When Osborne re-arranged the accounts between the Bank of England and the Treasury to put the £37bn profit of the QE programme on the nation's books, it was widely seen as a swindle, with our own David Blanchflower calling it a:
Smash-and-grab raid on the Bank of England to make his borrowing look lower.
But the FT's David Keohane (yes, second time today) wonders if the fading importance of central bank independence means that we should reconsider that assessment. Keohane writes:
We still find it hard to view the “raid” itself in any sort of harsh negative light.
We did and do acknowledge the timing was… awkward… but essentially it’s still accounting — the shifting of figures between a parent and a subsidiary. If anything, the “raid” has made the whole process far more transparent.
More generally, the idea that central bank independence might necessarily be eroded, and that it might be a good thing, was until recently taboo. But it is becoming more and more accepted that a central bank’s status is dependent on the economic realities it exists in.
The two big problems highlighted by Osborne's raid were that it blurred the lines between monetary and fiscal policy, and that it could come back to bite in the future. The former's looking like less of a concern in the current climate, but the latter actually might not be that bad. Even if it has already happened.
Keohane quotes Bank of America Merril Lynch's John Wraith:
As a result of the dramatic spike higher in yields that occurred over the first week or so of the New Year, the mark-to-market value of the BoE’s portfolio of Gilts acquired through QE over the past four years dropped by more than £7bn.
The Treasury/BoE is still earning £1bn a
year month of positive carry — the value of holding the bonds — which ought to soften the blow. But ultimately, the fear sparked by an accounting change may prove to have been a storm in a teapot.