Skip to main content


Volume 493: debated on Tuesday 9 June 2009

The Treasury’s latest assessment of inflation and its effect, and the effect of other factors on the economy, was published in the Budget. Since then, consumer price inflation was 2.3 per cent. in April.

I welcome my right hon. Friend to his new post.

In the longer term, will the Government look again at the inflation target, perhaps with a view to raising it so that as the economy moves out of recession—it is doing that, which is very welcome—the green shoots of recovery are not crushed by too early and too steep an increase in interest rates?

We certainly have no plans to choke off growth when it returns, which is exactly why we have put so many tools and resources in place to ensure that we return to recovery as quickly as possible. The reason why we will not revisit the inflation target in future is simple: we do not see that there is a trade-off between inflation and growth, and in the medium term we believe that higher inflation will deliver higher interest rates, which in turn will dampen down our long-term rate of growth. That is exactly why, when the Chancellor published the Budget a month or two ago, he confirmed the Bank’s remit to keep the inflation target exactly where it is.

I had intended to congratulate the Chancellor on rising from his grave, but it appears that he is still lurking in the graveyard.

May I ask when the Treasury plans to reverse the not very successful quantitative easing programme, in order to moderate inflationary expectations?

The Governor of the Bank of England has been very clear that quantitative easing is a tool that he needs to ensure that monetary policy operates effectively in this country. That is perhaps why we have not seen the falls in prices that have been seen in other parts of the world. We are absolutely determined to ensure that the Governor has the tools that he needs to set that measure alongside a fiscal stimulus. Together, they amount to something like 4 per cent. of the economy. We believe that that is the best way to return to growth as quickly as possible.

The market is factoring in expectations of a significant rise in inflation, as reflected in higher bond yields. Why is that happening, and does it not run the risk of choking off any economic recovery when it comes?

That is exactly why the Chancellor has been clear that the inflation-busting remit of the Governor of the Bank of England remains undisturbed. What is important is that the Chancellor makes available to the Governor the tools that he needs to deliver on that inflation target. That is why it is important that it is down to the independent Monetary Policy Committee to help oversee how tools such as quantitative easing are used.

The Governor has been clear about how he will approach the question of when to stop using the tools that have been made available to him. He said in the May inflation report that that decision would be based on a judgment about the inflation outlook, so there is no change in the strategy or the approach. This is simply another way of conducting monetary policy within the framework that the Chancellor has set for him.

May I, too, welcome the Chief Secretary to his new position?

Last week in Beijing, US Treasury Secretary Tim Geithner said that

“consumer spending in the United States will be restrained for some time relative to what is typically the case in recoveries. These are necessary adjustments. They will entail a longer, slower process of recovery”.

Going into this recession, UK household debt was even higher than that in the US, so why does the Chief Secretary think that the UK recovery will be so much stronger than that in the US and is he still sticking to his trampoline forecast of 3.5 per cent. growth in 2011?

The reason why we have confidence in the forecast is that we not only acted early, but acted to ensure that a considerable stimulus was put in place. If the hon. Gentleman looks at the return to growth after previous recessions in the 1980s and 1990s, he will see that it was not dissimilar to the return to growth that we project in the years to come. But that growth would not materialise and we would not see the recovery that we project if we followed the course of action proposed by the Opposition, and took £5 billion out of the economy at the worst possible time.

Like me, the hon. Gentleman will have read closely the speech made by the shadow Chancellor, who said this morning:

“You might think that the middle of a recession is not the time to be investing in the businesses and entrepreneurs of the future, but you couldn’t be more wrong. It’s actually exactly the right time.”

Can the hon. Gentleman perhaps explain why he plans to take £5 billion out of the economy in the middle of a recession?

Notwithstanding the progress that has been made arising from the G20 and all the rest of it—[Interruption.] This is serious—[Interruption.] We won every seat in Bolsover last week, six out of six—[Interruption.] Not in my area. I was on the streets speaking to voters and getting them out—[Interruption.] You are no good at maths, either.

Will my right hon. Friend bear it in mind that this time last year there was serious speculation in oil and other commodities, and the price of oil rose to $147 a barrel? Speculation undoubtedly played a significant part in that. The price has now risen to $68 today. Will he ensure that there is no speculation of the kind that we had last year, to ensure that the recovery gathers pace through to next year?

As my hon. Friend will know, the Governor of the Bank of England and the Chancellor, in the Budget, projected that the consumer prices index would begin to fall over the course of this year, which is why it is important that we ensure that the Governor has the right tools at his disposal to ensure that we do not see prices falling uncontrollably and for an extended length of time. We will therefore ensure that the Governor has the tools that he says he needs, but we will need to keep situations such as the rise in oil prices under close review. That is why it is important that we retain a degree of flexibility. It is also why it will be important for us to carry on acting internationally, because the kind of co-ordination that my hon. Friend mentions is best done internationally. That is something that would be very difficult if we were to take the very different approach proposed by the Opposition.

I often want to intervene, although not particularly on this point; the question that I was going to ask concerns something that arose some time ago. What level of quantitative easing does the Chief Secretary believe is consistent with a low inflation target?

Well, I am afraid that that is a judgment that we will leave to the Governor of the Bank of England. The Chancellor has authorised up to £150 billion of quantitative easing, and the Bank has drawn down something like £125 billion so far. As I say, it is important that we provide the framework and give the Governor the tools to do the job, but it is also important for the confidence of markets and for delivering the target in hand that it is left to the MPC and the Governor to make the ultimate judgment about how much is needed now and how much is needed later.