Fears over Bank’s money-printing spree finally prove to be founded

Monetarists have long said that quantitative easing would lead to higher prices but policymakers pressed on, finds

‘It is page three or four in the economics textbook: if you print more money than is demanded, you will have inflation’

‘Extra quantitative easing in November 2020 was one of the worst policy decisions in the Bank of England’s history’

Printing money to prop up economies is not, traditionally speaking, considered to be good practice. Cranking up the printing presses evokes images of Weimar Germany or Zimbabwe under Robert Mugabe: denominations with an absurd row of zeros at the end, or those terrifying images of wheelbarrow loads of cash being transported for use as kindling.

Some trepidation, then, greeted the announcement in the financial crisis of quantitative easing – in the UK’S case under Mervyn King, the Bank’s governor at the time.

This type of digital money creation was an innovation to combat the worst recession for decades, and led to some forecasts of a huge wave of inflation.

The Bank argued it is nothing like simply printing and spending money – QE is used to buy bonds in financial markets, not to fund spending directly. It can also be removed from circulation later, as is happening now.

In the event, hyperinflation did not follow and most advanced economies spent the following decade trying to push inflation up, not down.

Quantitative easing became a standard tool to soothe conditions in financial markets and stimulate the economy when interest rates could not be cut. Mark Carney, Lord King’s successor, fired up the metaphorical presses again after the Brexit vote. Andrew Bailey, the current Governor, did the same when the pandemic struck to stop financial markets grinding to a halt.

By the end of last year Threadneedle Street held £895bn of bonds, largely issued by the Government.

But suddenly Britain has found itself – along with the eurozone and the US – facing a cost-of-living crisis.

Inflation is booming with prices rising at a rate not seen in 40 years.

In some ways it is a moment of vindication for those who have warned about the growing risk from QE and the money supply.

They are sometimes classed as monetarists, following the school of thought of Milton Friedman, who set the scene for the vanquishing of inflation in the 1980s, though precise definitions of the term and its adherents have changed over the decades.

By and large they approved of QE to fight the credit crunch.

Prof Tim Congdon, of the Institute of International Monetary Research, who calls himself a “very long-standing supporter of monetarism, back to the 1970s”, says he was “a strong supporter” of QE then.

Banks were under orders to boost their capital buffers, so called in loans that destroyed deposits and shrank the supply of money. The solution was QE.

“I was very pleased when the Bank of England did it,” he says.

He credits those initial rounds, starting with £200bn of asset purchases approved in 2009, later rising to £375bn through 2011 and 2012, with keeping inflation generally low and stable in the 2010s.

Similarly, Peter Warburton at

Economic Perspectives – with the caveat that he has “not been a paid-up monetarist for 30 years” – describes QE in the credit crunch as “an airbag in a crash”.

But the pandemic was different. Congdon suspects QE was not entirely necessary in the first lockdown, but says he has sympathy with the Monetary Policy Committee.

“People were dying, the Government wanted to help, that meant more spending and the Bank must help in these circumstances,” he says.

But the Bank launched another £150bn of QE in November 2020 – which Congdon calls “stupid” – with inevitable inflationary consequences.

Lars Christensen, an economist who runs the Market Monetarist blog, says the Bank took the right decision in 2008, possibly even being too cautious with QE at first, but has learnt the

wrong lessons from the years since by assuming that more easing would not set off inflation this time around.

“It is page three or four in the economics textbook: if you print more money than is demanded, you will have inflation. So when you opened up the economy, suddenly we had inflation. It is no surprise,” he says.

Simon Ward, of Janus Henderson, says the extra QE in November 2020 was “one of the worst policy decisions in their history”, as broad money growth figures were “already in double digits, so very much giving a warning signal.”

On a worldwide scale, he says, rounds of QE may even be to blame for much of the rise in global commodities including energy, before Russia’s invasion of Ukraine.

This is not a mainstream view. Bosses at the Bank of England put forward a more widely held version of events this week: that inflation has been caused by a dire confluence of severe shocks, from Covid flattening then unleashing global demand; repeated lockdowns in China playing havoc with supply chains; heavy spending in US, supported by QE, firing up the world’s biggest consumers; and now Russia’s war in Ukraine sending energy and food prices haywire.

On top of that they point out the difficulties of tightening policy last year – the enormous uncertainty over the fate of the million jobs still on furlough in the autumn, and then the omicron variant’s emergence to threaten the recovery.

Ward says monetary explanations have “passed with flying colours” when it comes to predicting this inflationary surge, while for sceptics there is “always alternative explanation that people can fall back on”.

What about countries without surging inflation?

Japan has had ultra-loose monetary policy for decades and was an early dabbler in QE, yet its inflation is still just 1.2pc.

Warburton says conditions are different in Japan, while early rounds of bond-buying were deliberately structured to have minimal impact.

“It was executed in a way which would be least effective,” he says.

“The way we implemented QE, it was designed to have a direct, broad money impact.”

The analysts are divided on what should happen next.

Christensen says the Bank of England needs to “take responsibility”, and should raise interest rates in bigger increments than 0.25 percentage points as “overall domestic demand is strong”.

Warburton is more cautious, recommending small rate hikes, as well as tax rises and spending restraint from the Government to slow the economy.

Congdon fears the money supply could go into reverse. Whatever happens, he anticipates a recession. Selling off bonds in active quantitative tightening risks an “unnecessarily bad recession”.

Yet more hiking is definitely on the way.

Ward says the Bank can stop tightening now as money growth has fallen back so inflation should drop to the 2pc target in 2023 or 2024.

But he also acknowledges the political reality: “It is virtually impossible to be on hold because of the previous policy mistake,” he says.

“They have now got to demonstrate their inflation-fighting credentials again.”