asked Her Majesty’s Government:

Whether they have any plans to revise their instructions to the Monetary Policy Committee of the Bank of England on the issue of inflation.

My Lords, the Chancellor will send his updated remits to the Governor of the Bank of England in March, as he does every year. Since the Bank of England was made independent in 1997, the United Kingdom has enjoyed unprecedented macroeconomic stability and a period of unbroken growth unparalleled by any other G7 economy.

My Lords, my noble friend is right to congratulate, as do we all, the Monetary Policy Committee on having maintained a low rate of inflation as per the targets for the past 10 years. However, I am sure that he is aware that, in addition to inflation, the committee is also required under the Bank of England Act 1998 to consider and support the Government’s economic objectives of high and stable levels of growth and employment. A former member of the Monetary Policy Committee recently told me that neither the Governor nor the MPC has ever considered the second requirement. So will my noble friend ask the Chancellor of the Exchequer, before he moves on, to consider sending at least a reminder to the Governor and the MPC that they should take proper account of the Government’s other requirement?

My Lords, I am somewhat surprised by my noble friend’s source on this. The minutes of the Monetary Policy Committee clearly indicate that the MPC attaches great importance to the growth of the gross domestic product and to labour market conditions. The Chancellor, in his letter, makes that clear to the committee, and the record stands by itself.

My Lords, is not the lesson of 2006 that the MPC should keep its concentration fixed on its anti-inflationary remit rather than letting itself be distracted too much by other concerns about the state of the economy or economic management? Is it not the case that as long as the MPC maintains its predictability and its credibility on inflation, we are thereby likely to have lower interest rates and faster domestic economic growth?

My Lords, I am grateful to my second noble friend for producing the justified balance that we always expect from the government Back Benches on this issue. On growth and employment, I want to emphasise and reinforce what he has just said: the issue is the inflation target. The Bank is all too well aware of the sanctions under the Bank of England Act 1998 if it fails to hit the inflation target. If inflation goes over the target by more than 1 per cent, the Bank will have to explain itself. That will be the main driver of its business.

My Lords, at the end of 2003 the Chancellor decided to change the measure from RPIX to CPI. Since then, the CPI measure has doubled and is now 1 per cent above its target. Do the Government believe that that was a wise decision? Do they believe that it has had any impact at all on wage settlements?

My Lords, we think that it was a wise decision for the obvious reason that it clearly enables us to directly use international comparators, which is of great importance. Even with the limited rise in United Kingdom interest rates in recent months, we are still well below the international average. The vast majority of central banks have been obliged in recent months to increase interest rates as a result of the obvious factor of high oil, gas and food prices. We use the index as a credible indicator for our major macroeconomic decisions, and wage bargainers of course have recourse to it.

My Lords, does my noble friend agree that there is a direct correlation between credibility, both at home and abroad, and government interference, and that the decision that the Government made immediately on coming to office in 1997 has been the foundation of much of the clear economic success?

My Lords, I am glad to agree with my noble friend.

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My Lords, it is time to hear from the Lib Dems.

My Lords, I suspect that even the noble Lord, Lord Barnett, will have doubts whether the Monetary Policy Committee will change its procedures given that the current remit has operated for nearly 10 years. However, the MPC’s procedures are deficient in the method of appointment provided for. Will the Minister recommend to his colleague the Chancellor that future appointments to the MPC should be made openly and transparently, rather than in a late-night telephone call from the Chancellor asking some poor, unsuspecting economist to make up his mind by the following morning?

My Lords, I have met few poor economists, and very few unsuspecting ones, but I have not seen any of them turn the offer down.

My Lords, I am somewhat confused. What do the Government think the Monetary Policy Committee is doing? Is it concentrating solely on inflation and the inflation target, as the noble Lord, Lord Howarth, suggested, or is it doing what the noble Lord, Lord Barnett, has suggested it should be doing and looking at more than one area? I think that the noble Lord, Lord Howarth, is right. What do the Government think is going on?

My Lords, the answer to that question is straightforward. The major obligation on the Monetary Policy Committee is clearly detailed in the Bank of England Act, and the Chancellor’s remit stays scrupulously close to that. The committee has a major objective on inflation. That does not alter the fact that it is all too well aware that its deliberations and decisions have an impact on the wider macro-economy. The Chancellor and others point out to it the necessity of taking the issue in the round—and that is broadly what my noble friends succeeded in doing with their two contrasting but exceedingly helpful questions.