Quantitative Easing — House of Commons, 2016-09-15
Topic: Macroeconomics
Simon Kirby (Conservative, Centre-right): I thank the hon. Member for Ross, Skye and Lochaber (Ian Blackford) for securing the debate. The subject of quantitative easing attracts a wide range of opinions, as has been convincingly demonstrated in the Chamber today. This Back-Bench business debate has been an example of something that is small but perfectly formed. It has been a very interesting debate. The topic is extremely important to our economy and I know that Members across the House will join me in thanking the hon. Gentleman for giving us the opportunity to discuss it Let me begin by setting out briefly the Bank of England’s role in the monetary policy of this country. The first thing to stress is that the Bank of England, and its Monetary Policy Committee, are rightly independent from the Government. The MPC holds responsibility for setting monetary policy to meet its clearly defined objectives, as set out in law. Its primary objective is to maintain price stability, defined by the Government’s inflation target of 2%, as measured under the consumer prices index. The MPC is empowered to deploy unconventional policy measures, such as quantitative easing, when necessary, to meet this objective. Wherever such instruments are used, the committee is expected to work with the Government to make sure that appropriate governance arrangements are in place to ensure its accountability Following the financial crisis in 2009, as Members are aware, the Bank of England was authorised to begin quantitative easing, establishing an asset purchase facility to improve liquidity in credit markets. This provided an additional tool by which the Bank’s committee could adjust our monetary policy. In August this year, the MPC judged that in the absence of monetary stimulus, there would be undesirable volatility in output and employment, and a sustainable return of inflation to the target in the medium term was less likely. As a result, the MPC expanded its programme of asset purchases and established the term funding scheme as a mechanism to ensure that banks passed on the benefits of low interest rates to our businesses and to the public as a whole Although financial markets have reacted positively to the latest round of quantitative easing, it will take several months before we know how the economy has responded, as is always the case. Time will need to pass before it is possible to make a full assessment of the latest round of asset purchases. Both the Government and the MPC place enormous weight on the need to research the wider impacts of our monetary policy across our society. In line with our determination to make sure that this is a country that works for everyone, we want to ensure that our businesses and the general public all benefit from the lower borrowing costs established through the Bank’s monetary policies Let me deal with some of the points raised. The hon. Gentleman, the modest crofter from Skye, mentioned the need for fiscal stimulus. Monetary policy tools are the first line of defence against a macroeconomic shock, and the Government will set out their fiscal plans in the usual way in the autumn statement. The hon. Gentleman suggested that there had been little growth in M4 in the past eight years since QE was introduced. However, the relationship between monetary aggregates and inflation is tenuous, and monetary aggregates are not systematically targeted by central banks. To target monetary aggregates, there would have to be a direct relationship between the monetary supply and inflation. For this to be the case, there would have to be a degree of stability in the velocity of money—the speed at which money circulates around the economy. I hope that is clear The hon. Gentleman mentioned the impact on savers. Building a strong economy is in everyone’s interests, and the MPC’s remit makes clear that ensuring price stability is the prerequisite for economic prosperity. He also mentioned pensions, and the best possible protection for pensions comes from strong, sustainable employers and a buoyant economy, so it is important that action is taken to support that economy My hon. Friend the Member for Wycombe (Mr Baker) speaks with passion on this subject, and it is obviously of great interest to him. I have looked at his excellent website, stevebaker.info, where he considers, among other matters, whether the whole economic system runs on funny money. He mentioned wealth inequality and wealth justice, and those are two very important areas. The Governor of the Bank of England has stated that this package will ensure a better economic outcome for all. Economic recovery will boost incomes and help all individuals, including those at the lowest end of the economic distribution. Inequality is lower—we should not forget this—than it was in 2010.