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Bank of England

Volume 698: debated on Tuesday 22 January 2008

asked Her Majesty’s Government:

Whether they propose to change the relationship between the Bank of England and HM Treasury.

My Lords, the Monetary Policy Committee of the Bank of England has had operational independence for setting interest rates to achieve the Government’s inflation target since May 1997. These arrangements have removed the risk that short-term political factors can influence monetary policy, and ensure that interest rates are set in a forward-looking manner to meet the Government’s symmetrical inflation target. There is absolutely no intention to change these arrangements, which have resulted in one of the lowest inflation rates in the G7 and interest rates of around half the average of the previous decade.

My Lords, I am grateful to the noble Lord for that reply, but would he agree that the high reputation of the Bank of England for independence has been tarnished by its involvement in the tripartite meetings led by the Chancellor of the Exchequer in the context of the Northern Rock fiasco? Is that independence and the Bank’s high reputation in that regard not going to be further undermined in the public’s eye as that shambles continues? Furthermore, what will be the effect on the Bank and its status of the new powers anticipated for the Financial Services Authority?

My Lords, the issues regarding the Financial Services Authority will become clear in the next few weeks, as has been reported. That is when the discussions will have concluded. On the broader question, the partners in the tripartite arrangement are in close contact all the time. It will be recognised that it is necessary for them to meet fairly regularly at a certain level, and they have done so over the past decade, which has contributed to the exceptional record of the British economy over that decade. The noble Lord will appreciate that the difficulties over Northern Rock necessitated additional meetings. However, he will appreciate, too, from my Answer, that we have no intention at all of changing the role of the Monetary Policy Committee, which sets the interest rates that relate to the question of controlling inflation in this country.

My Lords, I revert to the Question. Would my noble friend agree that not only does the Monetary Policy Committee have a remit to deal with inflation, but subject to that, in those famous three little words, the committee is supposed to be considering other matters—namely, helping the British economy? Would he ensure that the Treasury emphasises that to the Monetary Policy Committee, not that I suggest that it would panic in the same way as the Federal Reserve in America is doing—but at least to take account of the possible panic affecting us here?

My Lords, I had appreciated that my noble friend might intervene and broaden the issue with regard to the role of the Monetary Policy Committee. Of course, he will take delight in the fact that the British economy at present not only has the second lowest rate of inflation in the G7 but has a very high employment rate indeed. I know that he stresses the successes of the Monetary Policy Committee in its concern that the economy should grow and employment levels should be high.

My Lords, will the noble Lord and the Government reflect further on the matter raised by my noble friend Lord Roberts of Conwy? It is clear, is it not, that the arrangement for removing banking supervision from the Bank of England and giving it to the FSA has not been successful, to say the least? That is not because the then Chancellor was wrong to remove it from the Bank of England; there was a case for doing so. That case was to give it to an institution which had the sole purpose and remit of banking supervision. That is what needs to be done, as I wrote in my book—

My Lords, that was as far back as 1992, so I am not just being wise after the event. Will the noble Lord and the Government now think again and do the right thing?

My Lords, on the widespread consideration of the role of the Financial Services Authority and the need for certain changes to its operational role, I have not the slightest doubt that those concerned have read with great care the noble Lord’s book and will take on board the representation that he makes. Other voices have also commented on the developments over the past few months. All of us will appreciate that Northern Rock presented a unique and significant problem to the financial position in Britain at the time, and lessons are being learnt from that experience.

My Lords, will the noble Lord accept that the main charge against the FSA is that it did not act quickly enough in pointing out that the management of Northern Rock was acting in a reckless fashion in the first half of last year? This is not the first time that the FSA has been slow. Will he reassure the House that, when a new chair of the FSA is appointed later in the year, banking experience and an ability to take tough decisions quickly are part of that person's curriculum vitae?

My Lords, the House will appreciate that the role of chairman of the FSA is a significant one and an appointment will be made in due course. On the idea that the FSA should have acted earlier, these arrangements have been in place for more than a decade. Northern Rock produced a more significant shock to the system than anything that has been experienced over the past decade and lessons need to be learnt from that experience. The Government have given an undertaking that the FSA is looking closely at its operational requirements and we will come forward with proposals in the very near future.

My Lords, the world is waiting for the Government to announce whether they will reappoint the Governor of the Bank of England for a further term. The delay is bad for the Bank of England and bad for the perception of its independence. Is the road block in the Treasury or in No. 10?

My Lords, the road block is common sense. The appointment of the Governor of the Bank of England is not due until the middle of this year. To accelerate the process at this time would do nothing for the stability of the economy or confidence in the Bank of England. We should follow a normal course for that appointment. It is such a crucial appointment. The timetable is well established. Everyone knows what that timetable is. The Government are not producing a road block: they are just following common sense.