Government Underestimated Impact of Money-Printing on Inflation: Chancellor

Jeremy Hunt MP, chancellor of the Exchequer, attends a fringe meeting on the third day of the Conservative Conference in Manchester, England, on Oct. 3, 2023. Christopher Furlong/Getty Images

The government underestimated the impact of increasing the money supply during the COVID-19 pandemic on inflation, Chancellor Jeremy Hunt has said.

Mr. Hunt was speaking at the Centre for Policy Studies (CPS) fringe event at the Conservative Party Conference on Wednesday, where he discussed tax cuts, high inflation, and public debt.

The discussion comes at a time of a cost-of-living crisis in Britain, exacerbated by a high inflation rate of 6.7 percent and a dire state of public sector finances.

The Treasury will reveal its strategy to curb the inflation rate and develop the economy in the Autumn Statement in November.

The chancellor was asked about what had contributed to the inflation crisis: the war in Ukraine, money printing during the pandemic, or a wage spiral.

In response, Mr. Hunt noted that Downing Street has underestimated the effect of boosting the UK’s money supply when the economy was hit by the consequences of lockdowns.

“I hate ducking questions. I don’t think it’s quite as straightforward as ranking them one, two, three. I’d definitely put Russia’s war in Ukraine at the top of that list. I think that quantitative easing… I think it is reasonable to say we collectively underestimated the impact of that. Although in fairness to the Bank of England [BoE] they did start to raise interest rates before everyone else,” Mr. Hunt said.

Quantitative easing (QE) is a monetary policy strategy used by central banks to stimulate economic activity, where electronic money is created and used to buy bonds.

In QE a central bank purchases securities in an attempt to reduce interest rates and drive more lending to consumers and businesses.

The policy was first introduced in 2009 when the economy was suffering from the impact of the global financial crisis. Since the onset of the pandemic, the BoE doubled the size of the QE programme.

By the end of 2021, the bank owned £875 billion in government bonds and £20 billion in corporate bonds, which was equivalent to around 40 percent of UK GDP.

Prime Minister Rishi Sunak, who served as chancellor between February 2020 and July 2022, was aware of the potential impact of the policy on inflation. Now, leading the government, Mr. Sunak has made it a priority to halve the stubbornly high inflation rate by the end of the year.

‘Mistake’

Although Mr. Hunt pointed to the war in Ukraine as the number one reason for the inflationary crisis, official figures show that the surge of inflation started long before February 2022.

At that time, inflation was already at 6.2 percent, high above the BoE’s target of 2 percent.

Economists have argued that by launching a money-printing spree, the BoE helped to trigger the surge of inflation currently affecting the UK economy.

Speaking to the BBC last October, former BoE Gov. Mervyn King said that pumping money into the economy during the COVID-19 crisis was a “mistake,” which led to losing control of inflation.

In November, the BoE chief economist Huw Pill told the House of Lords Economic Affairs Committee that the rounds of QE undertaken in 2020 “may have contributed” to inflation hikes.

“I was not at the bank two or three years ago when some of the decisions on the rounds of QE were undertaken in 2020. Whether they would be chosen now is an open question,” Mr. Pill said.

Current BoE Gov. Andrew Bailey has defended the bank’s QE decisions during the pandemic.

“We were in the middle of a pandemic when it was having the economic effects that it was having. I really do not think that is a reasonable thing to have done based on what we knew at the time,” Mr. Bailey told the Treasury Select Committee in November.