Did the Bank of England’s Quantitative Easing Programme Become Fiscally Wasteful?

Abstract In the period of central bank independence since 1997, the level of UK nominal interest rates has been driven almost entirely by real rates as reflected in the market for index-linked government bonds. These bonds offered a yield of + 4% in the 1980s, falling steadily to below -2% in late 2019, and only recovered somewhat in 2022, with long bond yields closely following short bond yields. The Bank of England doubled its purchases of bonds through its Quantitative Easing (QE) programme in 2020–21 at significantly negative real interest rates, taking up almost all of the increased supply associated with the massively increased budget deficit during the Covid-19 pandemic. Neither the Bank nor the Government bothered about the likely eventual fiscal cost, which rose quite steeply at the margin to the extent that the QE purchases had their intended effect of depressing bond yields. Much, but not all, of the blame for this lies with the Government, since under independence it is the Government that defines what the Bank should take into account in making its decisions about monetary policy. The issue of the eventual fiscal cost of QE is also of concern in the Euro Area and the United States.