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Banking: Money Supply

Volume 708: debated on Tuesday 10 March 2009


Asked By

To ask Her Majesty’s Government to what extent they propose to increase the supply of money.

My Lords, the asset purchase facility provides a framework for the Monetary Policy Committee to use for monetary policy purposes. The Chancellor’s letter to the governor on 3 March authorised that the MPC should have the option to finance purchases of up to £150 billion, under the facility by the issuance of central bank reserves.

Monetary policy decisions continue to be set by the MPC. It has full operational independence from the Government in deciding how to meet the Government’s inflation target.

My Lords, I am grateful to the noble Lord for providing details of the unprecedented authorisation which the Chancellor of the Exchequer has given. However, so far the House and Parliament generally have had no opportunity to comment on or debate this issue. What steps are the Government taking to enable Parliament to exercise control on this matter, which is of great importance to many people, not least pensioners and those on fixed incomes? In what way can we hold the Government to account?

Are we not now on a merry-go-round, with the Government lending to particular banks, which are lending the money back to them? If it is the Government’s objective to increase the money supply, would it not be better to do so by underfunding the borrowing requirement rather than buying back government debt?

My Lords, parliamentary engagement with the issue of quantitative easing is a matter for determination through the usual channels. I believe that the flaw in the noble Lord’s suggestion at the end of his question is that it conflates monetary policy with fiscal policy. Monetary policy has to date, under the very effective management of the MPC, targeted and achieved the inflation goal through the price of money. As the price of money has reduced to a level which we have not seen for more than 300 years, it is necessary to address the issue of the quantity of money. Given his monetary background, the noble Lord will understand the equation MV=PY. We are targeting the quantity of money times velocity to equal price equals monetary GDP. To confuse that with fiscal policy, as I suspect the noble Lord knows, would be a dangerous and foolish thing to do.

My Lords, given the concerns about the delays in some of the Government’s financial rescue package coming into force, when does the Minister envisage that the first purchases will be made under the facility he has just described and how long does he expect it will take before the full facility is used?

My Lords, the answer to the first question is tomorrow. The answer to the second is that it is in the hands of the MPC, which is independent.

My Lords, does my noble friend not agree that, in the way he stated, the velocity has dropped to a very low level and is about to hit zero and that there is therefore no danger that the creation of extra money will create inflation, which is the fear expressed by the noble Lord, Lord Higgins?

My Lords, I am most grateful to my noble friend for that observation. The targeted amount of money for use in the asset purchase facility is £75 billion, which is the amount requested by the Governor of the Bank of England. It approximately equals two current central bank monetary reserves, which are one-19th of nominal GDP. Therefore, the effect on GDP in nominal terms is likely to be of the order of 5 per cent with stable velocity. However, in these circumstances, one would imagine that, with the low cost of interest rates and the attractive lending opportunities, velocity will increase.

My Lords, in embarking on this policy, which I accept is necessary, will the Minister say whether the Bank of England is still operating solely to a target of future inflation levels or now adopting a target related to the expansion of credit or nominal GDP?

My Lords, the Bank of England’s policy target remains as set by my right honourable friend the Chancellor of the Exchequer on 11 March last year, which is to target inflation on a symmetrical basis at 2 per cent and to subserviate beneath that the goals of employment and growth. However, the inflation target remains overriding in its importance behind all decisions taken by the Monetary Policy Committee.

My Lords, would my noble friend be kind enough to tell us in simple terms what he hopes will be the outcome of the G20 meeting in London in April?

My Lords, the answer is in simple terms the same as that which I would have given if I had been asked what the purpose of quantitative easing was, which is improved economic activity, more jobs, fewer people threatened with losing their homes, more investment and a confident economy.

My Lords, last week, one of my young grandchildren asked me whether the Government would now have to go to prison because they were printing money. The Minister has given us some wonderful answers this afternoon. Could he please give me a convincing answer for a seven year-old as to why nobody is to be punished for creating this unholy mess?

My Lords, I think, as my right honourable friend the Chancellor of the Exchequer has said, there are many things to be learnt as a result of these experiences globally. We need to recognise that the challenges that we are facing are global. It is not an issue of punishment, but of taking the right decisions for Britain to create real outcomes which are positive for jobs, families and the future of this country.