Last night George Osborne delivered the Speaker’s lecture. Unsurprisingly, given that he is an Oxford history graduate, we were treated to an historical treatise on the Treasury stretching back to the origins of its Exchequer in Anglo-Saxon England, which was also a happily uncontroversial theme for the Chancellor.
Before Michael Crick lowered the tone by ‘complimenting’ the Chancellor on a lecture that “was first class rather than standard fare” I asked George Osborne about Quantitative Easing (QE) and whether it would ever be unwound.
The authorities believe that QE was needed because interest rates could not effectively fall any further. However, when it considers that it is time to tighten policy, the Bank of England will be able to do that by raising bank rate in the normal way. We must therefore ask:
- Why then would the Bank of England want to tighten policy by overfunding what will already be a mammoth gilt issuance programme to fund the government’s massive borrowing requirement as well as normal gilt redemptions?
- Do we really believe that the Bank of England would overfund to the tune of £375 billion (or still more if QE were to be extended), when doing so would hike long term interest and greatly steepen the yield curve?
- How would the government justify this to ordinary savers who would have to make do with paltry interest rates on deposit accounts for years to come because of a policy decision to raise long terms interest rates instead of those deposit rates?
- Why would Parliament and the Treasury want to give the Bank of England policy discretion to tighten policy through overfunding instead of bank rate for up to £375 billion (or whatever the total amount of QE happened to have been in the past) but not beyond?
None of these questions seem to have been answered, perhaps because QE is so poorly understood – even, it would seem from my correspondence with them, by the Treasury officials responsible for explaining it.
The Chancellor at least was able to confirm to me in his answer last night that, when it does decide to tighten policy, it would be open to the Bank of England not to sell back any of the gilts bought under QE, and to instead rely solely on raising bank rate in the normal way.
It will be interesting to see whether the outgoing Bank of England Governor, Mervyn King, can enlighten us any further when he speaks in Cardiff this evening.