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Volume 691: debated on Tuesday 1 May 2007

My Lords, the Monetary Policy Committee of the Bank of England has operational responsibility for the conduct of monetary policy. Under the Chancellor's remit for the MPC, the operational target for monetary policy is an underlying inflation rate of 2 per cent. The remit was last confirmed on 21 March 2007. For their part, the Government will continue to be vigilant and disciplined in the fight against inflation. To that end, the Chancellor announced to Parliament on 1 March that overall headline settlements for public sector workforces covered by pay review bodies are to be less than the 2 per cent inflation target in 2007-08.

My Lords, I thank the Minister for that reply. Will he confirm that the Government’s attitude towards this is confident but not complacent? Does he agree that the Monetary Policy Committee is composed of the most distinguished people and that it is grossly unfair and unfortunate that commentators should say that the Chancellor of the Exchequer has packed it with Keynesian doves? Does he think that it would be good for the Bank of England’s reputation for independence if future MPC members were appointed not by the Chancellor of the Exchequer but by the Civil Service Commission?

My Lords, first, I echo the noble Lord’s opening remarks: the Government are confident that they will get inflation within target and below 2 per cent. Measures have been taken to guarantee it and public sector pay settlements are an important contributory factor in that. As the noble Lord will recognise, the Governor's letter is the first from the Monetary Policy Committee in a decade. The board as constituted, with the Bank of England representatives and the Chancellor’s nominees, has generally ensured that this country has enjoyed the best inflation record of any advanced economy in recent years. There is therefore no obvious reason why we need to change the committee’s structure.

My Lords, it is nice to agree with my noble friend on the third of the four Questions he is replying to—which I think is a record. However, in his regular chats with the Governor of the Bank of England, will my noble friend remind him that going 0.1 per cent over the target once in 10 years is no cause for panic? He should remind him that, in practice, he also has another remit, as excessive interest rate increases would have a serious impact not only on the exchange rate but on the potential for economic growth.

My Lords, I am grateful to my noble friend for that reminder. However, it is scarcely panic on the part of the Governor of the Bank of England: he is fulfilling his legal commitment under the Bank of England Act 1998 to write to the Chancellor when the inflation target has been exceeded by 1 per cent. So it was not an indication of panic. The whole House will recognise this year’s very exceptional circumstances, particularly the increasing energy prices and oil price rise which have occasioned this blip in performance. But a blip is what it is. I can say that without the risk of falling into the complacency against which the noble Lord, Lord Goodlad, warned me.

My Lords, what are the Government doing about the growth of the money supply, which cannot be controlled purely by interest rates?

My Lords, that is indeed so. However, the noble Lord will also recognise that we have been able over the past decade to manage the economy to produce not only significant growth but control over inflation. It compares well with all previous Administrations. The noble Lord would not want me to comment on inflation rates between 1979 and 1997—which is one possible choice of dates. He can rest assured that the Chancellor and the Governor of the Bank of England are all too aware of these requirements.

My Lords, there is no doubt that just about everyone would agree that one of the current Government’s best moves has been the creation of the independent Monetary Policy Committee, which has performed very well overall, with low inflation over a prolonged period. But are the Government confident that the measure of inflation is a true representative of today’s consumer?

My Lords, it is a true representative in terms of international comparisons. We can establish that over the past decade Britain has had the lowest inflation rate of any of the G8 countries with the exception of Japan. We have a need for international comparison which is accurate and that is what the present measure provides. However, I recognise the probable point underlying the noble Lord’s question—that mortgages are outside the present computation, and they are important to households. The noble Lord will also recognise that tackling inflation and lower interest rates also help in the question of mortgages.

My Lords, while I am sure that all Members of the House will believe that the members of the Monetary Policy Committee have performed their job extremely well, does the Minister accept that concerns have been expressed to which the noble Lord, Lord Goodlad, gave voice—of cronyism in recent appointments and reappointments? Does he accept that the way in which to deal with this is to have a more open and transparent appointments system for members of the Monetary Policy Committee?

My Lords, that is a very fine principle, and who could disagree with it—except for the obvious fact that such appointments are market-sensitive. People are watching the development of the Monetary Policy Committee and who is appointed to it very carefully. An open process would create circumstances in which there would be a great deal of uncertainty as to the eventual appointments—and what does the noble Lord think would happen to market speculation in that period?

My Lords, I am confused. The Minister quoted earlier the letter that the Chancellor wrote to the Governor of the Bank of England saying that the Chancellor was going to keep wages in the public sector below 2 per cent. RPI is 4.8 per cent. What magic wand has the Chancellor got to make employees in the public sector accept a real pay cut of 3 per cent?

My Lords, the Chancellor does not have a magic wand, but he probably has the confidence of the nation that he has run an economy at an inflation rate below half the inflation rate that the previous Administration managed for 18 years. It is an economy with significant growth and one of full employment. Members who value their jobs and earning power recognise that at times short-term sacrifices bring longer-term rewards.