Vince Cable’s call in the FT for the Bank of England to restart quantatative easing for the first time since February 2010 marks a remarkable intervention into monetary policy.
Since the Bank was granted operational independence in 1997, politicians have generally steered clear of giving advice on monetary policy, which has been delegated to the Bank.
Mervyn King, Bank governor, has fiercely defended its independence against much less overt interference in the past. Almost a decade ago he publicly dressed-down Ed Balls , then Gordon Brown’s special adviser, for milder remarks on monetary policy.
The business secretary’s call for more QE reflects some desperation among the coalition in advance of tomorrow’s second quarter growth figures, which are expected to be weak. (We are all looking for clues in Osborne’s body language at a press conference with the Indian finance minister today; he has just said ‘there are risks to current and future growth‘).
Calling for the Bank to buy more assets and be more imaginative about the assets it buys will irritate the Bank. Mr King has pointed out many times that the Bank, if it decides to restart QE will buy predominantly gilts, unless any particular markets are dysfunctional.
The Bank bought corporate bonds in 2009 but has been selling them recently as the market is operating smoothly. It will not take kindly to the intervention, which it sees as ministers passing the buck.
UPDATE: Incidentally, Vince has spoken out in the past about the importance of taking a hands-off approach to the Bank of England. In his speech to the Liberal Democrat conference in September 2008, he repeated that the independence of the Bank of England must not be compromised, and that interest rates should not be cut.
“The Government must not compromise the independence of the Bank of England by telling it to slash interest rates and generate another dangerous inflationary ‘bubble’.”
Jim Pickard
Kiran Stacey