The UK government has turned on the debt taps to provide extensive financial support to the economy and the many supporters of this policy have been happy to point out that borrowing is cheap. Government bond yields have been ultra-low, yet this has been to some degree an artifice.

At the same time, other central banks, including the Federal Reserve, the Bank of Japan and the European Central Bank, were also engaged in heavy purchases of government securities. Government bond yields remained low, partly because central banks’ colossal purchases kept them low. The true cost of government borrowing will be known only when the central banks sell the bonds that they have bought – if they ever do. When the current quantitative easing has been completed, the total of UK floating-rate public sector debt will be around £1tn: nearly half of expected GDP in 2020. This situation will be very risky. If the Bank of England were to increase short-term interest rates by 1 percentage point, the government’s debt servicing costs would immediately increase by roughly 0.45% of GDP. There would be a sharp conflict between fiscal and monetary policy.

But interest rates would increase only if inflation presented a serious threat, and it has not done so for many years. The economy will need to make some permanent adaptations to coronavirus and companies will need to repair their balance sheets. Many people will also need to find new jobs. All these influences will help to keep inflation down. The Bank of England expects inflation to remain below target until 2023, even with ultra-low short-term interest rates. It judges the risks around its central inflation forecast as “broadly balanced”.

But there are reasons to fear resurgent inflation. Charles Goodhart and Manoj Pradhan in their book, The Great Democratic Reversal; ageing societies, waning inequality, and an inflation revival, argue cogently that the low inflation of the past quarter-century has been facilitated by the combination of favourable demographics – falling dependency ratios in rich countries – and the entry into international trade of China and formerly communist eastern European countries. In this environment, Japanese inflation has remained low despite many years of ultra-expansionary monetary policy.

What could be done now to mitigate the risks? Quantitative easing has converted nearly half of the public sector’s debt into floating-interest-rate form. If the interest rate on some of that debt were fixed for a period, then the conflict would be delayed. It would be prudent, therefore, as a matter of risk management, to end quantitative easing and embark on a programme of gilt sales to drain the enormous pool of bankers’ deposits in the Bank of England. Obviously, the longer the maturity of the gilts that were sold, the greater the risk reduction, but even sales of, say, 3-10-year gilts would make an important difference.