Quantitative easing ‘experimental’, says top civil servant

The Treasury’s most senior civil servant has told a committee of MPs that pumping hundreds of billions of pounds worth of cash into the economy as an emergency measure was an “experiment” and the results may not be known for years, reports The Guardian.

Permanent secretary Sir Nicholas Macpherson told the public accounts committee there was “uncertainty” in Whitehall over whether increasing quantitative easing by £50bn next month to £425bn was the right move.

Richard Bacon, a Conservative member of the committee, said he was “horrified” by Macpherson’s assessment of the policy.

The permanent secretary insisted QE had stopped the UK’s economy spiralling further down. “There is uncertainty around it,” he told MPs. “We are very clear it has had a positive on the economy as far as economic activity is concerned.

“We don’t really know because even when the economy is working perfectly the precise relationship between a change in interest rates and the economy is very uncertain.

“I’m confident that QE has had a positive effect but in one sense this is an experiment and we won’t know the ultimate answer for many years.”

Bacon said QE was the equivalent of around 5% of GDP each year over four years. He added: “All the things you are talking about are having an effect in the margin, if at all.

“I would have hoped something of the scale would have rather more than a marginal effect. The best you can say is that it has stopped us going into a more vicious cycle,” he said.

Bacon added: “I was horrified by your description earlier where you basically said, first of all that you didn’t anticipate that it would be going on this long, that it’s an experiment and we won’t know the results for many years and you can’t say for sure how much of the benefit is actually coming through to the UK.”

Last week, the Bank of England’s monetary policy committee (MPC) questioned the impact that a further injection would have on the broader economy, and MPs on the Commons Treasury select committee have launched an inquiry into the policy.

The PAC heard that the way the scheme was set up meant government coffers were missing out on extra cash that other nations, such as the United States, were clawing back under their schemes.

A Bank of England asset protection fund is holding about £14bn of coupons on gilts bought by an arm of the institution at 0.5% interest.

Sir Nicholas told MPs: “When we set it up we didn’t anticipate that quantitative easing would last quite as long as it has nor did we anticipate that quite such a large fund would be built up.”

Last week the Bank of England’s most consistent inflation “dove” made the case for a fresh boost to demand, warning that the prospect for the UK remains a period of sub-par economic growth and weak inflationary pressure.

David Miles, one of the nine members of Threadneedle Street’s monetary policy committee, said that even though the level of stimulus being provided by the Bank was already “off the scale”, there was no evidence that the economy was overheating.

Miles said: “The state of the economy is not as good as I had hoped a year or so back, I must admit. The last 18 months have seen no significant growth.”