To ask Her Majesty’s Government what discussions they have had with the Governor of the Bank of England on the effectiveness of quantitative easing.

My Lords, the Chancellor of the Exchequer and the Governor of the Bank of England discussed the use of the asset purchase facility for monetary policy purposes at a meeting on 5 February. The Chancellor stated this fact in his open letter to the governor on 3 March. Since then, the Chancellor has continued to have regular meetings with the governor to discuss a wide range of issues.

My Lords, I thank my noble friend, but does he accept that in current economic circumstances quantitative easing is likely to have an even greater impact on the economy than some of the helpful measures in the Budget? Does he agree that something like one-third of the amount initially said to be going out in quantitative easing—namely, £75 billion—has been spent so far? Is there a danger that the Governor of the Bank of England is being rather slow in handling this matter, or is it simply that the methods that he has chosen are not suitable? In the circumstances, it is urgent for industry and the banks that this is done well and properly in terms of amounts and the method of doing it. I hope that the Minister can assure us that it is not the governor who decides this but the Government.

My Lords, I welcome my noble friend’s support for the Budget measures announced earlier today in the other place. Those measures complement the monetary policy that is being pursued, of which quantitative easing is now an important part in the context of low interest rates where the price of money can no longer be as effective in determining money nominal demand as was the case when interest rates were higher—hence the Bank of England, through the Monetary Policy Committee, is now also targeting the quantity of available money through the creation of central bank reserves in a non-sterilised fashion. It will take time to determine whether this works, as the governor has always said that it would, which is why he is phasing this in over time, with a target of £75 billion over a three-month period. We are seeing some very positive benefits. We have seen long gilt yields fall to low levels. We have seen a tightening of credit spreads. We have seen a reduction of LIBOR and an increased appetite on the part of banks to extend credit. The early signs of quantitative easing are encouraging but, by its very nature, it is a strategy that it is hard to measure over a very short period.

My Lords, does the Minister agree that it is crucial to distinguish between interest rate policy concerned with the price of money and monetary policy concerned with the supply of money? For the past 10 years, we have had only the policy from the Bank of England that is concerned with very short-term interest rates. The change to concern with the supply of money is welcome, but is it not the case—the noble Lord will correct me if I am wrong—that in the whole of this massive document there is no attempt to forecast what is going to happen to the supply of money? This is crucial if we are to understand what is happening in the economy.

My Lords, what is crucial is that the conduct of monetary policy continues to be focused on managing inflation to a 2 per cent target, which was restated by my right honourable friend in the other place in the Budget speech earlier today, and that the control of monetary policy and the achievement of that inflation goal lies in the hands of the MPC. It was the MPC that advised the Government that the limitations of interest rate movements in affecting money aggregate demand were severely diminished by the fact that interest rates are now at a level that we have not seen for 350 years, as a result of which the MPC had to reach out for what the governor described as unconventional methods—that is to say, quantitative easing. I should add that we are not alone in this; the Swiss are engaging in quantitative easing and the Americans are engaged in both quantitative and qualitative easing.

My Lords, the Minister said that there are positive benefits to this policy and that the Government envisage that £75 billion will be created over three months. Now that we are some way into the three months, have the Government yet formed a view about what might happen at the end of the period? Will the £75 billion be it, or might we see another £75 billion or £50 billion in the succeeding three months?

My Lords, this is a matter on which we will take advice from the Monetary Policy Committee and the governor.

My Lords, while I support the principle, in theory at least, of quantitative easing, I agree with what my noble friend Lord Higgins said. Is not an inflation target the end, while money is the means by which the inflation target is achieved? Is it not therefore regrettable that, when the Government restated the inflation target when it gave the Bank of England independence, they abolished all monitoring ranges for money, because money is actually how you determine inflation?

My Lords, the belief that money measurement is the key to economic management was much more strongly held in the 1970s and 1980s than it is now. Let us remember that since the Government gave the Monetary Policy Committee responsibility for targeting inflation and setting interest rates, we have had a truly extraordinary period of continuing low inflation. It is to the credit of the mechanism and the Bank of England that that has been achieved without a lot of gobbledegook about different forms of monetary measurement.

My Lords, the Minister told the House that it is the Government’s policy fully to fund their borrowing requirement and for the monetary authorities, if they think fit, to inject liquidity into the economy by buying back gilts. Would it be practicable in the converse situation for the monetary authorities to overfund the Government’s borrowing requirement, as may be necessary before too long?

My Lords, that is a possibility, but it is not under contemplation at all in economic management at the moment. It will clearly be necessary at some point in the future to reverse the impact of quantitative easing, which we will do through increases in interest rates, allowing existing bonds to mature and selling stock from the APF back into the marketplace.