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Monetary Policy Committee

Volume 724: debated on Monday 31 January 2011


Asked By

To ask Her Majesty’s Government what assessment they have made of the impact of the Monetary Policy Committee missing its monthly inflation target repeatedly over the last 10 years.

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. Although the rate of inflation has increased over the past months, the committee’s view is that inflation is likely to fall back to target during 2012, as the impact of temporary factors wanes, but the timing and extent of that decline in inflation are uncertain due to the margin of spare capacity in the economy.

My Lords, in the final quarter of last year, we saw a reduction in GDP of 0.5 per cent, which is the thickening of a trend back towards recession, a trend that the UK alone is experiencing. Economic output is now at the same level as in the first quarter of 2008, and output is running 8 per cent below trend growth rates. Real incomes are being squeezed. The Governor of the Bank of England has forecast that they will be back to the level of 2005. House prices are falling and unemployment is rising. I put it to the Minister—

Members on the other side do not like these economic facts and it is not surprising that they react as they do. I put it to the Minister that the Bank of England is having to take risks on inflation because of the severe cuts in economic activity consequent upon the Government’s reckless fiscal policy.

My Lords, that was a nice long lecture. I think there was a question at the end of it. It is precisely because the Government took resolute and early action to restore the fiscal position to one that pulls us back from the brink of the disaster which the previous Government left us with that the Bank of England can conduct monetary policy on a prudent basis and, as I said in my earlier Answer, all forecasters that I know of are forecasting that inflation is likely to come back towards the target range.

As the Minister appears to agree with the Chancellor on almost everything, does he agree with the Governor and the majority of the members of the MPC that the interest rate should be kept at its present level?

My Lords, I will not fall into the trap of second-guessing the MPC. As I have said, the Monetary Policy Committee of the Bank of England runs monetary policy on an independent basis. That was an establishment of the previous Government to which I pay tribute. I am certainly not going to do anything other than restate the critical importance of the independence of the Monetary Policy Committee. It is up to the committee to decide how to hit the inflation target, which it is doing with the full confidence of the Government.

My Lords, does the noble Lord agree that the principal reason for having an inflation target was to bear down on domestic demand inflation, particularly wage inflation? Would he further agree that at the moment such pressure does not exist—wages are flat—and therefore it would be a mistake to put interest rates up primarily in response to external factors?

My Lords, I am grateful to my noble friend because, while again I will resist the temptation to second-guess the Bank of England, it has indeed attributed the recent rise in inflation, which has been significantly to the depreciation of sterling, to the increase in VAT which the last Government put in place and to the rise in energy prices. These are external factors.

My Lords, the noble Lord in his Answer earlier referred to temporary factors accelerating inflation and reducing the living standards of the British people. Is not one of the most important temporary factors that are accelerating inflation through the rest of this year the increase in VAT to 20 per cent?

My Lords, I absolutely did not refer to the reduction in anyone’s living standards. Absolutely at the heart of the Government’s response to the situation that we inherited is the need to get growth back into the economy, and we need fairness as we do it. That is why the Government are taking steps to take almost 900,000 people out of the tax net this April; that is why, under the coalition Government’s plans, 23 million taxpayers will be up to £170 better off next year than they would otherwise be; that is why we are reducing corporation tax from 28 to 24 per cent with other measures to make sure that we get the economy growing again.

My Lords, can the Minister confirm that the Government are nevertheless concerned about inflation? Does he recall the very wise words of the former Prime Minister the late Lord Callaghan, who reminded us in the 1970s that inflation is the father and mother of unemployment?

My Lords, I absolutely agree with my noble friend that the Government are concerned about inflation. It eats into the savings of people who did all the right and prudent things through the last decade. We are concerned and are taking actions to make sure that the hard working and lower-income families in this country are protected in the current difficult economic circumstances.

My Lords, is the noble Lord aware that the City correspondents seem to be briefed that the inflation increase is attributable significantly to employment incomes rising? In fact they are not rising because, according to the ONS, the statistics now include, for the first time, three public sector banks, which pay out about £25 billion to people. That has given the impression, incorrectly, that average workers in the public sector are getting an increase.

My Lords, forgive me but I did not quite follow the logic of all of that. All I can say is that, if we are talking about the City, the Treasury’s latest comparison of independent inflation forecasts from City and other commentators in mid-December shows that the City is forecasting inflation to come down to 1.8 per cent in 2012 and then to be steady at 2 per cent thereafter.