An influential parliamentary committee said that the Bank of England needs to provide better reasons to prove that the rise in inflation is temporary. The committee also questioned whether the quantitative easing policy needs to continue.
The House of Lords Committee on Economic Affairs, including former Bank of England Governor Mervyn King, said on Friday that the Bank of England failed to justify its flagship quantitative easing policy — the central bank tried to stimulate spending by creating money and injecting it into the economy The approach is through the purchase of assets.
Lord Michael Forsyth of Drumlean and Chairman of the Economic Affairs Committee stated that the bank “has been obsessed with” quantitative easing as “the answer to all the country’s economic problems” despite the “dazzling” size.
He added that there is a “risk that inflation may take off given the economic situation” and although the bank said it will be temporary, it should state that “if this is not the case, a plan should be made”.
The committee’s report will sting Threadneedle Street, because one of the authors is Jin. The other is Nicholas Stern, the former chief economic adviser of the Ministry of Finance and chief economist of the World Bank.
The report stated that if the Bank of England “does not respond to the threat of inflation early enough, it may be much more difficult to contain it later.”
In the committee’s investigation, the committee members interviewed many well-known experts including the former central bank governors of the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, and concluded that the latter must do more to clarify quantitative easing. Side effects and ensure its independence.
Official data this week showed that annual consumer inflation jumped from 0.4% in February to UK 2.5% in June, Which is much higher than the Bank of England’s 2% target and much higher than its recent forecast.
The report pointed out that quantitative easing Impact on inflation It’s not clear, but the conclusion is that the latest round may trigger inflation because it coincides with economic growth, a surge in government spending and a high level of personal savings.
“In view of the current economic situation, rising inflation, shortage of goods, and a lot of savings, is it really necessary to carry out a lot of quantitative easing?” Forsyth asked. He added that if so, the Bank of England should explain why and how it is completely related to maintaining price stability.
The report pointed out that the Bank of England is “widely believed” to use quantitative easing to finance government deficits during the pandemic, because the central bank’s bond purchases are closely related to the speed of issuance by the Ministry of Finance.
It also pointed out that long-term high inflation may “undermine” the bank’s hard-won independence because it “may be affected.” Political pressure“Don’t raise interest rates when you need to stabilize prices, because it means that the government’s debt costs are higher.
The report said: “If people continue to believe that banks primarily use quantitative easing to fund government spending priorities, they may lose credibility, thereby undermining their ability to control inflation and maintain financial stability.”
By the end of 2021, the bank will have 875 billion pounds of government bonds and 20 billion pounds of corporate bonds, equivalent to about 40% of GDP, as part of a quantitative easing program aimed at stimulating the economy by promoting loans, investment and consumption.
The report also called on the Bank of England to formulate a road map to show how it intends to relax its quantitative easing policy, and more openly discuss the side effects of the plan, especially the issue of inequality.
It shows that quantitative easing artificially raises asset prices, such as stocks and housing prices, which benefits those who own them disproportionately and exacerbates wealth inequality.
“Just ask any young man who wants to buy an apartment, and they will tell you the impact of quantitative easing,” Forsyth said.
The Bank of England rejected the committee’s conclusions, saying that it was “wrong” to call quantitative easing aimed at financing the government. It added that in the course of economic recovery, “the Monetary Policy Committee will continue to assess the outlook for inflation and economic activity, and formulate monetary policies as needed to achieve the goal of a sustainable rise in inflation to 2%”.