Deputy Governor of the Bank of England, Ben Broadbent, recently spoke at the National Institute of Economic and Social Research, discussing the effects of monetary policy and whether they should be understood in terms of interest rates and bond yields or monetary aggregates. He considered the relationship between these aggregates and inflation in the past and present, and explained how the Monetary Policy Committee (MPC) accounts for "QT" (quantitative tightening) in its forecasts.
Broadbent explored the question of whether the current inflation is mainly due to the growth in broad money in 2020, as a result of quantitative easing (QE) conducted that year. He argued that movements in broad money can occur independently of developments in the central bank's balance sheet, and that the growth of consumer spending over the past year was weaker than expected.
The speech also addressed the question of whether the MPC should include identifiable and separate effects of asset sales on activity and inflation in its forecasts. Broadbent's answer was "no," as the impact of QT is already captured in the prices of assets on which the MPC conditions its forecasts. Adding something else would result in double-counting the effect.
In conclusion, Broadbent emphasized that monetary policymakers should not ignore relevant information for future inflation, including monetary aggregates. However, he argued that the strongest claims about QE and its relationship to inflation are not well supported by evidence.
