14
Examination of witnesses
Nigel Wilson and Adrian Grey.
Q49 The Chair: I welcome Nigel Wilson, chief executive officer of Legal & General, and Adrian Grey, global chief investment officer of Insight Investment.
Mr Wilson, what do you think the purpose of QE has been during the current Covid-19 pandemic? Has the perception that the Bank has engaged in monetary financing been strengthened during the latest round of QE in comparison with previous rounds?
Nigel Wilson: Thank you very much for inviting me. I am delighted to be here.
The Bank has achieved its outcomes and objectives—financial stability, credible stress testing, providing liquidity and hitting inflation targets—during this very unexpected crisis. We have never had a pandemic in anybody’s living memory. As the UK’s largest insurance company, we have been waiting for a pandemic since 1918 and have been analysing it. Sadly, we did not forecast it even in December of last year.
We firmly believe that Lord King’s decision to deploy QE after the global financial crisis was the right one. This time, in the pandemic, we needed a different policy response. We needed both a fiscal and a monetary policy response, particularly from the Treasury and the Bank of England, and to a certain extent they needed to be co‑ordinated. A similar approach was adopted in the United States, Europe and Japan. To a large extent, that part of the equation has been successful, certainly in the short term.
A bit like the global financial crisis, I think we are less sure about the longer-term outcomes and policy changes that are required. On long-term outcomes, there is greater uncertainty about the route of inflation than when we had the first crisis, because we have an unprecedented amount of QE and a massive amount of fiscal policy across the globe. As a firm we are not quite sure what the consequences of that are. We are certainly concerned about inflation.
QE was definitely seen as an unconventional policy in 2008-09. It is not any more; it is one that all the major economies follow. We believe that the Bank of England, the PRA and the FCA have done a very good job during the pandemic in achieving the outcomes that as regulators they should be trying to achieve.
The Solvency II regime has been stress-tested during this, and has come through incredibly well for the insurance sector.
I do not think that we have had any major issues in the financial services sector during this crisis, and the Bank of England and the PRA deserve some credit for that.
I do not believe that there is a widespread view that the Bank of England has done anything other than do its job. For the first time, the Treasury has had a massive fiscal expansion. That was in a sense the new part of the strategy against the pandemic. Some of that has been successful; some of it has not been. I think that QE has been successful.
There are two other issues that we would raise. One of the unintended consequences of the GFC and QE is that we have seen UK financial institutions gradually become less globally relevant. They have shrunk in relative size compared with those across the world. We would hope that does not happen this time and that we see financial institutions in the UK becoming stronger.
One of our main issues is that for a large number of years the UK has had a low productivity, low wage and low growth economy, driven largely by a lack of real investment in the economy. We think that the lack of policy tools outside what is now conventional QE results in underinvestment in the UK, greater inequality and a greater K-shaped recovery than planned as an unintended outcome.
Therefore, in big-picture terms we would like to see greater priority being given to investment that drives long-term productive growth that goes towards levelling up and building back better. At the moment we have policy tools that are designed for the Bank of England to meet its objectives, and we think it is meeting its objectives.
The Chair: I am sorry to cut you off, but I am hoping to get through eight questions in an hour.
Adrian Grey: I echo Nigel’s sentiments. Thank you very much for the invitation.
Unlike Nigel, who is on the insurance side of the business, Insight—which you may not be familiar with—is concerned mainly with the pension fund side of the business. We manage some £800 billion of mostly UK pension funds. We are one of the largest buyers of UK government debt, hence we have a keen interest in the impact of QE.
The purpose of QE this time round was clearly as part of a co‑ordinated policy package for a macro shock. I do not think that we have any more to add to that that would be particularly insightful.
Another angle is that March 2020 was a peculiarly dysfunctional time for UK financial markets. It turns out that Mr Bailey’s big and fast announcement of QE was very effective in calming down that dysfunction, which Mr Ramsden described in his speech as the dash for cash.
That starts to get into some of the difficulties that come with QE. To a certain extent, it can be seen as a cure for everything. It turns out that QE is an effective backstop for financial market dysfunction, but my view is that that would certainly stimulate a debate within policy circles about what other instruments that particularly the central bank might use instead of QE next time. That gets away from QE just being rolled out as the go‑to instrument when effectively you are constrained at the zero policy bound with conventional policy.
Q50 Lord Livingston of Parkhead: Focusing on the pandemic QE, if I can call it that, as opposed to the GFC, do you think that the way this round of QE has operated has caused an issue, perceived or real, about the Bank’s independence? I am thinking particularly about the eerie way in which the amount of QE seems to equal roughly the Government’s borrowing requirement. This is Adrian Grey’s particular area as a big buyer of gilts. Do you think that it has and, if so, what are the consequences of that for independence?
Adrian Grey: Clearly, it has at least posed that risk. As your previous session teased out, there are some coincidences in the amount of funds and announced amounts, which are hopefully just that, but clearly if you are of a cynical disposition you could pursue that line of inquiry.
I think it would be helpful if in the whole communication strategy there was a little bit more about how the amount of QE mapped on to a growth or inflation target in the forecast period. We do not see much in the way of that sort of communication.
There is also an issue of perception. The DMO and Bank of England are at pains not to synchronise their announcements about issuance and purchases, but at a practical level every Tuesday and Wednesday, between 10 am and 11.30 am, the DMO issues gilts. At 2.45 on the same afternoon the Bank of England buys gilts. They are not the same gilts, but they might be ones with an October rather than a December coupon. I am not sure that is really in the spirit of Article 104 of Maastricht and Article 123 of Lisbon, which effectively tried to separate those matters. You can see the practicalities that the Bank and the DMO are running into, but you can also see the difficulty of perception.
Lord Livingston of Parkhead: For you as a buyer of gilts, what is the implication of this issue of perception, not so much currently but going forward?
Adrian Grey: You will be aware that the UK defined benefit pension schemes have a regulatory requirement to hold a number of gilts to map on to their liabilities. If the Bank of England purchases them and pushes up the price, its liabilities also go up, so it has to buy more gilts. I suppose that gets into the debate about the transmission mechanism. These are not people who will sell their gilts and transfer their portfolio into more risky instruments; they will just hold the gilts and will have to buy more.
Lord Livingston of Parkhead: Is it fair to say that they are forced buyers and that it does not really change them? It is perhaps more to do with discretionary buyers.
Adrian Grey: Yes. Let us say that about 30% of the UK gilts market is owned by overseas investors. Ultimately, we are at the mercy or kindness of strangers if we run into a world where—this takes us into the unwind story—for example, the UK persists in QE at the same time as other major central banks are rowing back from it.
Lord Livingston of Parkhead: Nigel, it is nice to see you again. Do you think that, compared with other countries, there is an issue and, if so, does it have an impact on future UK financing of the gilt market?
Nigel Wilson: No. We think that the Bank of England is renowned not just in the City of London but across the world as a strong, independent central bank. Even the amount of QE that it did during the current crisis is less than America, Japan and the euro area have done, so it is now a fairly conventional tool, not a special one.
I think that all governors of the Bank of England have strong, independent views on these issues. Do we see them doing anything different from the rest of the world? No. We look after £1.3 trillion. Of that, about $400 billion is outside the UK, so we have a good sense of what happens in other markets. I think that the Bank of England has a tremendous reputation around the world, whether that is in China, Japan or the UK, as being a strong independent central bank run by a strong independent governor and strong independent chief economists. There is a strong degree of independence wrapped around that.
Lord Livingston of Parkhead: In your mind, that has not been shaken by the apparent coincidence, and lack of comment on it, in borrowing and QE.
Nigel Wilson: No. It did require a co‑ordinated fiscal and monetary response, which I think we saw throughout the world. There was not anything unconventional about what the Bank and Treasury were doing in the UK. It was hard to predict at the beginning exactly how much money would be spent fiscally and on QE. I think in both instances they are much bigger numbers than had been anticipated and each got its forecast wrong, because it was a much bigger pandemic than anybody expected. This time last year people were not thinking about a pandemic. Nobody forecast GDP growth at minus 10%. To be fair, the financial system has been tremendously strong in the UK in the past year. To a large degree, the Governor, PRA and FCA should have credit for that.
Viscount Chandos: Mr Grey, you talked about the eerie way in which the amount and timing of purchases and issuances of gilts coincided. If your chief Bank watcher came to you and said, “This is not a coincidence. The Bank is signalling that it feels it is under uncomfortable pressure”, how much credibility would you give that suggestion?
Adrian Grey: The UK has an institutional framework, which Nigel alluded to, that is highly respected around the world, so when there is a relatively new policy tool, which clearly has been very effective heretofore as far as we can tell, there is all the more onus on the Bank, Treasury and other actors to be particularly keen to communicate what the governance framework around it is and to have a programme of building public trust and understanding so that we do not find ourselves suddenly susceptible to the suggestion that the Government have found a magic money tree, to use the popular vernacular, and the Bank is acquiescent in helping with that. Everything has to be geared towards making sure that this is a policy tool that is kept in the Bank’s armory that it can deploy as it sees fit without all these suggestions being put into the public domain.
Viscount Chandos: Whatever the UK’s reputation is for the strength of its institutions, can you really interpret the coincidence to which you have referred in any other way? As Sir Paul Tucker said in his evidence to us, the Bank could buy much more or much less in any given period, but, given that it is allowing itself to track it, is that not likely to be conscious and a signal rather than a coincidence?
Adrian Grey: I think that the answer is that the longer it goes on the less of a coincidence it becomes.
Nigel Wilson: I agree that it is unfortunate to a certain degree that there is a coincidence around this. I do not think that it has harmed the Bank’s reputation around the world, or the credibility of the senior people within the Bank and the regulatory system. The parallels between what is going on in the UK and the rest of the world are very pronounced. I do not think that anybody is thinking that there is anything untoward going on in the UK right now.
The Chair: Nigel Wilson, I got the impression listening to your answer that you see QE as a bit of a cure-for-everything point. In your view, are markets seeing QE as having diminishing returns? What would be the alternatives to which you alluded in your answer?
Nigel Wilson: The alternatives have always been that we should invest more in the UK’s real economy and that QE has been seen as a tremendous single source of policy initiative. We have become massively dependent on QE because of the role that it played both during the financial crisis and during the pandemic. The real issues that the UK economy faces are not being addressed by lots of policy initiatives because there is an overdependence on QE. I do not know whether a combination of QE and a massive fiscal stimulus will result in further inflation down the road. One of our fears is that because it has happened in all the geographies of the western world it may result in inflation further down the line.
Lord Monks: Since we started this inquiry, there has been, to coin a phrase of Lord Livingston’s, an apparent coincidence that a lot of other people have suddenly woken up to quantitative easing and are beginning to ask quite a lot of questions. It has taken the form of demands for transparency, for communication strategies to be improved and so on. You have both been complimentary about the robustness of the Bank’s handling of QE, at least to date. You qualified that by referring to a problem if inflation rises, but in the light of that apparent coincidence and the rising tide of interest and, perhaps in some quarters, criticism—we have heard some of that in evidence on other occasions—do you think that the Bank will get away with apparent coincidences without coming absolutely clean about what is going on? Do you think that will survive?
Nigel Wilson: I think that there is a necessity for greater transparency for everyone. As chief executive of one of the UK’s largest financial institutions, I know that we strive for greater transparency. All of us have very complicated balance sheets and regulation, and we try constantly to communicate that. Andrew and the rest of the team at the Bank of England are trying to do that. If there is a demand for further communication from the Bank and greater clarity and transparency, the Bank is set up for that and is probably willing to do that.
Do we enjoy it when Andrew gives a speech on a specific topic to provide greater transparency? Yes. Thinking of my own role, have I done more communication in the past year than I have done in previous years? The answer is yes. There has been much greater demand from my colleagues and the rest of my stakeholders for further communication. Should that be put to the Bank: “Can you step up to do more communication?” I think that a good outcome from this process is to get further communications and clarity on it because that will only enhance the reputation of the Bank. I think that if there was anything untoward Andrew or the previous governors of the Bank of England would have stepped up and said so.
Lord Monks: I do not know whether Adrian wants to add anything to that. I have a question for both of you. Perhaps you would like to have a crack at it. When I sit around the kitchen table the question I get from members of the family is, “Where does all this money go?”, whether it is in the markets, insurance, the banks or whatever. Adrian, what do you do with it? Do you cheer when a new slug of QE comes along and think this is a great thing for our shares? What happens?
Adrian Grey: I notice that one of your later questions is whether QE is viewed as a success by the markets. I think that everyone would agree that it has been highly successful in boosting financial assets and other asset prices, such as property. There is a somewhat more nuanced debate about how effective it has been in terms of the real economy. I suspect that is where the rubber hits the road in terms of the haves and have-nots. You can see quite easily how that debate could become politicised at some point in the future. As to where it goes and what it has done, the straight answer is that it has inflated asset prices.
Lord Monks: Do you agree with that, Nigel?
Nigel Wilson: I think that it has inflated asset prices, and it is an unintended consequence of what has happened. My opening comments were along that line. We simply have not invested enough in the real economy to create real wage growth and improved productivity right across the UK. On its own, it solves the problem in hand—the financial crisis or the pandemic—but it has been seen as a potential solver of the general problems of the UK economy, which it is not. Therefore, we have not had enough policy initiatives elsewhere in my view that drive real economic growth in the UK for the betterment of everyone. I think that the rich have benefited from the various forms of QE right across the world. It is not just in the UK; it is elsewhere as well, and we are heading to a K-shaped recovery where well-off people will get even better off and poorer people will struggle. That is not part of the objectives of the Bank of England right now. We would like to see more policy initiatives that have an impact on the real economy.
As for where all the money goes, that is what we have been investing in. We have invested £26 billion in levelling‑up capital expenditure across the UK in all the towns and cities outside London, whether that is Cardiff, Salford, Leeds, Manchester, Newcastle, Bristol or Birmingham—all over. We have seen the City of London do very well since the 1980s and repopulate, and the rest of the UK has fallen behind. In our view, that needs to be reversed. One of the unintended consequences of QE has been rising asset prices, which have benefited richer people, and we have not seen the same on productivity and real wages across all the UK.
Q51 Lord Skidelsky: May I turn the question by raising the dreaded word “fiscal”, which I think is the counterpart to a lot of what we have been talking about? Does not QE expose the Government to a lot of moral hazard simply by removing fiscal discipline? That is one part of the question. After all, the thinking behind monetary policy is that it would raise or tighten fiscal policy when it became too loose. If the Bank is simply a passive supplier of whatever funds the Government want to pursue their spending programme, what happens to the Government’s fiscal credibility? Leaving aside the Bank’s credibility as an anti-inflationary instrument, what about the Government’s fiscal credibility?
That is one area. The other is that it was implicit in what both Nigel and Adrian said that fiscal policy must become much more powerful. What we have been relying on is monetary policy as a kind of rescue for a huge shock. The implication of what you are saying is that you have to have more focused spending than the Bank can provide, and that can come only from the Government giving a mandate to the Bank if they want to rely on Bank financing to do certain things. I think that there is a big issue about the design of monetary policy. Would you like the Chancellor to come to the House and say, “This is the macro policy framework that I want to guide our decisions in the future”?
Adrian Grey: Almost de facto the heavy lifting must be done by fiscal policy simply because conventional monetary policy has reached the limits of what it can do. Once you get to zero or negative territory on short rates all sorts of other issues come into play, so clearly the spotlight is on fiscal policy.
The key around the credibility issue and the involvement of QE in all this is when we move forward through the pandemic to economic recovery and the output gaps close. With monetary aggregates clearly growing quite quickly now, fiscal policy would have to be reined back in at that point. I think there is a sequenced aspect to this.
Nigel Wilson: Fiscal policy is tremendously important. On the point you raise about having a much more razor-sharp and focused fiscal policy, one of the sad features of the past few years is that we had an austerity programme. We have never really had a capital programme from the Government that has led to productivity and real wage growth across the economy. Much of it does not even exist right now because the outputs that we need in the future are from products and services that we do not have right now.
Therefore, we need policy initiatives that are forward looking. The world’s economy is changing at a dramatic pace; there is more technological disruption than we have ever seen before. The worry is that the UK economy will fall behind, whether that is in electric vehicles, carbon capture or in onshore or offshore wind and energy, even in our housing strategy. We have had a massive undersupply of housing for 30 or 40 years. Much of that can be attributed to the fiscal policy that we have had for a long time that has not addressed these issues at all.
It would be a good idea to have the Chancellor explain how the fiscal policy will result in the prioritisation of productivity growth, real improvements in research and development across the UK, real economic growth and better wages for people across Britain, not just financial returns on assets for rich people.
We have genuine opportunities to reshape the economy. There is £200 billion of excess savings now in the economy as an unintended consequence of the pandemic. How that money gets spent and how the Government encourage that spending in different ways is a very important policy objective.
Lord Skidelsky: Do you have any view on how fiscal discipline is to be maintained if the Bank is simply a passive supplier of money to the Government?
Nigel Wilson: Is that question to me personally or both of us?
Lord Skidelsky: Both, of course.
The Chair: Perhaps you could give short answers because I am conscious of time.
Nigel Wilson: I think there is a real problem of moral hazard. That is an issue. That is why having greater transparency at the Bank and the Chancellor explaining his fiscal strategy and how that relates to the real economy is tremendously important.
The Chair: Mr Grey, will you give a short answer to Lord Skidelsky’s question?
Adrian Grey: I think it would be very unhelpful if the Bank was seen to become a passive supplier of cash to the Government, to use Lord Skidelsky’s words.
Q52 Lord Stern of Brentford: I have declared my interests in the register and at the beginning of this inquiry, but up to about a year ago I was an adviser to the LGIM Future World Fund. I am not at the moment.
My question in some ways has been answered, but I want to probe a little further. To what extent is QE viewed as a success by the markets? You have said in broad terms, if I understood correctly, that in price and financial stability it has been a success compared with what might have happened had it not been used. I think you have answered that question.
You have also raised the issue—I must say that I am in very strong agreement with you—that investment performance in the UK has been very weak. We have dropped a couple of percentage points in GDP and investment over the past 15 to 20 years. We can see one of the consequences of that in sluggish growth and productivity, but, more to the point, we can see that, if we invested a couple of percentage points more of GDP now and pointed in the direction of levelling up, going net zero and so on, it could have a very powerful effect on employment, growth and productivity. That is my view, and I thought that was what you said, Nigel.
Are you saying that in a very narrow sense it has been successful, but that in a bigger, longer-term sense it has been unsuccessful, or are you saying that the problem of investment should be solved elsewhere and that we should not look to QE to tackle it? That is really a question for both of you, but, Nigel, would you like to start?
Nigel Wilson: I agree with everything that you said. Is QE viewed as a success by the market? If we define that in terms of solving the crisis, boosting asset prices and financial stability, tick; we have solved that. If it is about the wider issue, which I think we would both like to see addressed, the answer is that we have not solved that. Could a combination of fiscal and monetary policy help on things that are of national significance, such as climate change? I know that you are very passionate about that. We are also very passionate about it.
If we want to build a world-class climate change industry in the UK, QE is not the way to do it. We need much sharper fiscal and monetary tools that may or may not be in the remit of the Bank. It is certainly in the remit of the Government to sort out how we become world leaders. There are many new industries emerging in the climate arena. These are huge global industries. The path-breaking work that you did led the charge into these areas, but energy is now clean, green and cheap, and it can dramatically transform economies and create real jobs.
I do not think we are having a sufficiently good debate about that, frankly. We are still looking backwards as to what QE has and has not done. In terms of what it was asked to do, it has done that, but there is a whole raft of other initiatives about how fiscal and monetary policy interact to help to create these new businesses of the future. We would like to step up much more and invest in real assets rather than gilts, to be frank, and get our pension fund clients on both the defined contribution side and the defined benefit pension side investing much more heavily in the future productive growth of the UK.
Lord Stern of Brentford: Buying corporate bonds from fossil fuel companies would go the other way from what you are describing, would it not?
Nigel Wilson: Yes.
Lord Stern of Brentford: Adrian, do you have anything to add? I know we are very short of time.
Adrian Grey: To go back to the narrow focus of QE and raising financial and property prices—asset prices—with the transmission mechanism into the real economy perhaps not being as effective as one would hope, that is an area to dig into. If the yield curve is very flat, commercial banks do not make as much money as when it is upwards sloping. If they are less profitable, they lend less to the real economy, so you could argue that QE is making it harder for commercial banks to supply finance to the real economy. There are various areas that are not yet fully understood about the way QE works.
When you go back to the Bank of England’s purchase of corporate bonds, the phrase referred to earlier, “moral hazard”, becomes relevant. The notion that a central bank should be choosing company A to get lower financing costs than company B takes you into quite difficult territory, as the ECB has found with its somewhat more extensive programme that it rolled out in that area.
Q53 Viscount Chandos: Both of you have flagged concerns about a future increase in inflation beyond the target level. How much of a risk do you think not just your institutions but the market as a whole sees in that? What do you think that should mean for the management of QE from here on?
Adrian Grey: I think that markets have become very sanguine about inflation generally, for the simple reason that, in an adaptive expectations context, there has not been inflation for a good number of years.
It is worth noting the financial indicators that try to track inflation expectations. For example, in the US, the 30‑year expected inflation teased out of inflation-linked securities bottomed out at about 1.25% in the spring of last year. It is now above 2% and rising, along with nominal yields.
The Bank, in its QE programme, has not been buying index-linked securities, and in part that is a nod towards not wanting to pollute the inflation signal that comes from those. There are other issues as well such as RPI reform. Those are currently signalling 3.1% inflation expectations, as opposed to 2.6% and somewhere near the bottom in the spring.
There is a perceptible increase in expectations of future inflation, but you would be hard pushed to say that they are in any way runaway figures. I think that those banging the drum loudest on that front are the monetarist-type purists who look at monetary aggregates, which are now growing quite rapidly, particularly in North America.
Nigel Wilson: I think that we have become complacent about inflation because we have not had it. There are several long-term macro trends. Technology is inherently deflationary; the ageing demographics are deflationary; globalisation has been deflationary. There are definite signs that people’s expectations about inflation are rising—more so in America than in the UK.
That goes back to the commitment of the Bank of England to the 2% inflation target, which remains credible at the moment, but the scenarios that we are thinking deeply about in Legal & General are that inflation will rise. One of the consequences is rising inflation. There are more than soundbites that increasing the inflation target above 2%, whether implicitly or not, may well happen in the next 18 months to two years.
In having this dual experiment with both QE and massive fiscal expansion at the same time there is not really much economic theory on the consequences for inflation from that, but there is massive pent-up demand from customers because they have not been able to spend money. In the short term there is limited supply of some of the goods that customers want to buy, so we will see some inflation blips, and it may be in the interests of the Government to have higher inflation going forward.
Viscount Chandos: Do you worry about what some of our other witnesses have drawn our attention to, which is that the effect of the indemnity between the Treasury and the Bank could create a real moment of tension when the Bank needs to raise interest rates because of inflationary pressures, which creates a very large call on Treasury funds?
Nigel Wilson: Yes. The unanswered $64,000 question is about the true test of the independence of the Bank when the monetary policy tool that is called for is different from the one the Government want. I have no reason to believe that the Governor of the Bank of England would not make the right call on monetary policy, but it will certainly be a huge call at that time.
The Chair: Would that it was just $64,000.
Q54 Lord Fox: What is the market expectation on QE and future expansion of it? Is there a built-in expectation in the market that, come the next crisis, QE will be wheeled out yet again as the Swiss army knife of policy?
Adrian Grey: As to where we are now, the £150 billion announced in November has a run rate of about £4.4 billion a week. Therefore, that will play out by early November of this year. It is programmed to go to the end of the 2021 calendar year.
We have heard nothing—I presume no one else has—about any intentions thereafter. I do not think that anyone reasonably expects there to be a complete cliff.
When we get into the whole debate about what the unwind looks and feels like, it is instructive to look at the experience of the United States. Ben Bernanke first talked about tapering in June 2013. It took until October 2014 to stop purchasing, and it was not until 2018 that it started to shrink its balance sheet. This is a lot easier to get into than out of.
Nigel Wilson: It will remain as quite a conventional toolbox. The challenge is the unwind and whether we develop other policy initiatives. I am much in favour of our having more sweeping policy initiatives to address the real problems Britain faces rather than the global ones that this was designed to resolve.
Lord Fox: Given it has become a normal tool, do we have sufficient understanding of how it works?
Nigel Wilson: No. I think the increase in inequalities is a very poor outcome; how well some rich people have done is again a very poor outcome. It has not addressed productivity. The transmission mechanisms into the real economy have been less than we anticipated when interest rates became so low and investment was supposed to take place. That really has not happened. There have been too many players involved in financial assets and not new real assets, going back to the points Nick made earlier about climate change and the need for massive capital investments in those areas. Those things have been overlooked in the debate on QE.
Lord Fox: That is very helpful.
The Chair: Nigel, I do not want to embarrass you, but I was struck by an article that you wrote in the Financial Times in 2014 in which you said: “Rising asset prices add to the wealth of the already rich, but their effect on economic output is indirect and muted. True, some of the gains are likely to be spent lifting consumption, but investment is in the doldrums. There has been no leap in exports despite the fall in currency and sharply rising import prices have not helped domestic producers anything like as much as you would expect”. Nothing changes, does it?
Nigel Wilson: Nothing has changed. I wrote that a bit earlier; that was a refresh for the Financial Times, but we have been talking about it for 10 years. Let us have some real policy debates, which have got lost in time. That article in the FT lasted well. Sadly, many of the other things I have written have not lasted as well as that. I would not like to claim that is universally true for myself.
The Chair: We will cherish it.
Q55 Lord Haskel: If QE is not unwound, or only partly unwound, and the assets remain on the Bank’s balance sheet, what will be the future implications for financial markets? Will it continue to lower gilt and annuity rates? Will it continue to keep interest rates low? Will it inflate assets, or will diminishing returns set in and it just becomes another fact of life? Nigel, how will this affect your investments in the real economy that you were speaking of?
Nigel Wilson: As to what we will do, we will continue to invest in the real economy. There is a shortage of capital in the real economy right now. Therefore, whether it is new and emerging industries, towns and cities across the UK, or reskilling and retraining people, we are mainly an asset manager, not an insurance company, as you have probably guessed. We own five housing businesses in the UK, for instance, so we genuinely invest in the real economy.
We are in favour of low real rates and low nominal rates, but a much more productive and high-growth economy. We will get that only if we move to different policies other than QE being seen in its current light. QE has unintentionally favoured rich people rather than poor people, and older rather than younger people. It has worked for some countries much better than for many others. The net effect of the past 10 to 12 years is that median wages in Britain have not risen at all, and that cannot be a good outcome.
Therefore, the policy tool that we have applied over the past 10 years has not worked for the real economy and for real people. Too many of the asset price gains both of us talked about earlier have gone to a minority of people. That cannot be a good outcome for us, so we need to change.
Widening inequality is not a good outcome. It also happens at a country level. Rich people in rich countries and poor countries have done really well out of QE, but poor people relatively have not done well in any of the economies. If you look at the US, the UK and most of Europe, that is certainly the case.
We think we should be looking to the future. How do we influence the future and better outcomes from a societal point of view? To be fair to the Government, we are huge fans of levelling up and building back better. We would like much more proactive fiscal policies, giving DC and DB pensions and savers much more say in what they are investing in outside the current regulatory bounds, and getting central and local government, working in partnership with firms such as Legal & General, to develop the highly productive economy that we aspire to deliver.
We are very happy to continue to step up and invest in all sorts of real assets: affordable housing; social housing; build-to-rent housing; massive urban regeneration; and a huge raft of carbon opportunities that present themselves. Climate change is the biggest investment opportunity in the past 100 years. The UK has to decide whether it wants to seize it. We at Legal & General want to be placed in a position that allows us to seize it and invest, or co‑invest alongside central and local government and other institutions. The UK is a great place to invest. We have never achieved that potential for the past 30 years.
Lord Haskel: Adrian, how will it affect your business if it is not unwound? If it is unwound, should the Bank tell the industry—and, if so, how?
Adrian Grey: Therein lies the rub. That is a very interesting question. As I said earlier, it took the US from the middle of 2013 to early 2018 to go from buying less, to stop buying and to start to shrink its balance sheet, so call it five years. One thing that you cannot do is have a cliff edge and turn off the tap immediately. If you do that, the same number of gilts are to be issued but there is 25% to 30% less purchasing power because the Bank is no longer buying. You would have an immediate upward shift in the structure of UK interest rates, which would be potentially damaging and could be disorderly if it was done particularly poorly. There is a whole debate to be had about how the unwind is communicated and effected.
To come back to one of the points raised in the previous session, essentially there is an accounting issue between the Bank and the Treasury. As it happens, at the end of 2020 the £613 billion of gilts that had been bought by the Bank was worth £725 billion because the price had gone up. If you hold them just to maturity they have to go back to par, so that £112 billion needs to be found from somewhere to pay to the Treasury. There are some non-trivial issues to do with cash flow and accounting for the relevant institutions.
The Chair: On that note, that concludes this session. May I thank Nigel Wilson and Adrian Grey for their answers? Both sessions have been very useful, but this one has been particularly helpful. Thank you very much. I also thank colleagues on the committee.
