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Bank of England: Monetary Policy Committee

Volume 747: debated on Tuesday 9 July 2013


Asked By

To ask Her Majesty’s Government what is the Chancellor of the Exchequer’s assessment of the latest statement by the Monetary Policy Committee of the Bank of England.

My Lords, the Bank of England Act 1998 gives powers of operational responsibility for monetary policy to the independent Monetary Policy Committee of the Bank of England. The updated MPC remit set at Budget 2013 by the Chancellor requests the MPC to provide an assessment of the merits of using intermediate thresholds in monetary policy in its August 2013 inflation report, which will be published on 7 August.

My Lords, in the House last week, in answer to me, the Minister quoted the Prime Minister as saying at the G8 that the UK Government were “supporting … [an] active monetary policy”. How can he say that when it is not their responsibility? Is it because the new governor is virtually unsackable at the moment? Or is it that the Government are simply not interested at all in monetary policy? The new governor took his first meeting, to which the Minister referred. During the meeting, unusually for a governor, he gave some guidance and said that interest rates would be low for a long time, and could even go a little lower. In those circumstances, the pound dropped substantially. Some people are very happy with that. Is the Chancellor?

My Lords, on the first point, the Government updated the remit of the Monetary Policy Committee at Budget 2013 to give it greater powers to clarify the trade-offs that are involved in setting monetary policy to meet a forward-looking inflation target. That is what the governor and the Monetary Policy Committee will do over the coming months. On exchange rate policy, as the noble Lord knows, the previous Government did not have a policy for an exchange rate, and this Government do not have one, either.

My Lords, perhaps the Minister will comment on one aspect of the asset purchase scheme—quantitative easing—about which there has been some argument. When the original document setting up the asset purchase scheme was signed, and it was made consistent with the Bank of England Act 1998, was it set down that increases in the scale of the asset purchase scheme required the agreement of the Government, and that while day-to-day monetary policy may be the responsibility of the Bank of England, an increase in the scale of quantitative easing would require endorsement by the Government? Is that correct?

My Lords, my understanding is that it is for the MPC to decide on the scale of quantitative easing. As my noble friend will know, there is a Treasury representative at all meetings of the MPC. That representative is allowed to speak but does not have a vote.

My Lords, last week the New Economics Foundation suggested a new approach to quantitative easing. It suggested channelling investment directly into housing infrastructure and SME lending. Does the Minister agree with that suggestion?

My Lords, the Government are looking at a number of ways of increasing investment in all those areas of infrastructure. We set out in the spending review our plans for doing that in 2015-16 and subsequently. Plans or programmes already in place, such as the finance for lending scheme, are already having a significant impact on new housing construction.

My Lords, would not a word of caution be apposite at this time? Is not the American experience—where it has been difficult for the Federal Reserve to press on the monetary brake without destabilising the markets, as we have seen—a lesson that we need to learn for the British economy, particularly if there is any pick-up at all and the possibility of rising inflation?

My Lords, the American experience demonstrates how tricky it is for central banks to give forward-looking guidance without it having an effect on the market. However, as the MPC said at its meeting just last week, it viewed the implied rise in the expected future bank rate as not warranted by recent developments in the domestic economy. It is trying to be cautious and reduce any potential volatility.

My Lords, the world’s biggest gilt brokers, PIMCO, wrote about four weeks ago, as reported in the Financial Times, that the new Governor of the Bank of England would have only one shot in his locker, and that is to let the pound depreciate. Is it such a bad thing if, after 30 years, a trading nation begins to consider the rate at which it trades with the rest of the world? Is not our failure to look at the rate of our exchange in the past one of the reasons why we have such a high imbalance of trade?

My Lords, the pound has fallen in value against other international currencies by about 20% in recent years and that has not automatically had a vast impact on the balance of payments. There are considerable signs of optimism about that. For example, exports in goods to the EU increased by almost 7% last month. However, I think that recent experience has shown that devaluation on its own does not cut the mustard—we also need to have a whole raft of supply-side measures in place. That is why things ranging from the additional resources to UKTI, at one end, to bringing more money into science and apprenticeships, at the other, are necessary if we are to have a significant improvement in the balance of payments.