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The Central Banker’s New Clothes

The fact that fiscal policy is now driving monetary policy in the United Kingdom cannot be admitted, and not only to maintain the perception of central-bank independence. More fundamentally, admitting that the Bank of England is an agent of the Treasury would destroy the intellectual edifice of current macroeconomic theory.

LONDON – Since March 2020, the Bank of England (BOE) has bought £450 billion ($639 billion) of UK government debt through its so-called Asset Purchase Facility. Virtually all of this was new debt issued by the government since the start of the COVID-19 crisis. The BOE’s purchases look like a thinly veiled attempt to use quantitative easing (QE) to finance the government’s deficit and ensure low borrowing costs. Is this still monetary policy, or is the central bank conducting fiscal policy by the back door?

The BOE claims that there is no connection between monetary and fiscal policy, and that its asset purchases are aimed only at meeting its mandated 2% inflation target. The fact that the amount of the bank’s asset purchases since March 2020 just so happens to match the government’s deficit over the same period is no more than a coincidence. To claim otherwise – that the BOE is engaging in clandestine monetary financing of the deficit – smacks of conspiracy theory.

Moreover, the central bank’s defenders say, even the merest suggestion that the amount of QE was anything other than that required to achieve the BOE’s inflation target would damage the bank’s anti-inflationary credentials. How could the BOE act as an agent of the government and retain credibility as a check on excessive government spending? The BOE doesn’t do fiscal policy, full stop: that is the preserve of the Treasury.