BOE Independence Under Threat as QE Losses Reach £164 Billion

The Bank of England's (BOE) independence is seen as a positive development in British macroeconomic policy, but there have been questions raised about quantitative easing (QE).

Recently, parliamentary committees have expressed interest in QE and suggested re-examining the BOE's mandate. To address this criticism and maintain independence, reforms are proposed to deal with losses associated with QE.

The Office for Budgetary Responsibility (OBR) estimates that the cumulative net lifetime loss from the BOE's Asset Purchase Facility (APF) could amount to £164 billion by 2036. The OBR notes that this excludes wider benefits but highlights a potential issue for governments committed to fiscal rules.

The Monetary Policy Committee (MPC) currently ignores expected losses when making decisions, justifying this by the government's indemnification against future losses and efficient markets. However, it is argued that the MPC should be more transparent about potential losses and consider alternative strategies for achieving the inflation target, such as buying equities instead of gilts.

An additional recommendation is to facilitate greater policy coordination between the BOE and Treasury by sharing analysis on QE's expected fiscal costs versus benefits. This would allow the Treasury to propose alternative fiscal policies that could provide a better benefit-to-cost ratio while helping to achieve the inflation target.