The Bank of England’s quantitative easing money-printing programme enabled high inflation to take root in Britain, while creating “windfall gains” for the rich, a former Treasury mandarin has warned.
Nick Macpherson, who was permanent secretary to the Treasury under the last Labour government and during David Cameron’s premiership, said the central bank’s £895bn bond-buying stimulus programme had gone “too far” and made the inflation shock hitting Britain worse.
“I once compared it to heroin. The economy gets addicted to it and needs bigger and bigger fixes for it to have an impact,” he told the Lords economic affairs committee on Tuesday.
“It does leave money floating around, which I don’t think caused inflation but it enabled inflation to take root.”
Macpherson was permanent secretary when the Bank first started buying UK government bonds during the 2008 financial crisis. He said he had not worried about that intervention, but was concerned about the side-effects of the central bank stepping up its programme after the 2016 Brexit vote and in 2020 as the Covid pandemic spread.
“I am worried that quantitative easing has given windfall gains to a section of society, who quite frankly don’t need those windfall gains – potentially at the expense of poorer people who have suffered the effects of inflation because they spend more on food, energy and rents,” he said.
Although admitting “we’re definitely applying hindsight here”, given the unknown scale of the economic shock during the Covid pandemic, he argued that the Bank had gone “too far” with its attempts to drive down borrowing costs.
“It’s fair to say that all central banks perhaps loosened policy too much for fear that we were going into a period of deflation,” he said.
“We’re now dealing with the consequences which largely arise from supply side shocks, but I would argue that excessively loose monetary policy kept in place for too long has probably facilitated higher inflation than there would otherwise have been across the western world.”
Macpherson said central banks around the world had “deluded themselves that inflation was bound to come back to target” after decades of low and stable price growth in advanced economies. In the UK, inflation peaked at 11.1% in October, as Russia’s invasion of Ukraine exacerbated inflationary pressures triggered after advanced economies worldwide exited Covid lockdowns.
Inflation has since fallen by less than expected to 8.7%, but is still the highest rate in the G7, putting pressure on the Bank to raise interest rates for the 13th time in a row since December 2021. It also began reversing its quantitative easing programme in November 2022 by selling the government bonds it had accumulated.
The former top civil servant at the Treasury said he would have advised Rishi Sunak against setting a target to halve inflation this year. “I was slightly confused by that,” he said, suggesting it was the Bank’s job, rather than the government’s, to manage inflation.
“To be fair to the prime minister I think he thought he was making a pledge he was very confident he would meet,” he said.
“Personally if I’d have been there, I would have advised him against it. But I’m quite sure he would have ignored my advice.”
