asked Her Majesty’s Government:

Whether the Monetary Policy Committee of the Bank of England’s inflation target of 2 per cent is constraining the committee’s ability to stimulate economic growth.

My Lords, the Bank of England Act 1998 sets the objective for the Bank in relation to monetary policy, which is to maintain price stability and, subject to that, support the economic policy of Her Majesty’s Government, including their objectives for growth and employment. Price stability is the MPC’s primary objective and an essential precondition for economic growth and so must be achieved first and foremost if economic stability is to be assured.

My Lords, I thank the Minister for that reply. We all appreciate the fact that the Monetary Policy Committee controlled inflation in what the governor referred to as the “nice decade”. Does the Minister agree that now, with inflation rising at its fastest rate in six years and the economy cooling seriously, the Government are stuck between—if your Lordships will pardon the pun—a rock and a hard place? Does he agree that one of the advantages of being outside the euro is that we can set our own interest rates, but what is the point if we do not have the flexibility? How do the Government expect the Governor of the Bank of England to be able to stimulate economic growth if he has his hands tied behind his back?

My Lords, as I indicated in my Answer, in order to guarantee stability, inflation needs to be controlled. That is the basis on which investment leads to economic growth. The noble Lord is right to say that we are moving into a difficult period, whose duration we are not sure of. The Bank of England has a clear target, which is a signal of its objective and what it will seek to achieve with regard to inflation. That helps the wider economy in the decisions that are taken.

My Lords, I accept that you would not make the Monetary Policy Committee independent if you did not want it to be independent but, none the less, is there not a serious problem? You do not have to be very clever or artful to bring inflation down if that is your target. The Tories demonstrated this marvellously in the early 1980s, when they came to power and doubled the unemployment rate, which they got to over 10 per cent and kept at a high rate for many years. The trick is not just to destroy inflation. Is not the test of your ability improvement in the real economy? Is the Minister aware that some of us, listening to the Governor of the Bank of England, are terrified of the lack of interest in the real economy, as it affects us now and in the near future?

My Lords, the credit crunch is producing a crisis in the financial sector that is probably the greatest since the depression. Therefore, there are implications for the real economy. My noble friend will appreciate that this economy is still growing and that the forecast, even in this most difficult of circumstances, is that it will continue to grow when other economies are not able to do so. That growth guarantees that we will not fall into the same trap as the previous Administration, which was to control inflation through high unemployment.

My Lords, the Question refers to constraints on the MPC. Does the Minister think that the fiscal loosening, caused by the Government giving a £2.7 billion bribe to the electorate of Crewe last week, will help or hinder the MPC when it next decides on interest rates?

My Lords, the resources that were made available last week were to rectify a fault that had been identified and clearly recognised. They also have the benefit of being fair to the low-paid and of assisting purchasing power in the economy. That does not alter the fact that the Bank of England’s objective, as indicated in the original Question, is to return to target as rapidly as possible.

My Lords, does not the fact that inflation is more than 2 per cent and rising, yet the Bank of England has made it clear as far as it can that it has no intention of raising interest rates at this point, demonstrate that the Bank is taking full account of the effect of interest rates on unemployment and growth and is therefore interpreting its mandate with considerable flexibility?

My Lords, that is certainly the case. If the Bank of England had different objectives, it would have a different strategy for interest rates. The Bank’s primary objective relates to inflation but I reiterate that its objective is also to pursue a strategy that increases economic growth and helps the economy. It is obviously working in difficult parameters at the present time, but that does not alter the fact that we should have confidence that the strategy it is pursuing is accurate.

My Lords, my noble friend may recall that some 25 years ago the Government of the day sent the retail prices index into exile because they did not like the inclusion of the housing component, which they thought was just a proxy for interest rates. Now that we have the paradox that house prices may be coming down while other inflation is going up, would it not be useful for the Bank of England to do an objective study of the pros and cons of different measures of inflation, so that we have our eye on a target that may be more relevant on occasion to the cyclical position of the economy?

My Lords, there are several proposals relating to increases in the cost of living, but the Bank of England operates against the position of the CPI, which is the internationally recognised inflation rate. It is against that that its performance stands against all other comparisons.