Surplus cash switch ‘threatens Bank of England independence’

29 Jan 13
MPs have criticised the Bank of England’s handling of the decision to transfer surplus cash from its quantitative easing programme to the Treasury.

By Richard Johnstone | 29 January 2013

MPs have criticised the Bank of England’s handling of the decision to transfer surplus cash from its quantitative easing programme to the Treasury.

In a report examining the decisions made around last year’s Autumn Statement, the Commons Treasury select committee said the announcement of the switch had ‘created difficulties’ for the Bank’s independent reputation and should not be repeated.

It was revealed on November 9 that the Exchequer would begin to claim the funds that have built up in the Bank’s QE programme, known as the Asset Purchasing Facility. The Bank has bought £375bn of government debt since the programme began in 2009. As the government pays interest on all debt, the facility has built up a net surplus of around £37bn, which is now being transferred to the Treasury.

However, the announcement came just one day after the Bank’s Monetary Policy Committee issued its monthly statement, which made no mention of the imminent change. MPs said the transfer therefore called into question the ‘perceived independence’ of the Bank.

In evidence to MPs, Bank of England governor Sir Mervyn King said the MPC had known about the transfer when it made its decision on interest rates on November 8. He also acknowledged the transfer was equivalent to increasing the quantitative easing programme by £37bn.

Had the MPC decided to take action to negate this impact, such as reducing the overall size of the QE programme, it would have had to reveal the proposed transfer to explain its decision.

However, the decision to not ‘cancel out’ the effect of the transfer also ‘deserved public explanation’, the select committee concluded. Therefore, the Bank should have ‘ensured that the MPC was in a position to make the APF transfer public at the time of its November release’.

The committee’s Autumn Statement 2012 report stated: ‘By not announcing the monetary easing that arose from the APF transfer to the Treasury at the time of its regular November press release, the MPC gave the impression that the Treasury was undertaking monetary policy, rather than the MPC.’

Chair Andrew Tyrie said the transfer ‘was poorly coordinated’.

He added: ‘The Treasury and to some extent the Bank of England were at fault. It is vital that the MPC fulfils its duty to demonstrate its independence. ‘The way the transfer was announced could have had the opposite effect. The Treasury and the Bank must both ensure that there is no repetition.’

The committee has also urged the Treasury to restate ‘the primacy of the Budget’ after concluding the Autumn Statement had increased in scope.

Tyrie said that ‘the Autumn Statement is not, nor should it be, a second Budget [but] in recent years it has come to read like one’.

He added: ‘The case for two Budgets is weak. An additional one can create uncertainty and carries an economic cost. Only in an emergency would it be likely to carry long-term benefit. The primacy of the Budget as the main focus of fiscal and economic policy making should be re-established.’

Responding to the report, a Treasury spokeswoman said: ‘The Autumn Statement showed that despite the tough economic situation, we are making progress. The deficit is down, interest rates are low and jobs are being created. We will consider this report and respond in due course in the usual way.’


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