Quantitative Easing During COVID-19 Pandemic Contributed to Inflation, BoE Chief Economist Says

“Overly loose monetary policy” during the COVID-19 pandemic may have helped push up inflation to the current level, Bank of England’s (BoE) Chief Economist Huw Pill said on Tuesday.

It’s the first time a BoE official acknowledged the central bank’s role in adding to the inflationary pressure after Prime Minister Rishi Sunak said government borrowing “ultimately leads to … high inflation.”

Answering questions at a hearing at the House of Lords Economic Affairs Committee, Pill said he believes the double-digit inflation was mainly caused by external factors that pushed up oil prices, but the BoE’s rounds of quantitative easing (QE) during the pandemic may have been a contributing factor.

In 2020, before Pill joined the BoE, the bank announced three rounds of QE, injecting £450 billion into the British economy by buying financial assets—mostly government bonds but also some corporate bonds.

Asked by former BoE Governor Mervyn King, who sits on the Economic Affairs Committee, whether he believes the BoE’s boosting of money growth was an element in stoking inflation, Pill said the bank’s analysis suggests that higher oil and gas prices contributed to half (5 percent) of the 10.1 percent headline inflation rate.

The rest of the overshoot—inflation rate beyond the bank’s 2 percent target—was a combination of the BoE’s monetary policy and the global governments’ fiscal policy, Pill suggested.

“With the benefit of hindsight, I think, looking back at the impact of the pandemic, I think one could say, the destruction of demand was over-emphasized relative to the destruction of supply. And that probably meant support for demand was stronger than it should have been from a monetary policy and broader macroeconomic point of view,” he said.

“Overall, I would say QE and the choices on QE may have contributed” to inflation, Pill said.

He also said he believes loose fiscal policy around the world, particularly in the United States where “very substantial fiscal support” was provided to households, boosted international goods prices, adding to inflation in the UK. He also said the effect of this demand boost is “now beginning to dissipate.”

The UK’s consumer price inflation rocketed in the last 22 months, reaching a 40-year-high, but economists have been concerned about the looming second-round inflation as workers demand higher wages in a tight labour market.

The BoE’s Monetary Policy Committee (MPC) on Nov. 3 raised its base interest rate to 3 percent—the highest in 14 years, but it remains relatively low compared to historical figures from the last five decades.

Asked whether the 3 percent interest rate is “anywhere near enough” to bring inflation back down to 2 percent, Pill said the MPC “has sympathy with [King’s] view that 3 percent is not enough,” but believes the recent market forecast for the rate to reach 5.25 percent next year is “probably overly restrictive.”