The Bank of England should pay more attention to the growth of money supply in the economy, a group of British lawmakers said on Monday, warning that the central bank’s current approach could lead to inflation and financial instability.
The lawmakers, who belong to the House of Commons Treasury Committee, said that the Bank of England’s quantitative easing (QE) programme, which involves buying government bonds and other assets to pump money into the economy, had caused a surge in money supply during the coronavirus pandemic.
According to the committee’s report, the broad measure of money supply, known as M4ex, grew by 13.5% in the year to September 2023, the fastest rate since records began in 1987. The report said that this could pose a risk of higher inflation and asset price bubbles in the future, if the Bank of England did not take appropriate action to withdraw the excess liquidity.
Bank of England should adopt a new framework
The committee recommended that the Bank of England should adopt a new framework for monitoring and managing money supply, which would include setting a target range for money growth and publishing regular reports on its performance. The committee also suggested that the Bank of England should consider using alternative tools to QE, such as issuing its own bonds or raising the reserve requirement for banks, to control money supply more effectively.
The committee’s chair, Mel Stride, said that the Bank of England had been “too relaxed” about the implications of money supply growth, and that it needed to “wake up” to the potential dangers. He said that the committee was not calling for a return to monetarism, the economic doctrine that emphasises the role of money supply in determining inflation, but rather for a more balanced and transparent approach.
Bank of England defends its policy
The Bank of England responded to the committee’s report by defending its policy of QE, saying that it had been “essential” to support the economy and prevent a deflationary spiral during the pandemic. The Bank of England said that it was aware of the risks of money supply growth, but that it had other indicators and tools to assess and manage them.
The Bank of England’s governor, Andrew Bailey, said that money supply was not a reliable guide to inflation, and that the relationship between the two had weakened over time. He said that the Bank of England’s main focus was on the outlook for inflation and the labour market, and that it would adjust its policy accordingly.