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Bank of England: Interest Rates

Volume 705: debated on Wednesday 12 November 2008

asked Her Majesty’s Government:

Whether they plan to change the remit of the Bank of England regarding interest rates.

My Lords, the Bank of England Act 1998 sets the objectives of the Bank in relation to monetary policy as, first, 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 Chancellor last set the remit for the Monetary Policy Committee in the 2008 Budget and reiterated his full support in the Mais lecture.

My Lords, I thank my noble friend for that Answer. It is not very different from the ones I used to get from my noble friend Lord Davies of Oldham. Is my noble friend aware—I am sure that he is—that banks and building societies are still offering savers well over 6 per cent and therefore pressure on them to cut their interest rates further would be pretty meaningless? Does he accept that the main issue now is that commercial banks and building societies should be doing what the Government asked them to do; namely, because of the liquidity improvement that the Government have made, to lend to small businesses in particular? Does he recognise that the evidence is that they are not doing so? Apart from talking to them, what is he doing in the cases of banks where he has a direct interest and direct control?

My Lords, I thank my noble friend for his warm comments about joined-up government and for noting that I am saying very much what my noble friend Lord Davies of Oldham would have said in reply to his Question. We have made it very clear that the banks that we assisted in capitalisation exercises will continue to be managed in the best interests of all their shareholders. We will not be directing them on the pricing of their products or services. However, we will be holding them to the commitments that they made to make funding available to small companies, hard-working families and needy borrowers over the next three years in accordance with the volumes of business that were available in 2007.

My Lords, does the noble Lord agree that it is understandable that he should give the same answer to the same question? Indeed, the answer is absolutely correct. Does he also agree that the Bank of England has shown by the sharp reduction in interest rates recently that it is not inhibited from cutting interest rates—I hope that it will do so some more in the near future—despite the concern of the noble Lord, Lord Barnett? Does he also agree that, as is shown by the sharp fall in the exchange rate of sterling, the financial markets are extremely concerned about the prospects for the British economy in general, the fiscal position in particular and the underlying structural deficit, and that it would be disastrous if confidence were further knocked by a change in the remit of the Bank of England?

My Lords, the announcement by the Monetary Policy Committee of its most recent change in interest rates has delivered interest rates at their lowest level since 1964. Since 1997, we have had low and stable interest rates—the standard deviation of interest rates has fallen by one-third compared with the average of the three previous decades. The global economy is facing very serious challenges, but we address those from a position of strength: low debt and—as was flagged today by the Bank of England—expectations of low inflation. We have an economy that has been working very close to full capacity, which is flexible and which will be capable of ensuring that we are competitive over the next few years, as the global economy faces a very significant challenge. We are confident that the UK economy, as a result of the competitiveness that our manufacturing industry now enjoys, will do particularly well in increasing its share of global manufacturing.

My Lords, the Minister will be aware that the Bank of England Act allows the Treasury, in times of “extreme economic circumstances”, as the Act describes it, to give directions to the Bank of England and the Monetary Policy Committee on their remit. Why, given that the Chancellor clearly wanted interest rates reduced a number of weeks before they were reduced, was no such direction given four to six weeks ago? Will the Government bear that reserve power in mind in future if, as seems likely, we remain in extreme economic circumstances for the next year or so and the Bank of England is not perceived by the Government to be reducing interest rates as far as they would wish?

My Lords, the Government are not of the view that we are in extreme economic circumstances and therefore would not have given direction to the Bank of England in that respect. The challenges that we are facing are the same ones being faced by the whole developed world. We are delighted to see co-ordinated action being taken and pleased to see that the Prime Minister this weekend in Washington will continue to use his efforts to ensure that global action is taken to address the downturn in economic production and output that we are currently experiencing worldwide.

My Lords, is it not rather unfair on the Bank of England that it is routinely condemned these days for being what I think they call behind the curve, by which people mean slow, late, unprepared, and so on? Is it not true that it is like a top general who has been given the wrong orders? Does not the fault lie, as the questions of the noble Lords, Lord Barnett and Lord Newby, imply, with the legislation that created the independent Bank of England, and in particular with Section 11, which concerns the remit? That asks the Bank of England to concentrate exclusively on inflation as the be-all and end-all of economic policy. Do we not now know that it is possible to have what the Bank of England called, contrary to what the Minister said, the largest financial crisis in human history, which has occurred during a period of low inflation? Does not that mean that there must be more to it than Section 11 suggests?

My Lords, I shall endeavour to be brief in my reply to the noble Lord, Lord Saatchi. Since the independence of the Bank of England was established in 1997, we have enjoyed an unparalleled period of sustained economic growth and low inflation. That is not what I would judge to be being behind the curve; I judge that to be a commendable achievement by the Government and the Monetary Policy Committee of the Bank of England. The outlook is that those policies and practices will continue to be highly effective. The Government do not interfere or intervene in the decision-making of the MPC and will not do so. I draw the attention of the noble Lord, Lord Saatchi, to the IMF report in 2008, which could not have been stronger in its endorsement of the achievements of the Monetary Policy Committee, stating that it should not in any way be amended.

My Lords, in view of the Prime Minister’s forthright comments on the need for the banks to be disciplined about credit card charges in view of the reduction in the base rate, will the Minister confirm that the Government will follow that policy to insist that the banks behave properly vis-à-vis credit card borrowers?

My Lords, will my noble friend remind the noble Lord, Lord Saatchi, that in his first reply he made it clear that the statutes of the Bank of England say that once price stability has been established, growth and employment are proper considerations for the banks?

My Lords, it is worth emphasising that experience has shown us that stability of prices are an essential precondition for economic growth, prosperity and fairness. These two objectives are not in conflict; one is a precondition of the other.