Energy Price Guarantee scheme that absorbed around two-thirds of the rise in household energy bills, Broadbent said the scheme, which injected money into people’s pocket and therefore would increase demand, did reduce the current inflation, but will push up inflation in the medium term and add pressure on wage demand.

“In our judgement, the larger effect was on demand. And therefore the net effect on inflation forecasts in the medium term was positive. And that was one of the reasons that many one of the things that many committee members cited in decisions to raise interest rates,” he said.

Asked whether he will get a pay raise amid concerns of a wage-price spiral, Bailey told the committee he would “politely decline.”

Recession

On Nov. 3, the BoE raised its base interest rate to 3 percent in a bid to control runaway inflation. The bank also forecast an eight-quarter recession, the longest since records began in the 1920s.

Bailey said the forecast recession is not expected to be deep by historical standards.

Broadbent told the committee that the projected decline in the last two or three quarters is “pretty small,” meaning the length of the recession is hugely uncertain.

Asked about the recent collapse of cryptocurrency exchange FTX, Bailey said he doesn’t believe cryptocurrency ownership is large enough in the UK to pose a systemic risk.

But the governor added that there are now more things “blowing up in the non-bank world” including cryptocurrency and LDI pension funds.