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Monetary Policy Committee

Volume 729: debated on Wednesday 6 July 2011


Asked By

To ask Her Majesty’s Government whether they will maintain the inflation target as the primary criterion of the Monetary Policy Committee.

My Lords, the Bank of England Act 1998 states that the objectives of the Monetary Policy Committee of the Bank of England are to maintain price stability and, subject to that, to support the economic policy of the Government. The Chancellor reaffirmed in Budget 2011 that the MPC will continue to target 2 per cent inflation as defined by the 12-month increase in the consumer prices index.

I thank my noble friend for that Answer—and take it as a yes. In the light of that, what response are the Government giving to the stream of letters of apology from the Governor of the Bank of England for not meeting the inflation target?

My Lords, it is part of the discipline of the way in which the Monetary Policy Committee operates that it is required to write letters to the Chancellor when inflation is outside the target range. The most recent exchange of letters was in May 2011, in which the Chancellor recognised the factors driving short-term inflation, including, particularly, the very high commodity prices. However, it is important to recognise that the MPC’s mandate enables it to look through short-term movements in prices towards a medium-term target.

My Lords, as the Minister said, the Bank of England has two monetary policy objectives: to deliver the inflation target, currently set at 2 per cent, and to deliver growth—and to be accountable to the Treasury and Parliament for doing so. On which of those two objectives does the Minister think the governor and the Bank of England are doing best?

I would always hesitate to hold up and criticise the characterisation of the Bank of England MPC’s target by the noble Lord, Lord Myners. However, as I have made clear, it has one primary target—to maintain price stability, with the target that I have already confirmed—and it is doing a fine job in extremely difficult circumstances, when oil prices are 40 per cent higher than they were at the end of last year and agricultural prices are 60 per cent higher than a year ago. Against that background the MPC is doing a fine job in very difficult conditions.

Having not got an answer on the first Question, I shall try again. Would my noble friend agree that much of the problem is that the present inflation is imported rather than domestically generated, and that needs to be taken into account in making these decisions? None the less, the MPC also has responsibility for growth. Given the low rate of growth, and the low rate of growth in money supply, is there not a further case for more quantitative easing?

I apologise to my noble friend for cutting him off earlier, but I am glad that he has got in now. It is certainly a bit of a puzzle that there is continued weakness in broad money growth at a time when nominal GDP is growing. I am no macroeconomist, but when I look at the tables I see that, among other things, the velocity of the circulation of broad money is increasing. I cannot see behind me to see whether my noble friend is nodding, but I think he is, so I am all right on that one. Any question of additional quantitative easing or withdrawal of quantitative easing will be decisions for the MPC whenever it sees fit.

My Lords, would the Minister agree that increases in commodity prices and oil prices affect the economy of France, Germany and the United States just as much as they do of Britain? Why then is Britain’s inflation rate more than twice that of France, twice that of Germany and significantly greater than that of the United States?

My Lords, the really important thing here is that the inflation expectations remain very low. All the range of forecasters is predicting that inflation will come down to the range of 2 per cent to 2.1 per cent in 2012 and beyond. That is the critical challenge for the MPC, in which it has the market’s confidence, and that is what underpins the very low interest rates that we continue to enjoy. We suffer, inherited from the last Government, a deficit the size of Portugal’s, but we have interest rates at the level of Germany’s.

My Lords, we have time for both noble Lords. We can have the noble Lord, Lord Newby, and then the noble Lord, Lord Maples.

My Lords, does the noble Lord agree that at a time when real incomes are falling, if the Bank of England Monetary Policy Committee were to raise interest rates now the principal effect would simply be to reduce growth and increase unemployment?

Would the Minister agree that we are fortunate that the Bank of England has taken account of the fragility of output and employment in the UK economy, and will he assure us that the Government will also take account of that fragility in setting their own policy?

My Lords, I can confirm the first part of what the noble Lord, Lord Stern, says. What the Government will do is to stick to a very firm, clear deficit reduction plan as the background against which the Monetary Policy Committee can make its decisions with confidence.

My Lords, consumer price inflation is only one measure of inflation. May I suggest that if in the run-up to the crash the Monetary Policy Committee had been looking at asset price inflation—

My Lords, there are two noble Lords trying to speak. We are on 22 minutes and perhaps we should go on to the next Question.