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Bank of England: Monetary Policy Committee

Volume 702: debated on Wednesday 4 June 2008

asked Her Majesty’s Government:

What consideration they have given to widening the remit of the Monetary Policy Committee of the Bank of England.

My Lords, the Bank of England Act 1998 sets the objectives of the Bank in relation to monetary policy: to maintain price stability and, subject to that, to support the economic policy of Her Majesty’s Government including their objectives for growth and employment. The Government continually monitor the monetary policy framework to ensure that it remains at the forefront of international best practice. Changes to the framework are implemented only when clear advantages can be established for doing so.

Yes, my Lords, but my noble friend will have noticed that the governor is very concerned about having to write a letter to the Chancellor on the level of inflation. Would he care to join me in asking the Chancellor to send a letter to the governor congratulating him on his recent inflation report, which indicated that inflation will stay at about the level of his target over the medium term? In the short term, it might reach 3.7 per cent, but that is by no means catastrophic. Would he therefore remind the Chancellor to tell the governor that his second remit is now to ensure that the Government’s economic policy for growth should be continued? If he agrees with me, I will draft the letter if he likes.

My Lords, I would not think there was any doubt that the Chancellor would look to my noble friend for any such help if it were needed, but it is not. The governor will indeed be obliged under the legislation to write to the Chancellor if the inflation rate exceeds 3 per cent, and forecasts indicate that it will do so in the fairly near future. As my noble friend has indicated, 3.1 per cent is scarcely catastrophic when, in the 1980s and 1990s, we were consistently used to seeing inflation rates that were double that and, at one stage, as high as 15 per cent. We ought not, then, to think that because world economic circumstances are unfavourable, Britain is in any way, shape or form remotely near economic crisis.

My Lords, does the Minister agree that against a background of rampant house-price inflation in this country and credit growth, the Monetary Policy Committee should be more focused on asset-price inflation and money growth than purely on CPI inflation?

My Lords, the noble Lord will recognise the advantage of the CPI. It is an internationally registered measure of inflation, against a background where the economic resources of countries are directed towards housing and where families within those countries vary so enormously. Britain is atypical in that respect. We would not be adding to the general perspective on the successful conduct of the economy if we changed from the CPI as a measure of inflation rate.

My Lords, arising from my noble friend’s eminently sensible replies to the previous two questions, does he agree that when a Labour Government increase interest rates three times in one day, end the day with a maximum interest rate of 15 per cent, as he rightly reminded us, and spend £14 billion of our reserves in a vain attempt to stay in the ERM, then and only then will we accept advice from the party opposite, particularly when it comes from Selsdon man?

My Lords, can the Minister remind us under which Labour Prime Minister’s aegis inflation rose to 25 per cent?

My Lords, that was more than 30 years ago and, of course, we have learnt the lessons from the past. We introduced the Bank of England Act, which gave us the machinery not only to implement action, but to achieve successful action following those lessons. That is why the British economy is in a position, as international authorities recognise, to withstand the current international difficulties more ably than perhaps any other economy in the G8.

My Lords, the Minister said that the CPI is a successful international index because it reflects housing conditions in other countries. Is not the principal remit of the Monetary Policy Committee to deal with inflation in this country, not the rest of Europe or anywhere else? Therefore, would it not be sensible that the definition of inflation that it took reflected housing conditions in this country rather than anywhere else?

No, my Lords, I did not suggest that the CPI reflected conditions anywhere else. I merely indicated why housing was not included in the CPI, the British index, in order that we should have an effective comparator with other countries. For the success of the economy, the management of the economy, and international and business confidence, it is important to have accurate comparators on the way in which economies are proving to be effective. The CPI is the internationally recognised comparator and Britain does very well against that comparison.

My Lords, I readily defer to the hard-won experience and wisdom of my noble friend Lord Barnett, but would not my noble friend be a little worried if, particularly in present circumstances, a signal were to be sent to the markets that the authorities in Britain are going to take an indulgent view of inflation? Would not that be followed in due course, ineluctably, by rising unemployment? Do we not need the Bank of England to continue as it has done under its existing remit to balance sensibly and sensitively restraint of inflation with restraint of unemployment?

My Lords, the governor of the Bank of England and the Monetary Policy Committee will follow the rubric established for them in the Bank of England Act. If it is necessary to write to the Chancellor, because for a short period inflation edges above 3 per cent, the governor will of course write accordingly. That would be proof of the fact that the governor knows his obligations and that we know the worth of the strategy which has been pursued over the past decade for the control of inflation.

My Lords, is not one of the lessons we should learn from the past that people’s expectations of inflation are important in controlling it? Therefore, if the Government persist with a measure of inflation that does not carry public credibility, they will get into grave difficulty. Does the Minister not see that?

My Lords, that is an important consideration. We recognise that it is difficult to conceive of any index that accurately measures a larger number of households’ inflation rates. There is no doubt that, at a time of high increases in energy and food prices, family budgets are suffering. That does not alter the fact that, when it comes to the economic strategy that the Government should pursue for the benefit of the nation—particularly in keeping inflation under control in order that the high levels of employment we presently enjoy should continue—we need an index that is an international comparator and against which, I repeat, the United Kingdom economy does very well.