MNI INTERVIEW:Tightening To Test BOE Independence-Lord Bridges

The withdrawal of monetary stimulus will pose a key test for the independence of the Bank of England and it should be as transparent as possible about its strategy and the likely impact of quantitative tightening, a member of the Lords Economic Affairs Committee told MNI after it released a report on the BOE's bond-buying operations.

The Bank could find itself in the political firing line if it drives up government debt servicing costs at a time of increased public spending, Lord Bridges said in an interview. The BOE could come under pressure to reduce remuneration on central bank reserves, said Bridges, also noting the Treasury's refusal to release a key legal document setting out the indemnity it is supposed to pay if the BOE runs up losses from its asset purchases as rates rise.

"We have public finances far more susceptible and vulnerable to a rise in rates. We have, secondly, a public that has become accustomed to very low rates, very low inflation and all that that entails. We have a government that has a political agenda … which will require further expenditure. We have other enormous challenges coming down the tracks," Bridges said.

"What I am concerned about is how this is going to play out. I think it a key test of Bank of England independence, and therefore Bank of England credibility, that if and when it sees the need to tighten QE and/or raise rates it can do so in pursuit of its inflation target."

REFUSAL TO PUBLISH DEED OF INDEMNITY

While the Bank published estimates of the impact of the early rounds of quantitative easing, starting in March 2009, it has not followed up with estimates of the effects of later rounds and LEAC's new report argues that it should clearly state its past and present objectives for QE and QT.

"I think within the exit strategy that would help only if it is just drawing attention to some of the risks of action and inaction," Bridges said. "I don't think anyone would expect complete accuracy in any forecast or prediction. Pointing to the pitfalls of action and inaction would be, in my view, a welcome step."

LEAC said it had asked Chancellor of the Exchequer Rishi Sunak to publish the Deed of Indemnity that sets out the details of the Treasury's underwriting of the Bank if it runs up losses on its asset purchase programme, but Sunak refused.

"The more they persist in saying we are not going to publish it they may be unnecessarily contributing to a suspicion that there is something odd within this document. The Chancellor simply said I have carefully considered the case for publishing and I do not intend to publish the document. Well, why?" Bridges said.

Similarly, he expressed concerns over the Bank's reserve remuneration regime, with all reserves remunerated at Bank Rate, which effectively sets the cost to the public sector of that portion of government debt acquired under QE.

"The pressure could well be on the Bank to stop paying interest to the commercial banks," Bridges said.

"It will be very interesting to see how that one pans out, because you can quite easily see the populism around saying 'it is a new tax on banks'. But at the same time what that does for bank lending and the ability of banks to power growth at a time when we need it?"