Quantitative Easing

‘Trussonomics’ has put the Prime Minister on a collision course with the Bank of England

It is remarkable how quickly those who furiously criticized the Bank for not tightening sooner say it is too late now and demand a change in the mandate to better align the Bank with the new approach to the government’s “momentum for growth” economy. .

Things may change, but at this point I would be surprised if the Bank of England backed away from the tightening plan. The Old Lady is already accused of being asleep at the wheel of inflation, and is therefore doubly determined to get prices back on target, whatever the cost to growth.

Moreover, he is extremely sensitive to the accusation that extensive quantitative easing during the pandemic had little to do with inflation targeting as such, but rather amounted to outright monetization. government debt issued to pay for furloughs, test and trace, business-friendly loans, and other support measures during two years of on/off lockdown.

Any suspicion of the same today in support of a politically motivated spree for spending growth and tax cuts would be a further blow to the Bank’s credibility as an independent authority. Either way, the Bank finds itself on a collision course with the government on several fronts.

And it’s not just in the area of ​​monetary and fiscal policy. Bank Governor Andrew Bailey also finds himself accused of being slow to take advantage of Brexit freedoms by cutting city regulations to deliver on the government’s ‘Big Bang 2.0’ aspirations.

In addition, Bailey has experienced reservations about new powers about to be enshrined in the government’s landmark Financial Services and Markets Bill, giving ministers the right to request regulatory decisions.

Rishi Sunak and Nadhim Zahawi, the last two chancellors, were won over by the argument that effective independent regulation, free from political interference, is key to the city’s overall competitiveness, and dropped the clause. But the new batch decided to reinsert him in committee.

If he could, the Chancellor, Kwasi Kwarteng, would undoubtedly sack Bailey with the same callous disregard for protocol that was applied last week to Tom Scholar, now a former Permanent Secretary to the Treasury. Yet it is virtually impossible to remove a sitting Governor of the Bank of England.

Everything is set for a particularly uncomfortable stalemate in which Downing and Threadneedle Streets repeatedly find themselves on different pages.

As things stand, the government is about to see its tax-expensive growth plans put to the test by the markets. This time around, nothing will stand in the way of the Bank of England’s easing of support.

The kind of sums we are talking about for the energy crisis are certainly lower than the cost to public finances of the pandemic, which has added about 15 percentage points of GDP to the national debt. From what we know, the sums earmarked for tax cuts and the energy crisis would add “only” 7 to 8% to the debt, and obviously if they succeed as expected in widening the denominator of GDP, still less.