The Bank of England has “already cost taxpayers £24bn” to cover losses from selling bonds to April 2023, a figure that could rise to £100bn, an MP has warned.
In the report, The New Great Inflation, MP for Wokingham, John Redwood, argued that the bank is “over correcting” for earlier failures, such as creating £450bn as part of quantitative easing during the Covid-19 pandemic.
Redwood explained that this overcorrecting was done by keeping interest rates too high for too long driving up mortgage rates, and undertaking quantitative tightening, selling bonds purchased during QE.
The leading central banks need to improve their forecasts of inflation as a basis for better policy responsesMP for Wokingham, Sir John RedwoodHe explained that the UK has faced a cost of living crisis following the pandemic while the likes of China and Japan avoided the “scourge of inflation”.
Redwood blamed this difference on the “failures of central bankers”.
He explained that, in July 2021, Bank of England Governor, Andrew Bailey labelled resurgent inflation “temporary”.
According to Redwood this inflation cannot be blamed on the Ukraine war, and spiralling energy and food prices as inflation was “already well above target and rising” before the invasion.
International comparison
Redwood contrasted this with Japan and China, which undertook no additional QE during the pandemic and where inflation peaked at just under 2 per cent and 3.2 per cent respectively.
These countries faced similar external pressures without the same cost of living crisis, according to Redwood.
Redwood blamed failures at the Bank of England on “faulty forecasting models” that placed “too little weight” on the growth of the money supply, resulting in central bankers missing the inflation threat.
Additionally, the report highlighted the “important role” of the UK government in approving QE, with the Treasury providing a guarantee for any losses from buying and selling the bonds.
Redwood explained: “The central banks are clearly not independent when it comes to setting policy objectives. They respond to informal and formal changes to their remit from governments.”
Call to action
Redwood called for the Bank of England to review its models to improve inflation forecasting, and investigate the role of money and credit growth in inflation.
He also called for the bank to prioritise diversity of economic thought among senior staff and external appointees.
Additionally, he called for the government to link Bank of England senior staff and Monetary Policy Committee members’ pay to their ability to forecast and control inflation, and manage public finances with controlling inflation in mind.
Redwood stated: “The leading central banks need to improve their forecasts of inflation as a basis for better policy responses. They should not go too far the other way and create a recession.
“Printing too much money and buying too many bonds on the way up, and now selling too many bonds and making huge losses on the way down create a boom/bust cycle.
“Taking money and credit seriously might help them get a grip on inflation.”
Bank of England's response
In response, a spokesperson for the Bank of England stated that the scale, pace and nature of Asset Purchase Facility unwind is chosen solely to meet the MPC’s policy objectives.
They added that, subject to those policy objectives, the bank’s operations are governed, designed and risk managed with the aim of minimising cost and risk.
The spokesperson additionally stated that asset sales are not being used as the primary tool of monetary policy.
They evidenced this by pointing to the Treasury committee meeting on September 6 2023 where Andrew Bailey was asked to what extent has the quantitative tightening the bank engaged in so far tightened monetary policy.
In response, Bailey stated: “On the basis of what we have done so far, we do not think so, to any great extent.”
The spokesperson additionally stated that asset purchases and sales should be judged on wider cost-benefits and the degree to which they help to meet the inflation target.
They also said that, between 2009 and 2022, the APF’s activities generated “positive net cash flows” from the APF to the Treasury, peaking at a cumulative £123.8bn at end-September 2022.
Furthermore, future cash flows are “uncertain and highly sensitive to the assumptions used for market interest rates and how quickly the portfolio is unwound”, they stated.
tom.dunstan@ft.com
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