To make the macroeconomic effects of QE more concrete: previous Bank of England analysis suggests that the initial £ billion of QE during QE1 may have increased GDP by 1.5%–2% and inflation by 0.75pp–1.5pp.19 Using similar estimates in a 2016 speech, Mark Carney, estimated that if the MPC had left monetary policy – Bank Rate and QE – unchanged in the financial crisis, the level of GDP would have been 8% lower and 1.5 million more people would have been out of work.20  Whether the £ of QE we announced last March had the same impact is a complex question, and there are arguments in both directions as to whether its impact will turn out to have been larger or smaller. On the one hand, government bond yields have been very low by historical standards and it is possible that there may be limits to how much more QE can do to push them down. On the other hand, our March purchases in particular took place as I have said against a backdrop of extreme market disorder. Our purchases, alongside other policy measures here and abroad, were instrumental in restoring order, and indeed we deliberately carried them out at an unprecedentedly fast pace to achieve that – in the words of the Governor, Andrew Bailey, we “went big and fast”. Had we not done this then that market disorder might, as we said at the time, have led to an unwarranted tightening of monetary and financial conditions, and an even sharper contraction in GDP.
His 2017 NIESR paper with Bill Allen examined the shift from the “old normal” of pre-financial crisis monetary policy to the “new normal” of QE and forward guidance, as well as engaging seriously with what a “future normal” for monetary policy might look like.5 That is a framing I will use for this lecture in setting out my own views of QE as a monetary policy tool, and then focusing on two other policy debates highlighted by the IEO review, the links between QE and government financing, an issue Peter also considered6, and the links between QE and climate change. The Bank of England and its balance sheet I’ll come on to the details of what exactly QE is and what uses it has as a policy tool, including over the last 11 months in response to the Covid pandemic. But I want to start by considering a more general question, which is the question of what central banks are actually for. That’s because I don’t think you can answer the question of how to use a tool without first knowing what you want the tool to do.