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Volume 724: debated on Wednesday 19 January 2011


Asked By

My Lords, the UK’s monetary policy framework gives operational responsibility for maintaining price stability to the independent Monetary Policy Committee of the Bank of England. The MPC stated in the minutes of its December 2010 meeting that its central view remained that a substantial margin of spare capacity in the economy was likely to persist for some time and would bear down on inflation in the medium term as the impact of temporary factors waned.

I thank the Minister for that reply. Now that the consumer prices index has risen to almost twice the Bank of England’s target inflation figure, will the Government consider exchanging quantitative easing for quantitative tightening?

My Lords, of course the Government are concerned about the current level of inflation and the impact that it has on many parts of society, particularly on working families, savers and others. However, how the Bank of England meets the Government’s set target for inflation, including decisions about what it does, if anything, about quantitative easing or the reversal of it, is an operational decision for the bank.

My Lords, can the noble Lord confirm that he is not joining those who wrongly seek to pressurise the MPC to increase interest rates? Furthermore, as he cares about transparency, will he perhaps now take the opportunity to answer the Question for Written Answer that I put to him some time ago and tell us precisely what the Treasury representative on the MPC was instructed to say to the committee about the Treasury’s view on interest rates?

My Lords, I am very happy to confirm that the Government have every confidence in the MPC. They regard its independence as a cornerstone in making sure that the Chancellor’s inflation target is hit as far as it is in the power of the MPC to achieve it. That is what it is asked to do and there is absolutely no interference. As I have explained before, a representative of Her Majesty’s Treasury does indeed attend MPC meetings—not in any way to interfere with the independent deliberations of the MPC but to make sure that the committee is aware of relevant Treasury policy decisions, such as what is coming out of budgets. That is all I can say.

My Lords, first, the recent relatively high levels of inflation reflect, among other things, the previous Government returning the rate of VAT to 17.5 per cent, so that number is included and it is one of the factors behind the rise in inflation in December. As to the effect on inflation of the increase of the standard rate from 17.5 to 20 per cent, that depends on how much of the increase is passed on to consumers, and we will wait to see on that. However, because the rise to 17.5 per cent will come out of the inflation numbers, it will partially offset the effect of the increase that comes in in January.

My Lords, we fully accept the importance of the independence of the Monetary Policy Committee but the Government cannot wash their hands of any responsibility for inflation. The exchange of letters between the Chancellor of the Exchequer and the Governor of the Bank of England has now become very anodyne and routine—the same explanations are brought forward time after time. What are the Government going to do about the MPC’s inability to hit the target that the Government have set?

My Lords, I know that it is customary for me to answer the questions and for noble Lords to ask them but five letters were written by the Governor of the Bank of England to the previous Government and I do not recall the previous Government having done anything about them in response. It is quite right that the Governor of the Bank of England explains the situation, but the previous Government put in place and supported the framework that exists, exactly as we are doing, and it is an important part of that framework that the governor writes letters.

My Lords, the Minister will surely recognise that the Government take responsibility for the VAT rise and also take responsibility for the fact that the general inflation rate impacts with particular savagery, through government policies and cuts, on the poor and less well off in our society. In present circumstances, when our citizens are suffering and the growth rate is 2 per cent or below, surely the Government should express more than a little anxiety about the possibility of a rise in interest rates.

My Lords, I could not agree more with the starting premise of the noble Lord, Lord Davies of Oldham. The Government are concerned about the hard-pressed, hard-saving, hard-working low earners in this country. That is why, in April this year, 880,000 people will be taken out of taxation altogether. That is also why 23 million taxpayers will each receive back £170 compared with the plans of the previous Government. That is an absolute recognition of the fact that the Government understand how low-income families are suffering and are doing something about it.

My Lords, will my noble friend also comment on the consequences for inflation of the reductions in corporation tax, the reductions in national insurance contributions, the freezing of council tax and business rates and, most importantly, the tackling of the deficit that have all been announced?

I agree absolutely with my noble friend that these are all critical policies to ensure that growth gets going again. It is precisely by the Government both reducing the deficit and ensuring growth that the Monetary Policy Committee of the Bank of England will have a firm policy background against which to make its decisions that bear on the inflation target.

Can my noble friend indicate at what stage, after a series of letters from the MPC to the Chancellor, the latter would be prepared to reconsider the inflation target of 2 per cent and revise it in either direction?

My right honourable friend the Chancellor has no intention of revising the target for inflation. It is a matter on which he can write a new instruction whenever he wants, but he has no such intention.