My Lords, the Bank of England Act 1998 already gives powers of operational responsibility for monetary policy to the independent Monetary Policy Committee of the Bank of England. The Act requires the Treasury to specify the objectives of the MPC at least once every 12 months. The Chancellor set the remit for the MPC at Budget 2012 to target inflation of 2%, as measured by the 12-month increase in the consumer prices index.
My Lords, there have been widespread reports that the Chancellor was looking at that remit with the possibility of changing it. I appreciate that it may have been only a Lib Dem Budget leak but is it true and, if so, what does he propose to do about that kind of leak? Does the Chancellor, as has been said, believe in a looser monetary policy, and has he told the new Bank governor that that is what he wants him to do?
Does my noble friend agree that there is sometimes confusion between interest rate policy and monetary policy? Can he say what the Government’s policy is in relation to their own actions and those of the Bank of England as far as the quantity of money is concerned?
My Lords, bearing in mind that Section 19 of the Bank of England Act 1998 gives reserve powers to the Treasury to give directions to the Bank of England, am I right that those powers have never been used? I am pretty sure that I am right. Does it not follow that the failure—despite the fact that the Act says that this is the MPC’s objective—to hit the inflation target for three years without the slightest sign that it will be hit for the next two years, coupled with monetary easing, is down to the MPC?
My Lords, inflation has been higher than the 2% target for a number of years. The MPC has taken the view that the target would be met in the medium term and that, because the principal reasons for inflation did not include excessive domestic demand and are therefore less capable of being moderated by increases in our own interest rates, it was wiser to “see through” the temporary increase in inflation above 2% but to work, as the MPC has, on the basis that, in the medium term, inflation would indeed come down to 2%.
My Lords, Paul Tucker has floated the notion that the Bank of England could charge banks for holding reserves at the Bank as an incentive to get them to lend to the real economy. Is that an issue that has been actively discussed with the Treasury and what is the Government’s view?
My Lords, from what the noble Lord has said, the Treasury has clearly been content with the policy pursued by the Monetary Policy Committee over the past three years. Is the noble Lord also content with the impact of that policy on pensioners’ annuities?
My Lords, the Government’s view is that it is in the long-term interests of everybody, including pensioners and families, that we deal with the deficit and get growth going on a sustainable basis. In the short term, the Bank has taken the view that to keep within the inflation target and, subject to that, to support the economic policy of the Government, including their objectives for growth and employment, it should keep interest rates low.
My Lords, does the noble Lord agree that many people increasingly feel that the brief given to the American Fed, which is rather wider than the brief given to our Monetary Policy Committee, would be advantageous? Instead of looking solely at inflation, it would enable the Monetary Policy Committee to examine the effect of high interest rates on the rate of exchange. The pound has been kept higher than its purchasing power parity for years and, as a result, we have a huge trading deficit. A trading nation really ought to look seriously at its rate of exchange, which ought to be one of the factors that a new remit should cover.
My Lords, has the Minister noticed that the Deputy Governor of the Bank of England has floated the idea that banks should be entitled to charge negative interest on savings? Even the new Governor of the Bank of England, when he was in Canada, was apparently within days of allowing such a policy. This would be immensely damaging to savers. Will he put this to rest, immediately and unequivocally, and say that there is no possibility of the Government sanctioning any such idea?
My Lords, an awful lot of ideas have been floated recently but the key remit for the Bank of England is set by the Chancellor. Within that, the Bank has operational independence on how it follows that remit. The remit has not changed but the Bank of England, with or without a new governor, always looks at questions in the general area of monetary activism.