rose to move, That this House takes note of the report of the Economic Affairs Committee on The Current State of Monetary Policy (First Report, HL Paper 14).

The noble Lord said: My Lords, I am very pleased to introduce this debate today. Although the report of the Economic Affairs Committee was published some time ago now—in fact, last December—subsequent developments, to which I shall turn in a moment, mean that our debate is very timely.

I must thank all the members of the committee for their contributions to the report. As usual, our report is evidence-based and entirely non-political. It is based on an evidence session with the Governor of the Bank of England and some of his colleagues on the Monetary Policy Committee, as well as on some written evidence. I thank our admirable and long-standing specialist adviser, Professor Mike Wickens, as well as our Clerk and his small team.

I should say immediately that the Government's response to our report is extremely disappointing. Our report is short but it took the Treasury over three months to produce a response, which is cursory and devoid of substance on key issues, to the point of being offensive. They questioned where we got our evidence from. Let me tell them. The data in paragraph 22 come from table 2.3 on page 27 of the Treasury's pre-Budget forecast published in December 2006. The data in paragraphs 20 and 21 come from previous Budget Reports.

To get at the Government forecasts, one has to look at Budget Statements and track back. The Financial Times also published some of these data. In other words, the evidence is familiar. It shows porcupine-like graphs. The forecasts are the upward lines for the future that does not occur. The actual data are the back lines from which the forecast lines spring each Budget. It is noticeable how skilful the Treasury is in not reporting past forecasts and outcomes of expenditures in the Pre-Budget Report. If Treasury officials do not accept their own figures, I will be glad to ask our specialist adviser, Professor Mike Wickens, to brief them.

Treasury forecasts are of much more than academic interest. I acknowledge that there have been widely reported difficulties in measuring GDP, which have led to revisions to the figures. Clearly, that makes forecasting no easier. I am no economist, but if in the Treasury forecasts, which are of great importance in the real world, the economic growth forecasts are exaggerated, that leads in turn to exaggeration of tax receipts, with immediate implications for the fiscal deficit. In turn, that has implications for public confidence in the economy and for decision-making in the private sector.

The blunt fact is that the Government's response is not good enough. The Economic Affairs Select Committee, which I have the honour to chair, is made up of distinguished Members of your Lordships' House: several former Treasury Ministers, including two ex-Chancellors of the Exchequer; a former Governor of the Bank of England; two professors of economics; and other Peers, all of whom are entitled to better than this. It is not as if the Treasury does not have form on these matters. Last year, I had to reprimand the Treasury because it did not understand the constitutional position of the House of Lords in financial matters. To the credit of the Minister who was responding then for the Treasury, it climbed down completely and admitted that the Government had got it wrong.

Going back further, I remember when, as Leader of your Lordships' House, being appalled by the briefing sent to my colleague to do the job that the Minister is doing today. It was a vast, undigested and indigestible bundle of papers. I was so cross that I put the briefing in a brown paper bag and send it to the Permanent Secretary of the day asking that such contempt for the House of Lords should not be repeated. The Permanent Secretary took the point. If the Minister has a decent briefing today, perhaps I can claim a little credit for what I did some years ago.

A major point that I should have liked the Treasury to address concerns how external appointments are made to the Monetary Policy Committee. As we said in our report, how the choice of appointments to the MPC is made is still shrouded in mystery. As a result of the inadequate process, it is widely acknowledged that some appointments that probably should be made were not and, equally, that some appointments made have been surprising, to say no more. It is also unclear why some appointments were renewed while others of apparently successful members were not.

Altogether, it seems that there is a good deal more transparency in how appointments are made to the security services nowadays than to the Monetary Policy Committee. I very much hope that, when the Minister responds, he can cast more light on the matter than did the Treasury in its reply.

Despite our concerns on this point and some others and despite the need for the Governor to write an open letter to the Chancellor, it must be acknowledged that the independence of the Bank of England has worked very well. The United Kingdom has been seen around the world as an example to follow. Despite our concern about the recent rise in inflation, the recent need for the Governor to write a letter to the Chancellor and some other points, it must be acknowledged that the independence of the Bank of England has worked very well. The United Kingdom is seen as an excellent case to follow.

The recent rise in inflation has led to renewed speculation and discussion of monetary policy. However, we concluded that the bank has continued to conduct monetary policy with considerable success. It has steered the economy through a difficult period and the prospects for inflation appear to us to be good. However, the increased importance of goods inflation in recent months is a concern and needs more explanation than the Monetary Policy Committee has so far provided. As a matter of fact, the way in which interest rates act to control inflation still seems to us to be surprisingly little understood. Controlling expectations is probably the key, as the Governor of the Bank of England has frequently stressed. In any case, we should resist any temptation to over-rely on the scrutiny of the labour market, where the statistics are in some doubt, or on the scrutiny of money growth. Such scrutiny would not be wise or justified.

Finally, the retail prices index has recently enjoyed—if that is the right word—a return to prominence. This has been at the expense of the consumer prices index, which is of course the Chancellor’s chosen index of inflation. It would be helpful to know why the two indices now differ so much. The gap between them is around 1.5 per cent, although we were told that it would not be larger than 0.5 per cent. In particular, it must be asked how much of the difference between the two is attributable to the treatment of housing. The question that arises is simply: when will housing be properly included in the CPI? Do we really have to await the EU’s decision before we take the right decision for the UK?

Altogether, we can applaud the record of the Monetary Policy Committee in the past 10 years, but there are still some important questions to be answered, not least on the matter of appointments to the committee. I very much hope that the Minister will be able at least to start to respond to them this evening.

Moved, That this House takes note of the report of the Economic Affairs Committee on The Current State of Monetary Policy (First Report, HL Paper 14).—(Lord Wakeham.)

My Lords, I thank the noble Lord, Lord Wakeham, for chairing the committee so successfully. It has been quite a busy committee. It has many things to discuss and to concern itself with, but it has been very successful and has benefited from the experience and expertise of many of its members. That has been rather surprising, given that most committees do not have this level of expertise and experience. I look forward to the Treasury forecast, which the noble Lord mentioned, being rather more closely examined in the months to come.

I shall be brief, as my comments are on the outcome of giving the Bank of England the power that it required 10 years ago. It was quite unexpected that the Chancellor of the Exchequer would hand over enormous powers of this kind to the Bank of England, but it has been extraordinarily successful. To have had 10 years of success is rather surprising in the economic world. The Bank of England has conducted monetary policy with considerable success. It was a difficult period, and initially such power was wisely used. The Bank of England has dealt very well with inflation, the main concerns being the wage claims based on the RPI increases, the consequent wage claims based on the state of the labour markets and, of course, the very high rate of growth of the money supply. Although there is a connection between inflation and the growth of the money supply, this is not the certain relationship that some used to consider inevitable. It used to be felt that it was an essential connection between the two, but we have disproved that in the past 10 or more years.

The Governor of the Bank of England has said that the biggest uncertainty in the relationship between supply and demand is the size of the labour force on the supply side. There is undoubtedly a very big gap in our understanding of supply and demand in projecting the future of the economy. The particular gap is that the statistics of supply cannot deal adequately with those who do not qualify for benefit, and the figures point to a tight labour market, with the pressure of demand on capacity. The large numbers of people coming into this country are not wholly detailed, so the figures are quite unreliable. Given the new economic situation and a more united Europe, whereby immigration is under much less control than it has been for many years, we have to accept that, although we may be able to lessen the uncertainty, it will still be there.

The noble Lord, Lord Wakeham, referred to the external appointments of the Monetary Policy Committee. I am concerned about the method of appointment. The Bank of England has done so well in the past 10 years, whereby so much has depended on the ability and expertise of its members. External appointments have successfully been made by the Chancellor of the Exchequer, who has brought in people with great expertise and understanding of these matters to consider these areas. The Governor said that it was not for the bank to make suggestions but that it was highly proper for the Government to do so. I am not sure about that; I feel a bit uneasy about it.

External members of the bank, taking part in the determination of short-term interest rates, are in a position of major economic importance. Their expertise and experience must be of great importance. Professor Goodhart has made the point very successfully that highly technically expert members are needed and that they should be reasonably expert in the relationship between interest rates and incomes. That is their task. Professor Goodhart also points out that members without prior monetary experience would need a long learning period of four to five years, about which I am not very happy. The initial stages will be just learning. We want members to come in and take action based on their knowledge and understanding of these matters. I would much prefer to select members with experience as well as ability. I look forward to this matter being looked at again.

My Lords, I add my thanks to the noble Lord, Lord Wakeham, for his admirable and jargon-free chairmanship of our committee, which was particularly helpful for me, as I am not an economist let alone a monetary economist. For me, downloading the minutes of the Monetary Policy Committee bears more than a passing resemblance to a visit to the Delphic oracle. My observations are simply those of an interested but slightly bemused businessman, and they will be short. I shall briefly reinforce a few points made in our report and add an afterthought.

Three issues in the report especially bemused me. The first is the uncertainty over the size of the UK population, as the noble Lord, Lord Sheldon, said; what proportion of it is in work at any given time; and the impact of migrant labour. Even to the layman it is a concern that an important element of the understanding of the supply side of our economy seems clouded in uncertainty. I suppose that the business analogy would be not knowing how many people you have on your payroll or who turn up for work, a state of affairs you would not want to live with for very long. Obviously, this needs to be addressed, as our report recommends.

The second issue is the uncertainty over the relationship between consumer spending and asset prices, particularly with respect to housing. I can appreciate that the relationship must be difficult to understand, which was made clear in the oral evidence we received. Yet, given the country’s intense preoccupation with housing and the proportion of family wealth tied up in it, intuitively it feels like a key factor in an analysis of what is going on in the UK economy. So, once again, it is a matter of concern that the relationship is so uncertain. The business analogy, perhaps, is that of having to settle for an inadequate marketing analysis of what motivates your customers to buy your products. Again, this is a state of affairs you might not want to live with for very long. This, too, needs to be addressed, as our report recommends.

The third issue is the opaque procedure for appointing external members to the MPC, as noble Lords mentioned. Gone are the days in the business world when the chairman simply chose the non-executive directors on his own, behind closed doors, against an unspecified statement of the required qualifications. The normal procedures for public appointments would not allow that either. There is more than a little catch-up for the Chancellor to pursue here in making appointments to the MPC.

Now for the afterthought: looking beyond the immediate past and future to the inevitable time when the world economy becomes more turbulent, the MPC’s task of controlling UK inflation using the single lever of short-term interest rates is bound to become more demanding. The Governor, in his oral evidence, made it clear that in his view inflation is made at home and can be controlled at home. I hope he is right; but I am sure that he would also acknowledge that interest rates are influenced by what is happening elsewhere in the world and that the MPC’s understanding of the impact of the global economy on the UK is key to the effective use of the one lever the committee has at its disposal.

Others more economically literate than me can no doubt explain the combined effect that low interest rates in the US, Europe and Japan together with unprecedented savings rates in Asia, the Middle East and Russia have on global liquidity, asset prices and inflation. The only point I would make is that, while the tide of this liquidity is running in a discernible direction and at a discernible pace, steering the UK economy and its inflation rate may be relatively straightforward, but tides of this kind do not run on for ever and it is when they turn that we all become more vulnerable, nationally as well as globally.

The issues that will arise at that point are for the most part beyond the remit of the MPC. More worryingly, they look to be beyond the remit of any other institution. The track record of the international community in handling the major global issues of the day is unconvincing. We have only to look at the fortunes of the current WTO trade round or to the ineffective international response to climate change to see that. On current form, the same will hold good when it comes to managing a turning tide in global liquidity.

As we are reminded this week, the institution that might have taken this sort of issue in hand in the past, the G8—with four western European members but no China, India or Brazil—is an anachronism no longer truly fit for purpose. So my afterthought is something of a cry in the wilderness. Now is the time, while the global economic environment is relatively benign, to be thinking of what institutions and processes will be needed when inevitably the tide of liquidity begins to turn.

My Lords, I join other speakers in congratulating the noble Lord, Lord Wakeham, and his committee on their excellent report on the current state of monetary policy. However, I have to express my disappointment that, through no fault of the committee, the report is being debated so long after its publication on 18 December last year. A lot has happened since then, and I make no apologies for tackling this area first in my contribution. For a start, interest rates are now 0.5 per cent higher, at 5.5 per cent. Also the consumer prices index rose above the top end of its band, to 3.1 per cent in March, although it has fallen back a little since then. This meant that the Governor of the Bank of England had to write an open letter to the Chancellor explaining the reasons for the inflation overshoot and what measures, if any, the bank proposed to bring it back under target. Thus the conclusion to the report now needs to be re-examined. Certainly the committee cannot be criticised for saying last December:

“In our view, the Bank has continued to conduct monetary policy with considerable success”.

Indeed, the MPC has done a fine job over the past 10 years. However, events since last December may have altered the picture and put up some amber signs.

What has changed? Are there just temporary factors which have caused this overshoot, or is something more fundamental happening to inflation? I am not an economist, but it is interesting to examine the content of the Governor’s letter to the Chancellor in a little detail. In his letter the Governor outlines some of the reasons behind the inflation overshoot. First he mentions the unexpectedly sharp increase in domestic energy prices, such as electricity and gas, more than offsetting the then recent reduction in fuel prices. Secondly, he identifies a rise in food prices caused by weather-induced reductions in global supply. Thirdly, he highlights strong domestic spending, notably five consecutive quarters of robust GDP growth. Fourthly, he refers to capacity pressures in the economy, and finally he suggests that businesses are more confident that they can raise prices to increase margins and thus to recover some of the effects of the doubling in oil prices since 2004.

In looking at each of these areas in more detail, I shall cover domestic energy prices first. It is quite logical to argue that big cuts in gas and electricity prices will help the inflation numbers over the rest of the year. However, balanced against that is the continued high price of oil, not helped by Middle East tensions. Considered overall, though, lower energy prices can be viewed in the short term as a positive indicator for inflation. This has been emphasised by Peter Spencer, the chief economic adviser to the Ernst & Young ITEM Club. The question remains, though, whether the era of cheap energy that UK consumers enjoyed in the first half of this decade is over as our dependence on imports increases. I fear that it may be.

The second area covered is food prices. We have been used to cheap food for such a long time that it is easy to be complacent about the global aspect of this area. I will go overseas to highlight a recent article in Newsweek about Chinese food prices. It reports that pork prices were 71 per cent higher in April than a year ago. According to Chinese Ministry of Agriculture statistics, consumers are now paying 29.3 per cent more for pork products and 30.9 per cent more for eggs. In recent weeks, the Chinese media have chronicled steep price rises for beef, fish and chicken.

“So what?”, you might ask, and you could easily dismiss this overseas problem in the same way as the Governor of the Bank of England, who in response to the noble Lord, Lord Skidelsky, at question 28 of the report, stated:

“Inflation is made at home”.

Like the noble Lord, Lord Vallance, I hope that he is right. But if the Chinese are paying a lot more for their basic foods, this will lead to a rise in wage demands, which in turn will increase the cost of goods we import from China. The lower cost of these Chinese goods compared to when they were manufactured here was until recently helping to keep inflation down.

Back at home, the Scotsman, in an article of 3 June, describes another, albeit less serious, food problem in the UK. There is now a UK strawberry crisis. Prices are rising because there is a shortage of strawberry pickers. The article continues:

“The EU migrants of recent years are staying at home as Eastern European wages have surged”.

The Chinese crisis and the UK problem to which I have referred matter also because they are part of an increasing problem faced by Governments across the world; that is, a persistent and continuing rise in food prices. There is not time to go into the causes of this in more detail, but the switch to biofuels as an alternative to oil due to the high oil price has taken land-produced food out of production. This is an important cause: the reduction of food supply, leading to higher food prices.

Rising food prices have brought a new term in global economics: agflation. Food input prices are putting more pressure on producer inflation than at any time since the 1980s. Between March 2005 and March this year, the price of US wheat rose by 34 per cent, corn by 47.4 per cent, barley by 59.4 per cent and cattle by 41 per cent. This is working its way through to the retail level round the world. For example, in the US, food prices rose by an annualised rate of 7.3 per cent in the first quarter of 2007. In the UK, food price inflation is running at about 6 per cent, more than double the CPI figure and the highest rate of increase for some six years.

Food items, I understand, account for some 10 per cent of the CPI inflation basket. Between 1998 and 2005, food items in the CPI basket were recording lower than average inflation, an annual increase of 0.1 per cent a year. This had the effect of absorbing higher inflation in other areas. Today, food prices, far from acting as a shock absorber, are running well ahead of the basket average.

Strong domestic spending, the Governor’s third point, can of course be influenced by higher interest rates, so I do not wish to cover that in any more detail, except to mention the latest report from the Chartered Institute of Purchasing and Supply, which suggested that many people are reluctant to spend on larger items after recent interest rate rises.

The Governor’s fourth point is capacity pressures in the economy, meaning that the supply of workers is becoming tight, with the possible consequence that wages are pushed up. The Economic Affairs Committee report, at paragraphs 6 to 10, demonstrates considerable uncertainty by the Governor about this area. The report and the Governor seem to overlook—except for a brief mention in paragraph 6—the effect of the high level of RPI inflation, which stood at 4.5 per cent in April, and the anecdotally even higher individual inflation rate, which is influenced by items such as council tax and school fees.

Overall, and the report refers to this in paragraph 10, the level of immigration from eastern Europe has proved a one-off benefit in keeping down wage levels. If that is coming to an end, coupled with the public sector’s unfavourable reaction to limiting wage demands to 2 per cent, wage inflation will become a much bigger problem than suggested in the report.

The Governor’s final point is that businesses are more confident about raising prices. According to the Financial Times of 1 June, the latest reported survey from the Chartered Institute of Purchasing and Supply showed that the index of manufacturing activity is at its second highest level in the past two and a half years. Manufacturers reported rising inflationary pressures, with the prices of goods sold reaching their highest level since the series began over seven years ago and goods purchased by manufacturers at an eight-month high. Such a trend has also been noted by the latest CBI manufacturing survey. How much of a permanent problem that is, I am not sure.

My noble friend Lord Wakeham’s report has an interesting section on inflation and monetary growth. The committee holds a similar view to the Governor, that the growth in M4 money supply is not a problem because it has not caused inflation so far. I remind noble Lords that, while I emphasise that I am not an economist, I well remember how the M3 broad money supply growth in the late 1980s preceded by about two years the major increase in inflation that caused such large interest rate rises.

The report has an interesting section on inflation and asset prices that becomes a bit too technical for an amateur. One additional factor that could have been mentioned in connection with house prices is the shortage of supply. That, together with the extra demand from overseas affecting London in particular, has had a major effect on prices that, anecdotally, it would take quite a rise in interest rates to stem.

On monetary and fiscal policy, I note in particular the comments in paragraphs 22 and 25 of the report that the Treasury’s forecasts for economic growth have been too high for the past five years. That has led to consistent overestimates of tax revenues, and hence underestimates of the budget deficit and borrowing requirements. The government response to the report disputes those GDP observations, producing a table of GDP growth covering that period. Apart from in 2005, when their GDP forecasts were very inaccurate, they seem to have some justification for their challenge. It is the Government’s budget deficit figures that have been inaccurate, and which the report rightly focuses on. The government response does not cover that area at all, and as a whole, as my noble friend Lord Wakeham said, is most unsatisfactory in its lack of detailed comment on this excellent report.

The last section of the report concentrates on external appointments to the MPC, as all previous speakers mentioned. The views in those paragraphs should be taken very seriously by the Government, particularly in paragraphs 27 and 30. It is clearly a great concern if the external members lack experience in monetary economics. As the report highlights in paragraph 27, external appointments to the MPC are made by the Chancellor. How the appointments are made is shrouded in mystery. I agree with paragraph 30, which says that the appointment should be for a single term of four or five years. I also agree that greater transparency in the selection of appointees is desirable.

Overall I welcome this authoritative report on the current state of monetary policy. I end with a plea—and I know I am not the first to do so—that these reports are discussed much sooner after they are issued so that the House may gain the maximum benefit from them.

My Lords, the noble Lord, Lord Northbrook, made a good point and illustrated it well by speaking about market movements in the six months since our report was published.

Two main themes have emerged from the debate and I propose to deal with them in turn. They are the influence of asset prices on inflation and appointments to the MPC. I remember well our discussion when the Governor of the Bank of England came to speak to our committee. In response to a question from me, he explored the reasons why house prices had increased, asking whether it was because people felt that incomes in future would be higher or because long-term real interest rates in the world economy had gone down. He was probably at his least convincing at that point, although obviously none of us knows the answer. However, it is clear that the influence of asset prices on inflation is greater than we previously thought. Our report’s recommendation that the Bank of England undertake extensive research on the issue is timely and I hope that the bank will take note of it.

We now have a wide and fluctuating gap between the CPI—perhaps one could call it the “Chancellor’s pet index”—and the RPI, which most people regard rather more as the “real prices index”. I am a recidivist member of the committee. When I sat on it a few years ago, I remember having a vigorous discussion with Ed Balls on his assurances that the gap between the two indices would stay at between 0.5 per cent and 0.75 per cent. It has not turned out that way and we were right to be sceptical. Like the noble Lord, Lord Wakeham, I see no reason why we cannot add a housing element to the CPI, even if we have to wait a few years for the European joint index.

I liked the analogy used by my noble friend Lord Vallance. He said that, in a business, if you did not know what made your customers buy your products, you might not want to live with that for very long. As a rather smaller businessman than perhaps he was, I must say to him that some businessmen these days would not be able to live with it at all.

Appointments are a serious issue, which we on the committee have been raising for many years. It is a very proper issue for the House of Lords to raise. Our committee made much the same point strongly in 2003 and received no proper reply. I well remember that the argument that was produced—now no argument at all is produced—was about market sensitivity. I am pleased to say that Eddie George, when he met us, knocked that argument down. Terry Burns, whom your Lordships may remember as a former professor at the London Business School and a former Permanent Secretary to the Treasury, was dismissive of it, too. The idea that it would be market sensitive if one of out of nine names being considered for appointment were to leak is laughable.

We should consider seriously the points made by Professor Charles Goodhart from his great experience. He suggested that appointments should be made for a four-year or five-year, and preferably non-renewable, term. He said:

“In part because of the opaque nature of appointment (and re-appointment), and in part because of the possible penchant of Chancellors to appoint like-minded externals,”—

that is a very delicate way of putting it—

“I do think that appointments of externals ought to be for a single-term. I do not believe that any MPC member … has actually been influenced in his/her decision by a concern about what the Chancellor might currently want, but it would be as well to get rid of any perception that it might ever be so”.

I am afraid that I am rather more cynical than the professor, but his conclusion is incontrovertible.

I quote from an article published this week on the point in Private Eye:

“If you want a rough idea how Gordon Brown has been controlling the domestic policy agenda for some years now, look at what is happening to the planning system.

Ever since ... the mid-1990s, the supply of ‘undeveloped land’ to developers has been increasingly restricted—much to the outrage of economic policy wonks at the Treasury, to whom any interference in the right of business to build anywhere it chooses is anathema ... The chancellor responded by using his normal method for influencing policy in areas that don't immediately appear to concern the Treasury: ordering an external adviser to conduct a policy review which, oddly enough, ends up reflecting almost exactly the views of Gordon Brown and the Treasury.

In the case of planning, Kate Barker—an economist with a CV that included a long stint at the CBI ... was commissioned, firstly to review housing supply and, more recently, the planning system”.

Then she was reappointed as a member of the MPC. That is putting someone in a conflict of interests. Gordon Brown should not appoint a member of the MPC to what could be highly political task forces, nor should she accept such appointments. That is a timely example of why the process should be much more transparent and not personal.

I thank the noble Lord, Lord Wakeham, very much on behalf of the whole House for chairing our committee so admirably and for his robust defence of our rights and powers. If I may say so, his opening speech seemed rather mild when you look at the so-called response from the Government. We argued with considerable evidence,

“in favour of a single term of four or five years”,

with,

“at least two of the five external members”,

having,

“considerable prior knowledge of macro and monetary economics”.

That was a serious proposal and it should be considered. What do we get from the Treasury? We get:

“The Treasury welcomes constructive parliamentary opinion on the monetary policy process”.

Could the Minister favour the House by telling us whether the Treasury regards our opinion as constructive or not? It is insulting, frankly. The Treasury must take both Houses of Parliament more seriously. I have seen quite a few of these responses, but this one plumbs a new low of contempt for Parliament.

My Lords, like other noble Lords, I welcome the report of the Economic Affairs Committee and pay tribute to the committee and the chairmanship of my noble friend Lord Wakeham. It has been another stimulating report. As several noble Lords have already pointed out, the report charts monetary policy until broadly the end of last year, and hence misses some interesting events this year, notably the escape of inflation from its target range and interest rates being on the move upwards, certainly at present. If the committee had been writing it now, I am not sure that it would have been as bullish about the prospects for inflation as it was in paragraph 31. That is not a criticism of the report, because things have clearly moved on, but it underlines how difficult it is to make judgments about how well inflation is being kept under control.

Several noble Lords referred to the divergence between the CPI, which is used for the current target, and RPIX, its predecessor. RPIX has continued to be above the 0.5 to 0.75 per cent that the Governor advised the committee was to be expected. Admittedly, it is not much above that range, but when the CPI was first substituted for RPIX in the Bank of England’s target, people talked about a difference over time of 0.5 per cent, not 0.5 to 0.75 per cent. If you look at the historical record of CPI versus RPIX, you will find that it is much closer to 0.5 per cent over time. We have had a persistent larger difference for some time, which has to lead to the conclusion that monetary policy has been loosened in the past couple of years. I suggest to my noble friend and his committee that they might want to look at that further.

A number of people referred to how the CPI completely ignores housing costs, which is a major weakness in it for current use. That is why the CPI is largely ignored for any practical purposes, and particularly in wage bargaining. We have been lucky with wage levels being relatively subdued—relative, that is, to the RPI, which runs currently at 4.5 per cent with wages at 3.6 per cent. The RPI is much closer to the inflation experienced by ordinary people, though understating inflation as experienced by the poor, including pensioners.

When the Chancellor replied to the Governor’s letter in April, he said that his contribution to keeping inflation down was to keep public sector wages down to the CPI target of 2 per cent. I have asked the Minister before how he thinks it credible that public sector workers will take a real pay cut—that is, 2 per cent versus an RPI of 4.5 per cent—and I have never had an answer. I am hopeful that perhaps I shall get a straight answer from the Minister today.

It is clear from all these factors that there will be much to continue to be looked at by my noble friend’s committee on monetary policy. I hope that the committee returns to that matter in the not-too-distant future.

To say that I was disappointed by the Treasury’s response to the committee’s report is a massive understatement. It displays an arrogant lack of respect for the work of this House, and I support the remarks of my noble friend Lord Wakeham and the noble Lord, Lord Oakeshott, in that regard. The Minister should go back to the Treasury and make the point that government responses to the carefully worked-on reports of your Lordships' House deserve better.

As has already been pointed out, the Treasury response largely focuses on one small comment in the report on the Treasury’s GDP forecasting record— and my noble friend Lord Wakeham has already robustly rebutted that. Whatever the truth of the overall record, at least the Minister would accept that the Treasury got it spectacularly wrong in 2005. My noble friend Lord Northbrook has already referred to this. The Chancellor stuck obstinately to an estimate of 3 per cent to 3.5 per cent, right up until the end of 2005—and it was only in December 2005 that he admitted that inflation for the whole of 2005 would actually come down to 1.75 per cent.

The Treasury should be wary of bragging about its forecasting record, most notably in relation to its budgetary deficit and borrowing forecasts. My noble friend Lord Northbrook has already pointed this out. The Government’s response, at paragraph 6, spins the forecasting performance on one-year-out borrowing, but the plain fact is that the Treasury has consistently underestimated its borrowing requirement one year out. Over a longer time-scale, the record is very much worse. Five years ago, the borrowing forecast in 2006-07 was £18 billion and the outturn was £34 billion. Four years ago, the budget forecast for the current year was £22 billion, while this year’s budget says that it was £38 billion. I could go on. So let us not have the Treasury claiming any prizes for forecasting. The only prize that the Treasury can justifiably claim is for creative accounting, as it has with remarkable determination of purpose changed both the rules and its views of the economic cycle to prove that the Chancellor has met his golden rule. Fortunately, however, that has fooled no one, because no respectable economist takes it seriously any more.

The noble Lord, Lord Oakeshott, has already referred to the extraordinarily dismissive paragraph 8 of the response that,

“the Treasury welcomes constructive parliamentary opinion”,

in relation to the appointment of MPC members. It might well have added, “which we comprehensively ignore”.

The response completely fails to address the committee’s point that the process should be made more transparent. The truth is that the Government know that the process for MPC members is so far removed from good practice that it is indefensible, which is presumably why they did not even reply to the point in their response. I shall be interested to see whether the Minister attempts to put up a defence on that today.

The noble Lord, Lord Oakeshott, referred to Ms Kate Barker. She has recently been reappointed for a second time and therefore will serve an unprecedented three terms. What process did the Treasury follow when deciding to do that? What alternatives were considered? The Minister will be aware that it is suggested that there is more than a hint of political bias in the appointment. The Government have to understand that if they allow that kind of thinking to take hold, they will diminish the status of the MPC, which would be an appalling outcome for the credibility of monetary policy. Our policy is very clear—when we return to power, we shall make those appointments more open and transparent.

As has been pointed out, the committee’s report also dealt with some interesting areas which the Government’s response did not even deign to consider. That response did not even mention the extraordinarily difficult relationship between asset prices and inflation. Admittedly, the report concluded that the Bank of England should do more research, which is the proper conclusion, but do the Government not even have a view? Similarly, in paragraph 34 the uncertainties surrounding labour market data, particularly in relation to immigration flows, are noted as an issue which must be resolved quickly. Do the Government have no view on that, or is their view circumscribed by the fact that the statistics on those areas are produced by the Office for National Statistics, which as we know is the subject of a budgetary squeeze and a forced relocation to Newport, which is accounting for some of the problems with some of the statistical output? Perhaps that is why the Government chose simply to turn a blind eye to that recommendation.

I look forward to many more reports from my noble friend’s committee on monetary policy and I hope that in future the Government will take them more seriously.

My Lords, I am grateful to all noble Lords who have spoken. I am particularly grateful to the noble Lord, Lord Wakeham, both for his opening speech and for the role that he plays as chairman of this important committee.

Of course, I refute the contention that the Government fail to respect the committee’s work. We are all too well aware of its expertise. How could we not be, given the distinguished names that feature in its membership? The Government produced as full a response as was possible. I say to the noble Lord, Lord Wakeham, that I hope that we can improve liaison between the committee and the Treasury before the work is completed. I certainly expect the Treasury to talk as necessary with the special adviser and, indeed, with the chairman, who may consider that improvements could be made in that regard. I am only too willing to give that commitment from the Dispatch Box.

The brevity of the response was certainly not intended to cause offence. We believe that we have accurately addressed the report’s conclusions. I refer to a theme that has run through a number of contributions. I think that every speaker, including the noble Lord, Lord Wakeham, referred to appointments to the Monetary Policy Committee. I heard the noble Lord, Lord Oakeshott, say that he regards any concept of market sensitivity as an insubstantial argument in the current process. We shall have to differ on that point, as we have done in the past on such questions. Of course, I welcome the advances that have been made and the greater openness that exists in company non-executive appointments, but I say to the noble Lord, Lord Vallance, that there is a difference between their work and obligations and those of the Monetary Policy Committee. I think that the noble Lord would recognise that. There is an advantage in members of the Monetary Policy Committee extending their terms of appointment.

There was a slight contradiction in this debate between demands for a greater understanding of the relationship between movements in asset prices and the question of housing—a point mentioned by the noble Lord, Lord Vallance, and the noble Baroness, Lady Noakes. There is a contradiction in emphasising that housing should play a greater role but not recognising that Kate Barker has expertise in this area, so I am not so sure that the arguments against her reappointment are valid.

My brief is a good deal better than the one to which the noble Lord, Lord Wakeham, alluded. Any imperfections are in my delivery and not in what has been put before me. However, it probably is defective in the following respect. Had I been responding to questions concerning the Monetary Policy Committee at any other time, I would have felt obliged to press officials further in order to meet the points that have been made today, which were readily to be anticipated.

The Chancellor will appear before the Treasury Select Committee next week and there is not the slightest doubt that this matter will form a significant part of their discussions. The House will recognise that, however significant the committee and however significant the role that I play in this House as Treasury spokesman, it scarcely behoves me to pre-empt what the Chancellor will say in front of the committee next week. In this respect, I ask noble Lords to show an element of patience: they will get a response to many of the points about the MPC and its appointments from the Chancellor himself next week.

My Lords, I am grateful for that explanation, but can the noble Lord tell us when he next expects the Chancellor to appear before our committee, as he always used to do?

My Lords, I do not think that I can promise that this particular Chancellor is likely to appear before the committee in the future, but I hear what the noble Lord says. His request will be duly forwarded and I shall do my best to see that it is taken into account.

The noble Lord, Lord Wakeham, identified Treasury forecasts as an issue and several other noble Lords emphasised the same point. The Treasury is right to have some pride in the forecasts that it has made over recent years. On average, it outperformed the independent consensus in both current-year and year-ahead GDP growth forecasts in a sample of prominent forecasters, including international institutions such as the OECD, the IMF, the European Commission and City banks. Treasury forecasts have compared well with those of independent forecasters since 1997, and therefore there is a degree of confidence in what is being projected at present, as there is with regard to the work of the Monetary Policy Committee.

For the first time, that particular year, it was necessary for a letter to be written because inflation had gone above the stipulated figure by one percentage point. The system was tested and it met the tests. The Chancellor replied by letter to the Governor, so there is proof that we have an open system with regard to the MPC, and it is widely respected. Although the noble Baroness, Lady Noakes, is entitled to express doubts about the future—I am not sure how reliable they are—she cannot suggest that the record of the past 10 years is anything other than exceptionally different and exceptionally superior to the period of time when the previous Administration were in office. She will know that inflation rates have been half those that obtained between 1979 and 1997.

I hear what is said about the appointments to the MPC, but it has an excellent record and is held in high repute, as is the process that underpins it, which has stood us in such good stead over the past decade.

I emphasise that the debate on the relationship between monetary supply and inflation will continue among economists and all of us who practise in public life and who have an interest in the economy. My noble friend Lord Sheldon anticipated that the noble Baroness, Lady Noakes, might return to that theme and suggested that the issue of monetary supply is crucial as regards inflation. I agree with him that that attempt to forge such a close link between the two concepts—cause and effect—has proved to be a barren concept in the past and it is not one to which we subscribe now. As regards the extent to which we have seen steady growth in the economy over the past decade and controls on inflation, the proof of the pudding is in the eating.

The noble Lord, Lord Northbrook, expressed a number of anxieties, not just about forecasting, but about what he thought were movements on prices. I do not agree with all the points that he makes. He has indicated where certain world prices are moving in a particular direction on food. In Britain, over the past year, we have not seen a massively substantial increase in food prices, and other prices have corrected themselves. The reason why we ran into a position in which the Governor was obliged to write his letter was partly to do with increased food prices last year, but it had rather more to do with energy prices. We all recognised the spike that occurred with regard to the energy crisis last year, which has been corrected by falling energy prices over the past few months, which gives us hope for the future.

I appreciate that the committee has homed in on specific points to which the Government must pay attention. No doubt one of the major points will be addressed next week at the Treasury Select Committee and I doubt whether any of the other points will be included in the agenda that day, when questions will be addressed to the Chancellor. I assure the committee that its work is, of course, taken seriously. How could it be otherwise, given its quality? I apologise for the slightly longer interval before the reply on this occasion, but we will seek to respond to the committee’s work as positively as we can in future. It will be recognised in all parts of the House that, although we should address our anxieties about certain parts of the economy and the committee is well placed to point out warning signs on the conduct of economic policy, the record of the basic structure in this country—under the Monetary Policy Committee, the independence of the Governor of the Bank of England and the judgment of the Chancellor and the Government over the past decade—speaks for itself.

My Lords, I thank all noble Lords who have taken part in this short but useful debate. I particularly thank the Minister, who has a personal charm which the House appreciates, helping him whether he has a good or bad case. That is no bad thing. Today he made one or two points about consultation which the committee will appreciate very much.

On Question, Motion agreed to.

House adjourned at 6.51 pm.