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Bank of England (Amendment) Bill [HL]

Volume 710: debated on Friday 8 May 2009

Second Reading

Moved by

My Lords, I thank the usual channels for arranging the time for this Bill to be heard today. It is a privilege to have the opportunity to introduce this legislation into your Lordships’ House.

Shakespeare taught us that human beings can have a fatal flaw. So, too, can legislation. The Bank of England Act 1998 has a fatal flaw: it has three words too many. The Bill aims to delete those from the statute book, and here is why. When things go wrong, it is a human instinct to attribute blame. Today, many people are routinely blamed for this economic crisis—investment bankers for greed, central bankers for being behind the curve, regulators for being asleep at the wheel, credit-rating agencies for giving too many triple-A ratings, even the public themselves for foolishly borrowing too much. What made all these people reckless at the same time? The record seems to show that they were all just victims. Their mistake was to believe what they were told. They were lulled into a false sense of security by an idea—that if policy-makers could maintain low inflation and, more importantly, low inflation expectations, then all good things would follow: growth, employment, prosperity, stability. Unfortunately the idea turned out to be a myth—the largest public-policy failure of our generation.

The myth of inflation targeting created the illusion of the new Jerusalem, the new paradigm—the end of the economic cycle. But lack of clarity about the distinction between the necessity and sufficiency of inflation targets has been responsible for a misunderstanding of epic proportions. By first creating the false impression that low inflation meant financial stability, and then measuring the wrong kind of inflation, the inflation targeting policy encouraged the view that it was safe to borrow and safe to invest. The myth led bankers to lend more, traders to risk more, home owners to borrow more, regulators to relax more and politicians to boast more about the end of boom and bust. When the myth collapsed, it took all of us down with it—academics and auditors, bankers and bakers, economists and electricians; we all went into the dark. So this Bill has a definite purpose. For your Lordships’ easy reference, I offer this précis: never again.

I shall begin with the error in the Bank of England’s remit of obliging the Bank to focus only on inflation. I shall then address how that error was compounded by obliging the Bank to focus on only one kind of inflation—as it happens, the wrong kind. Finally, I shall try to deal with the consequences: how everyone was duped by this policy failure into an inappropriate sense of self-confidence which worked its way through the entire international banking system.

These proposals will not abolish the economic cycle, as was claimed by the myth of inflation-targeting. However, if this change is enacted in UK law, Britain will never again have an economic crisis caused by a banking crisis caused by debts that went unseen by auditors, regulators and central banks. That was the reasoning behind my introduction of the Bill into your Lordships’ House in October 2008.

The Bill does not seek to apportion blame for the crisis—failure of free markets; failure of regulation; failure of the FSA; failure of the Bank of England, the Treasury or the whole tripartite system; failure of the UK, the US or the whole world—the Bill is neutral on all counts. It has only one modest aim: to help whichever party is in government to be wary of the idea that an economic disaster cannot occur during a period of low inflation.

As your Lordships are well aware, the Bank of England Act 1998 was the iconic Act of Parliament that gave the Bank its independence. Clause 11, in Part 2 of the Act, defined the role of the Bank. It states:

“In relation to monetary policy, the objectives of the Bank of England shall be—

(a) to maintain price stability, and

(b) subject to that, to support the economic policy of Her Majesty’s Government, including its

objectives for growth and employment”.

The Bank of England was ordered to concentrate only on inflation, so that when the crunch came, its top officials were looking the other way.

During the passage of the Act in your Lordships’ House, there was much discussion about those three words “subject to that”. Why not, it was asked, “having regard to” or “taking account of”? Why were all other considerations to be subordinate to controlling inflation?

The economic orthodoxy which underpinned the Act was based on the seminal work of Professors Paish and Phillips at the London School of Economics. The Phillips curve showed that high inflation was incompatible with high employment and high growth. The mechanism of the causal relationship between them was “wage push”. According to the theory, unions, noting higher prices, would press for higher wages and employers would lay off workers to compensate. This was the dreaded wage/price spiral of the 1970s. Policy-makers concluded, and legislators concurred, that inflation must be curbed at all costs.

The winning argument at the time of the Act was that the relegation of the Government’s growth and employment objectives would prevent the manipulation of economic activity by unscrupulous politicians in search of votes, and it was said that control of inflation was, in any case, the best guarantor of growth and employment.

It is important to remember that the British psyche had been scarred by this stop-go cycle of the 1970s—a boom, followed by inflation, followed by severe measures to control inflation, then a bust. The lesson seemed obvious: if the monster of inflation could be tamed, that would be the end of the economic cycle as we know it.

So it was that when I introduced this Bill into your Lordships' House in October 2008, the UK Government were still clinging to the wreckage of that theory. On 12 November, speaking for the Government, the noble Lord, Lord Myners, said that the Government were quite satisfied with the remit of the Bank of England—it was impeccable. In fact, it was so perfect that it had been responsible for the fine performance of the economy under his Government. He said flat out that the remit,

“should not in any way be amended”,

and he gave his reasons. The remit had delivered,

“unparalleled … economic growth and low inflation”.

He explained how it had achieved this. He said that stable prices and economic growth are,

“not in conflict; one is a precondition of the other”.

He also said that low inflation was,

“an essential precondition for … growth, prosperity”.—[Official Report, 12/11/08; cols. 654-55.]

In other words, in November 2008 the UK Government were certain that low inflation would deliver economic growth and financial stability. As we all now know, it has not worked out quite like that. That fine theory, to which the Government were still attached in November, had already met its Waterloo in October, when we discovered, according to the deputy governor of the Bank of England, that,

“the largest financial crisis … in human history”

had arisen during a period of low inflation.

A month later, the Government had changed their mind. They had found a flaw in the Bank of England’s remit. On 4 December 2008, they published their Banking (No. 2) Bill to amend the remit. New Section 2A(1) in Section 238 of what is now the Banking Act 2009 would give the Bank of England a second objective:

“to contribute to protecting and enhancing the stability of the financial systems of the United Kingdom”.

So in this little-noticed revolution in economic management, the tectonic plates of the Bank of England were shifted from the sufficiency of a single remit to the necessity for a dual mandate.

What could have led the UK Government to such a change of mind about the remit of the Bank of England? Is it not because the Government belatedly agreed with the central proposition behind this Bill—that while low inflation may be a necessary condition for financial stability, it is certainly not a sufficient condition? By focusing only on inflation, as three words in Section 11 of the Bank of England Act 1998 directed it to do, the Bank of England was blindfolded to the disaster for economic growth and financial stability that could occur in a low-inflation environment. Never again.

I hope that that explains the error in the Bank of England’s remit of making the Bank focus only on inflation and the importance of removing the three words “subject to that” from the Bank of England Act, as this Bill proposes.

I shall now deal with how that error was compounded by obliging the Bank to focus on only one kind of inflation—as it happens, the wrong kind. Whereas the Bank’s consumer prices index, the CPI, keeps a close eye on inflation in the price of a packet of peas and a bar of chocolate, it overlooks the very aspects of inflation that caused this crisis—all the debt, housing and mortgage ingredients of our present misfortune. While asset prices rose and fell by 50 per cent, the Bank of England was directed by those three words in the Act of Parliament which created it to look the other way—to painstakingly examine a rate of inflation which barely moved at all.

While “inflation” as defined by the Bank of England stayed within a narrow range, other rates of inflation changed dramatically. For the past five years, “debt inflation” was on average 9.5 per cent a year—nearly five times the Bank of England’s CPI inflation target. But where is “debt inflation” in the CPI? It is not included. During the same period, the inflation rate of one particular asset class, property, was 13 per cent a year—six times the Bank’s CPI target. Where is that in the CPI? It is not included. What about the cost of acquiring and holding these property assets—that is, mortgage interest? Where is that in the CPI? It is not included.

CPI inflation barely moved. It was irrelevant. It registered neither the huge increase in asset-price inflation nor its huge collapse. The people were duped. Why? It was because the Bank’s measure of inflation was stuck in the past. The Bank’s CPI measure of inflation is out of touch, because the world has changed. Millions of people had become investors in a new asset class: they were home owners. This was the joy of debt as practised by the masters of private equity. It works like this: I borrow money, I buy an asset, the price goes up, I exit the asset, I repay the loan, I keep the profit. Remember that the great British public had been given specific assurances that central banks had achieved predictably low inflation, which meant prosperity and stability, so there was nothing to worry about.

But the great luminaries did not consider how a change in the inflation rate of a certain asset class could bring about a dramatic collapse in the economy, notwithstanding low inflation as they define it. As the chairman of the US Federal Reserve, Ben Bernanke, put it, there is no one correct method for valuing an asset class; there are two. First, there is the price that a normal seller would receive from a normal buyer who considers the value of the asset at maturity. Secondly, there is the price that a distressed seller would accept now from a reluctant, risk-averse buyer. That change in valuation methodology, completely unforeseen in the Bank’s definition of inflation, created this crisis. The IMF confirms my point in its report of 12 March 2009, which states that, by focusing on consumer prices, central banks ignored,

“risks associated with high asset prices and increased leverage”.

The Bill reveals to your Lordships' House that the true culprit for this crisis is not regulation or an accounting standard, not an institution or an industry but an idea: the myth of inflation targeting. It blinded us to how an economic catastrophe could occur during a period of low inflation. It lulled us into a false sense of security. Its confusion between the necessity and sufficiency of inflation targets led to a misunderstanding of epic proportions. When the myth was exposed, it took us all down with it. As we all now know, none of us can rely on inflation targeting for our safety and security. It has been the largest policy failure of our generation. It is not the guarantor of growth and stability, and never was. Why? Because it is a myth. Never again. I beg to move.

My Lords, I intervene briefly in the gap, which gives me the chance to thank the noble Lord, Lord Saatchi, for introducing his Bill. We will have a very interesting Second Reading debate. I rise to put two questions in the context of the Bill to the Minister in the hope that he will have the chance to deal with them later. I will be very brief. Today, 8 May, is Europe Day, the day when the European flag and member states’ flags are flying outside in Parliament Square. It would be nice if the European flag could stay up permanently, as it does in most other capitals of the member states of the European Union. I know that the Government are a bit nervous about that, but it would be appropriate.

My second point refers to the European Central Bank and its announcement of a rate reduction yesterday as well as its reference to its future techniques of policy formation to deal with the current global and European financial and economic crisis. It referred to quantitative easing as one technique and instrument of control in future—the first time that that has been said; the ECB has not referred to that before. The Minister is not directly responsible for ECB policy in that sense, but the British Government closely co-ordinate with the ECB. There is also the relationship between those not in the eurozone and those who are members of it. Perhaps the Minister can give the House an account of how the Government feel that quantitative easing is going so far—the Bank of England has made recent reference to that—and what their reaction would be if the ECB started to proceed with the same kind of policy. That depends on the fascinating question of what kind of issuance of bonds that might involve and how long-term gilt yields and long-term ECB yields are to be perceived in this country. I hope that it is not unfair to ask the Minister about that because he does not have direct responsibility for it, but it is of crucial relevance to this country in considering this kind of legislation.

My Lords, it is a great pleasure to speak in this debate and have the noble Lord, Lord Saatchi, back with us taking a leading part in debates on economic affairs. It is also a great pleasure to see the noble Lord, Lord McIntosh, in his place, because the Bill takes us back to the heady days of the Bank of England Act, when we were establishing the Monetary Policy Committee. That now seems a very long time ago.

I fear that the noble Lord, Lord Saatchi, claims too much for the role of inflation targeting in the current crisis. He contends that economic actors across the whole piece have been duped by the myth that low inflation meant that all restraint could be done away with. That is a very convenient myth, because it means that bankers, commentators, analysts and government can slough off any responsibility for what has happened because they were mere passive imbibers of the myth. There are many claims to be made for and against the way that the Monetary Policy Committee has worked and inflation targeting, but I do not believe that our current crisis can be laid entirely at that door. There are many other component parts of the crisis, lax regulation being one of them. To use Keynes’s phrase, there are “animal spirits”, the part that greed always plays when people think that they can get away with something. To claim that if only the inflation rate had been somewhat different, things would be completely different now is an overstatement.

I do not think that the Bill would achieve what the noble Lord wants, for two reasons. First, it introduces a degree of ambiguity into the role of the Monetary Policy Committee. What are its members trying to do when they sit every month? The great advantage of having a single target and a single aim is that there is a clear focus to decision-making. If we say that when they sit, they should be thinking about growth and employment, we could justify a much wider range of interest rate decisions than is the case when they have a single target. It will be very difficult to get it right if they are aiming at a number of targets with a single club.

I take the noble Lord, Lord Saatchi, back to the heady early days of the Thatcher Government. At that point, inflation was very high. The noble and learned Lord, Lord Howe of Aberavon, introduced a series of Budgets the consequence of which was to increase unemployment in the short term by reducing public expenditure. His justification for that—we can argue about whether it was good or bad—was to reduce inflation and to squeeze excessive expenditure out of the system. Let us go back to 1979, 1980 or 1981 and imagine that you are on the Monetary Policy Committee with the Bill of the noble Lord, Lord Saatchi, in force. Inflation is raging. What would you do that is different from what the noble and learned Lord, Lord Howe of Aberavon, did? Do you say, “If we put interest rates up, unemployment will go up, therefore we will not do it”, or do you say, “Inflation is so important that we will focus on that and accept that in the short or even the medium term, unemployment will rise”?

That takes me to my second criticism of the Bill, which is that having caused a muddle it would then, in many cases, have no effect. If you are in the situation that we were in the early days of the Thatcher Government and you want to drive inflation down, you will do that almost irrespective of the short-term consequences for growth and unemployment. So I disagree with that element of the noble Lord’s argument. The element that I agree with, but which is not actually influenced one way or another by the Bill, relates to how you define inflation. When reading the FT on Wednesday, I thought for a moment that the noble Lord, Lord Saatchi, had been able to persuade Martin Wolf of the value of his Bill, because the headline on his piece reads:

“Central banks must target more than just inflation”.

I thought, “Oh dear, he is going to completely shoot down my arguments and support the noble Lord, Lord Saatchi”. Actually, he does not. He argues, and I agree, that you need a definition of inflation that deals adequately with asset bubbles.

When I was a member of the Economic Affairs Committee in your Lordships’ House, the Governor of the Bank of England repeatedly came before us and explained why it would be completely irresponsible to take any account of asset bubbles in judging inflation and in setting interest rates. He has now done a 180-degree U-turn and agrees that it is now vital that we do so. I am very pleased that he has. I agree that that element of what the noble Lord is talking about is absolutely crucial for the future, and I hope, given that the contagion with which we are now dealing has spread across the EU, that the EU will move more quickly to redefine the CPI to take account of asset bubbles. If that had been done, interest rates would undoubtedly have been higher over recent years, and that, to a certain extent, would have reduced the bubble. If the noble Lord is to deal successfully with future bubbles and future irrational exuberance, as we all seek to do, he must realise that interest rate policy is one part of the picture and different forms of regulation are another.

As is often the case, I very much agreed with Martin Wolf in his article on Wednesday when he described a number of things that are “out”. He says:

“the choice, in the short term, is certainly going to be ‘inflation targeting plus’ … ‘In’ is likely to be ‘leaning against the wind’ whenever asset prices rise rapidly and to exceptionally high levels, along with a counter-cyclical ‘macro-prudential’ approach to capital requirements in systemically significant financial institutions”.

Those two things together—taking account of asset bubbles in inflation targeting and having a better macro-prudential approach to the banks—will be a much more effective constraint on irrational exuberance and animal spirits than the system that we have had to date, but I fear that the noble Lord’s Bill deals with neither of those issues.

My Lords, I pay tribute to my noble friend Lord Saatchi for yet again challenging the House. I wish that he would spend more time in your Lordships’ House enlivening our debates.

As my noble friend reminded us, the issue that is addressed by his Bill was debated at length when the Bank of England Bill 1998 was considered in your Lordships' House and in another place. Some wished the price stability objective to be subordinate to the Government’s general economic policy and others wanted to link them together more firmly. The Government did not budge then and, indeed, have batted away the intermittent questioning of the monetary policy objective ever since. I think it fair to say that the Government have had more trouble with those on their own Benches than they have with us on these Benches over the years. The noble Lord, Lord Barnett, who unfortunately cannot be in his place today, has raised this issue frequently.

In preparing for this debate, I sought to answer the hypothetical question: if the Act had been phrased in the way in which my noble friend's Bill suggests, would the Bank of England have acted any differently? Would we have avoided at least some of the economic mess in which this country is now mired? I am not convinced that the policy outcome would have been better.

There were calls throughout the period when interest rates were around 5 per cent for them to be cut in order to support one or other sector of the economy. It was always alleged that growth in the business sector was being held back because of the impact of interest rates—the CBI and other business groups were vociferous about this—but if interest rates had been cut at that point, monetary policy would have been looser, which would have added further fuel to an already overheated economy and to asset prices. We would therefore not have avoided the bust that we are now in.

I do not believe that the Bank’s monetary policy objective has been handled perfectly. For example, the decision by the then Chancellor to switch the inflation target from the RPIX to the CPI undoubtedly loosened monetary conditions at the wrong time. Moreover, as my noble friend and the noble Lord, Lord Newby, reminded us, asset prices are not captured at all in the target, which means that asset price bubbles can grow unhindered by a policy response. Even if these asset bubbles are noticed, asset prices are not a focus of policy. Neither of these issues—the change to the CPI and the absence of asset prices—would have been cured by the change in wording that my noble friend's Bill proposes. If there is a weakness, it is the way in which the Government specified inflation to the Bank, rather than the Act itself.

There are also questions about the Bank’s ability to forecast inflation two years out, which is how the Monetary Policy Committee has generally interpreted its price stability remit. The Bank made forecasts of inflation and of other economic variables, such as growth, and its record cannot be regarded as outstanding. The Bank will doubtless say that the global credit crunch invalidates a comparison between what has been forecast in the past and what has actually turned out, but there remains an uncomfortable fact that the Bank did not see the economic downturn or its severity. It is not alone in that, but it cannot claim any forecasting high ground. As two-year forecasts are a prime driver of interest rate policy, this is a serious issue.

My noble friend Lord Higgins, who also cannot be in his place today, has often reminded us that monetary policy is much more than interest rates, which control the price of money, and he has urged the importance of a focus on the money supply. The Bank of England has statistics on the money supply, but the question in the absence of a target or a benchmark is whether it got the prominence that it needed. Certainly it seemed not to until the money supply growth ground virtually to a standstill.

We have a longish list of other things that we need to look at again in relation to the Bank of England. Some of these were debated during the passage of the Banking Act earlier this year when I moved some amendments which the Government rejected. We do not believe, for example, that the tenure and reappointment provisions for the Governor are optimal in the context of supporting the independence of the Bank of England. We believe that the Bank should be given a more prominent role in financial stability, and in particular should have a formal ability to call time on debt, and we are not convinced that the tripartite arrangements, even after the Banking Act, are robust enough to prevent future banking crises. We are also far from convinced that the new arrangements for the Financial Stability Committee are well designed. I am not saying that the idea behind my noble friend’s Bill is not worth examining further. I think it would be a good idea to review very carefully all the issues that surround the Bank of England and the tripartite authorities and to consult widely on whether changes and further legislation are necessary.

On the basis that the next general election turns out in the way in which my noble friend and I fervently desire, I cannot promise him that our party will have this as one of our priorities. He will well understand that there are many other pressing issues surrounding the economy, as we debated at length yesterday. However, I am quite confident that he will continue to remind us of the inadequacies of the Bank of England’s remit, and I hope that he will get a more sympathetic hearing from the Treasury team that will be in place in a little over a year’s time than I anticipate he will get from the Minister today.

In the mean time, I have a suggestion for my noble friend. Last year, he authored a Centre for Policy Studies pamphlet, entitled Enemy of the People, which contained a devastating critique in the form of a charge sheet based on the Prime Minister’s tax and benefit policies. There were seven counts on the charge sheet. I do not suppose that the Minister has read it but, to give him a flavour, the first count was:

“Conspiracy to enslave United Kingdom citizens by making them unnecessarily dependent on the State”.

I do not think that the Bank of England’s remit will of itself provide such a dramatic charge sheet, but it would be interesting, if my noble friend had the time available, to create a similar charge sheet to capture the Prime Minister's role in the creation of asset bubbles, overindebtedness and boom and bust generally. The Bank of England is part of that. My noble friend is much more inventive than I am, but I suggest something along the lines of: “Conspiracy to impoverish UK citizens and to burden them with debts for a generation”.

My Lords, I congratulate the noble Lord, Lord Saatchi, on introducing this Bill, which gives us a chance to consider an important aspect of the British economy. He will have noted that we had five hours of general debate yesterday, in which he was unfortunately unable to participate. We would have welcomed that. He would also have heard the excellent response to that debate by my noble friend Lord Myners. He therefore will not expect me to comment much further about general economic policy when the House had the benefit of the Government’s perspective delivered only yesterday in such a clear and effective way. I also have no doubt that he will be just a little concerned that neither from the Liberal Front Bench nor, more importantly, his own Front Bench did he get total endorsement for his Bill.

One aspect of the noble Lord’s Bill and his proposed solution seems fully consistent with the attitude of his Front Bench here and in the other place; that is, an analysis which is purely directed towards the economic and financial crisis in terms of the United Kingdom only, as if the deficiencies, if they were proven to be the case, of the Bank of England had produced the worldwide credit crunch, and UK policy and institutions were alone responsible for the difficulties we are in. That is of course the economics of narrowness taken to the point of economic ignorance.

The Front Bench opposite and its colleagues in the other place persist in their arguments that they have a solution to the issue defined solely in terms of UK policy. They do not take into account all the significant perspectives of the great economies of the world, particularly the United States, which take a different view on how to emerge from this crisis. That view is much more consistent with that of Her Majesty’s Government. Therefore, once again, this Bill is an opportunity to narrow the debate on the crisis facing the world when we need breadth.

I am grateful to the noble Lord, Lord Dykes, for introducing that dimension in his short intervention about the European Central Bank. I agree with him that it plays a significant role with regard to the identification of the European Community’s response to the crisis. He will appreciate that I cannot go into a great deal of detail on the effects of that position at this stage, but it is clear that we are able to build on a perspective across Europe which is consistent with that which the British Government are taking, and which the Bank of England are taking in terms of its approach to quantitative easing. I am grateful to the noble Lord, Lord Dykes, for having identified that point.

The noble Lord, Lord Newby, introduced asset pricing, which he will know is easier said than done. Of course, there is a straightforward argument that inflation based on the CPI, which leaves out housing costs—particularly when we all recognise that with regard to the financial problem, housing, mortgages and finance for housing here and, even more significantly, in the United States is a significant contributing factor in terms of the collapse of the financial system—is an important issue. But the noble Lord, Lord Newby, is all too well aware that what has so far defied the statisticians’ analysis is a measure which can be used to get an accurate definition of housing costs across Europe, which would be our first dimension with regard to an index for inflation.

I have some words of comfort for the noble Lord, Lord Newby. Considerable work is being done by the Office for National Statistics with Eurostat and our counterparts in Europe to see whether we can make progress on this important point of asset pricing. The noble Lord will appreciate the difficulties attendant on that and will know that the search for rigour with regard to a price index, which led to the adoption of the CPI, has been important in combating inflation. It has meant that over the past decade we have had an exceptionally good record in controlling inflation. He will know that departing from that with a new measure requires the most careful evaluation.

However, we are not here to discuss the Government’s economic policy, although I did not think for one moment that we could debate the Bill without substantial reference to it. We are here to debate the Bill introduced by the noble Lord, Lord Saatchi, and to respond to his attempts to seek support across the House for the Bill. I share the reservations that have been expressed by the noble Lord and the noble Baroness who have spoken on behalf of their respective Front Benches on changing the Bank of England Act so that it adds to its primary objective in its monetary policy decisions; namely, to deal with price stability.

The Government remain strongly committed to the existing objectives for the Monetary Policy Committee. The noble Lord made reference to my noble friend Lord Myners, who is a very significant authority of the House in these matters, and he will know that the Chancellor of the Exchequer was at pains in the Mais Lecture on 29 October last year to emphasise our commitment. He said:

“The global challenges we face today are no reason for changing the remit of the Bank of England. The objective, price stability, is the right one”.

The 2009 Budget also reaffirmed the target of 2 per cent for the 12-month increase in the CPI, which applies at all times. The Government stay committed to that position. We are all too well aware of the additional measures which are necessary, in which the Prime Minister has taken such a significant international lead, to deal with the global crisis, but we see no reason to depart from the position that has stood us in good stead with regard to control of prices in terms of the Bank of England’s position.

Price stability is a precondition for growth and full employment. It must be achieved first and foremost if economic stability is to be assured. To give the MPC a dual mandate—the noble Lord, Lord Newby, expressed this point—with equal priority for price stability and economic growth objectives would risk the markets and the general public doubting that inflation will be tackled if there could be negative short-term consequences for growth. This would introduce an element of instability into inflation expectations and would do harm to the economy. It is also important to note that it is unnecessary to amend the objectives of monetary policy. The remit for the MPC already allows it to respond flexibly in difficult circumstances, such as “shocks and disturbances”.

Since the introduction of the existing monetary policy framework, and aside from the current challenging economic circumstances, interest rates have been lower and more stable, growth has been higher and more stable and inflation has been lower and more stable than they were between 1979 and 1997, when this framework was not in place. The proof is that in the past decade low inflation has supported growth and UK inflation has averaged less than half the rate of the preceding decade while growth has been higher. Moreover, the existing monetary policy framework has received praise from the International Monetary Fund, which reported as recently as August 2008 as follows:

“For over a decade, the United Kingdom has sustained low inflation and rapid growth—an exceptional achievement. This is the fruit of strong policies and policy frameworks”.

The IMF recommends that:

“The inflation targeting regime faces its most difficult test to date, but should remain unaltered. Adjusting the inflation target, its definition or the remit of the Bank of England to include output objectives, as suggested by some … would be a serious mistake”.

That is not a British analysis, but the judgment of the International Monetary Fund, and I am sure the noble Lord, Lord Saatchi, gives full weight to it.

Economic growth influencing inflation is an important factor underpinning the MPC’s interest rate decisions, which is evidenced in the minutes of the committee. We are able to appreciate its deliberations as they take place. The wider economic climate is already taken into account, but the primacy of the single objective must be retained. I say to the noble Lord, Lord Saatchi, that while he may not have expected the Government to give his Bill a fair wind, he must be a little concerned that neither his own Front Bench nor the Liberal Front Bench sees total merit in it. However, I congratulate him on introducing an element to the economic debate that we did not focus on in detail during our debate yesterday, so this is an added dimension from which we all can benefit. I am grateful to him for creating this opportunity, but I have to say that the Government do not support the intent of the Bill.

My Lords, I am most grateful to your Lordships’ House for the time it has taken over this Bill and I am very appreciative of the three Front Benches and the noble Lord, Lord Dykes. I do not want to detain noble Lords for more than a minute in my response, save to deal with the Minister and the noble Lord, Lord Newby. Your Lordships will want to consider carefully the fact that both of them said that there is tremendous merit in a single objective. I think the noble Lord, Lord Newby, used the words, “a single target and a single aim gives a clear focus on decision making”. The Minister used similar words when he referred to, “the primacy of a single objective”.

The point to remember is that the Government themselves have abandoned the concept of a single remit for the Bank of England. It went in the Banking Act, which was the Government’s legislative response to this crisis. They have abandoned the idea of a single remit for the Bank of England, however attractive it may have seemed years ago to have that single focus. They have introduced a new remit for the Bank of England. We should note carefully the exact words the Minister used in his response, because he said repeatedly that the remit of the Monetary Policy Committee should be a “single remit”. But the Government have changed the remit of the Bank of England because the Banking Act requires the Bank to consider how it will,

“protect and enhance the stability of the financial systems of the United Kingdom”.

That is proof of the central premise of this Bill, which is that an inflation target may be a necessary condition but not a sufficient condition. In recognising that, the Government introduced a second mandate for the Bank of England, which is to protect financial stability. The only possible reason for doing that is that they recognise the premise of this Bill, which is that an inflation target on its own is not sufficient to protect and enhance financial stability.

I am grateful to my noble friend Lady Noakes. We always agree about everything, and I agree with her that, as I said at the outset, this Bill is not a guarantee of the prevention of further crises—I do not claim that for it—and it is not the end of the economic cycle. That was the claim made for the myth of inflation targeting, which we know is wrong. I do not claim that for this Bill, only that whichever Government are in power, I urge them to remember that an economic catastrophe can occur during a period of low inflation. I thank all noble Lords who have taken part in the debate.

Bill read a second time and committed to a Committee of the Whole House.