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Bank of England

Volume 742: debated on Tuesday 22 January 2013


Asked By

To ask Her Majesty’s Government whether they agree with Mark Carney, the new Governor of the Bank of England, that the Bank’s target should be changed from inflation to nominal gross domestic product.

My Lords, the Chancellor set the remit for the Monetary Policy Committee at Budget 2012 to target inflation at 2%, as measured by the 12-month increase in the consumer prices index. The Government have no plans to change the inflation-targeting framework.

That was not really an Answer to my Question. I understand what is in the current Monetary Policy Committee target and that it has not changed. However, is the Minister aware that the ONS has recently found that GDP—real GDP, that is—was 3% less than it was before the recession and that growth, as most forecasters are saying, is not likely to be very good? So at least it would be helpful—if anybody can do anything about it—if the man whom the Prime Minister described as the best in the world was given these additional powers. Does this mean that if the Governor took those powers to himself, the Chancellor would override them with the current powers that he has?

My Lords, the Question that has been raised, about whether to change the inflation target, is an important one. Before any change is made, however, the question that we have to answer conclusively is: what could the MPC do under that target that it cannot do now? A debate is currently going on that is academic in part and in which all the commentators are involved. For the time being, however, we see no reason to change the current framework.

My Lords, the Government should be congratulated on appointing Mark Carney and for the first time bringing in somebody from outside the United Kingdom to serve as Governor of the Bank of England. It shows not only what an open country and economy we are but that we can get a fresh input of ideas—such as the suggestion that we should look at GDP as a target as well as interest rates. I think that the noble Lord, Lord Barnett, probably meant to ask whether the Bank of England should look at inflation targeting as well as targeting GDP—as the Fed in America always has—to help growth in the economy.

My Lords, I am extremely grateful to the noble Lord. The House will be aware that under the Bank of England Act the MPC has to meet, or aim to meet, an inflation target. Subject to that, it has to aim to promote the Government’s broader economic objectives. It is worth pointing out that in the past 20 years, the vast bulk of which have been conducted under the current regime, we have had an inflation target of 2%, inflation having been one of the main economic problems facing this country over recent decades. Against a target of 2%, the outturn has been 2.1%, so it has been a pretty effective target.

My Lords, would the Minister care to reflect on the irony of what he and government spokesmen are generally saying? The Europhobes on the government Benches are terribly upset with the idea that Brussels wants to get, and is getting, too involved in the determination of our economic policy, but is not our economic policy being driven by a quite different group—namely the credit rating agencies, which have no democratic legitimacy whatever and whose operations would not bear the slightest scrutiny if ever we were able to examine them properly? Is it not about time that the Government put the needs of our economy first and not the needs of the credit rating agencies?

My Lords, the Government do not put the needs of the credit rating agencies first. The Government are seeking to promote growth within a stable framework while reducing the deficit. We do not know what the credit rating agencies are going to do, but I can assure the noble Lord that people in the Treasury are not spending every night awake worrying about them. They are expending their efforts on promoting growth on the basis of a reducing budget deficit and a credible long-term macroeconomic policy.

My Lords, is it not obvious to everyone that inflation targeting has failed? The Bank of England has consistently failed to meet its inflation targets and we have zero growth in the economy. Would it not be sensible for the Government to listen to Mr Carney’s suggestions?

My Lords, the Government will listen to Mr Carney’s suggestions. Mr Carney has said that he will not comment on the position in the UK until he arrives. His key speech on this issue was made in February last year before he was appointed. In that speech, he said among other things that,

“if nominal GDP targeting is not fully understood or credible, it can, in fact, be destabilizing”.

There is no quick and easy answer—

There is no quick and easy answer to dealing with these issues, but the Government will listen very carefully to what Mr Carney says when he arrives.

My Lords, is it not abundantly clear that monetary policy can only do so much and that the whole question of the rate of inflation is marginal to our position in terms of the need for growth in the economy, as the noble Lord, Lord Forsyth, indicated? When will the Government realise that, as we tremble not on our fiscal cliff but on the brink of the possibility of a third recession, it is necessary to address the real economy and abolish plan A?

My Lords, I do not think that people struggling to make ends meet think that inflation is irrelevant. Keeping inflation down is a central aim of government policy. In terms of what is happening in the broader economy, I remind the noble Lord that the CBI industrial trends survey published today echoes the views of the British Chambers of Commerce quarterly economic survey published a couple of weeks ago: namely, that there is an improvement in confidence; that orders are increasing; and that employment expectations are improving. The noble Lord should not overdo the doom and gloom.