In the past, when interest rates have been cut, the media have often explained the effect on the average household by calculating the savings on a typical mortgage. Under quantitative easing (QE), explaining the direct impact of the monthly announcement of the monetary amount of gilts and corporate bonds that the Bank of England is going to purchase will be less easy.

In the early years of the Monetary Policy Committee (MPC), we toured the country explaining the new inflation-targeting framework in order to manage expectations. For QE to be effective, it will be helpful if businesses and consumers view it as evidence that the Bank is “on the case” with respect to promoting recovery. Therefore, those who organise regional trips for MPC members are likely to be very busy again.

The detail of how this new regime might operate is expected to be disclosed this week, in time for the MPC announcement on Thursday. It is clear, though surprising, that the authorities had no detailed contingency plan with respect to QE in place.

When I was at the Bank, the Japanese had introduced QE. Although some theoretical research into QE was undertaken then, the widespread belief was that the Japanese had been forced into undertaking this unconventional policy because of their policy mistakes. The unspoken presumption was that we would not make the same mistakes.

I was part of a group that published a report in 2000 arguing that central banks needed to make sure that they “leant against the wind” as an asset price bubble was emerging. Otherwise, we feared that the bursting of the bubble could force us into a situation where, with interest rates close to zero, one would be forced into using QE, an unproven policy tool. It is a source of considerable regret to me that we failed to persuade colleagues on this issue, who instead took the view that they would rather “mop up” after the bubble burst.

In Britain, we have gone through a succession of regimes to control inflation. This week marks yet another significant change. In 1997, many of us celebrated central bank independence. Under QE, the Bank has to work jointly with the Treasury. It is, as yet, too early to guess as to the enduring impact of the crisis on Bank independence.

It is rumoured that, under QE, the Bank intends to monitor how well it is doing through the use of intermediate targets for broad money growth. Given the past policy failures associated with using monetary targets, I believe this to be unwise.

We do not, as yet, know if the MPC will be involved in detailed decisions such as the maturity of the gilts that are purchased or the relative proportions of corporate bonds versus gilts. The basic rationale for an MPC with external members was that policy mistakes would be less likely when made with a committee where diverse views are represented. I do hope that the new regime is as inclusive of external members as possible.

I wish my former colleagues luck with this new regime.

Dr Wadhwani was an external member of the MPC from 1999 to 2002. He was previously head of equity strategy at Goldman Sachs, and now runs his own fund manager business and is a visiting professor at the London School of Economics and City University

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