Professor Patrick Honohan:

I will begin by responding to the questions asked about quantitative easing and inflation. I should not be talking about this at all, given that we are in the quiet period before the monetary policy meeting that will take place next Tuesday and Wednesday. While I will make an exception, I will not talk about current monetary policy decisions, rather I will talk about quantitative easing in general terms. I hope that will be acceptable.

There is a clear answer to the question asked by Deputy Sean Fleming about the 2% rate. The measurement of inflation is not very good at taking account of quality improvements and new goods. There have been studies of this in the past 20 or 30 years, particularly in the United States where there is quite a body of evidence and the data are super. The US authorities asked how much of a difference it would make if they could take proper account of new goods and quality improvements. They came up with the conclusion that it was the driver of the figure of 2%. I do not remember exactly what it was, but they more or less said that if one year was taken over the next, the rate was probably 2%. The real rate of inflation is 0% when the rate is 2%, if members know what I mean, when quality improvements are taken into account. We do not need to worry about competitors because the Americans, the British and the Japanese are aiming for a figure of approximately 2%, while some other countries are aiming for much higher rates. All of this will be sorted with exchange rates.

An interesting question was asked about the distributional impact of quantitative easing. We discuss it frequently. It is simplistic to suggest the people who sell the bonds to the Central Bank will surely make the profit. That is an overly simplistic approach. As the effects of quantitative easing pass through the economy, they generate greater activity, profits in some areas, new jobs for people who do not have jobs and higher wages. They pass through the economy and the issue is being studied. I know from the recent INET conference I attended in Paris that some left-thinking people have been discussing whether there are better ways of engaging in quantitative easing. Consideration is being given to approaches that could result in a better distributional effect. There is a broad distributional impact, but perhaps it could be done better.

As Deputy Arthur Spring said, we did not come to this until a certain point in time. Other countries had done it at an earlier stage. Yes, there are different interests. Some governors and members of the governing council perceive some issues as having greater prominence than others. Countries in which the saving constituency is very dominant are not clear that they like quantitative easing at all, with zero interest rates on their savings. Many considerations, including legal issues and the question of compliance with the treaty, were widely discussed. We tried all sorts of other tools. It was easier in a single country jurisdiction for the Americans to buy Federal Government guaranteed securities, for the Bank of England to buy many British Government securities or for the Bank of Japan to buy many Japanese Government bonds.

People were looking at the monetary financing of Governments and wondering if they could really do this. There were a lot of legal considerations and concerns. We got there, and that is important.