My Lords, I am sure that the whole House will wish to join me in congratulating the noble Lord on his 90th birthday. There are clearly two Barnett formulae. There is first the public one that we regularly discuss in your Lordships’ House, but secondly there must be a secret elixir that enables the noble Lord to continue to play an energetic part in our deliberations undiminished by the passage of the years. We wish him many happy returns.
The UK’s Monetary Policy Framework, set out in the Bank of England Act 1998, gives operational responsibility for monetary policy to the independent Monetary Policy Committee. The Chancellor of the Exchequer has frequent discussions with the Governor of the Bank of England on a wide range of issues in the UK economy.
My Lords, I thank the noble Lord for his initial comments. In the light of those, I had better be kind to him, but I am afraid that when he answered a similar question on 9 July, I believe that he misled the House on an important issue of the independence of the Monetary Policy Committee and the Governor of the Bank of England. I gather that he was depending on a command paper and on an exchange of letters between the Chancellor and the governor, but surely you cannot change a major Act of Parliament—the Bank of England Act 1998—by an exchange of letters and a command paper. That is clearly impossible. Can he explain how he has done that? The independence of the Monetary Policy Committee is important, as the new governor has told the country that he believes in long-term forecasts. He has forecast interest rates which clearly would be affected by QE, on which he is apparently being given unfettered power. Whether or not he has those powers, could the Minister explain and confirm that the Chancellor has agreed to allow the governor and the Monetary Policy Committee unfettered control over interest rates and QE?
My Lords, that is what the Bank of England Act says. The Monetary Policy Committee is operationally independent. The remit of the Monetary Policy Committee has to be set by the Governor of the Bank of England. It has to be renewed every year. It was renewed this year. The difference between this year and previous years is that the Chancellor asked the governor to look at possible methods of forward guidance which would give greater certainty to the markets about the medium-term movement of interest rates and, indeed, QE. That is exactly what the governor did, in line with the request from the Chancellor which was in line with the provisions of the Bank of England Act.
My Lords, I join in wishing the noble Lord, Lord Barnett, a very happy 90th birthday. He has asked an excellent question in that it relates to forward guidance. For a long time I have been saying that when setting interest rates the Governor of the Bank of England and the Monetary Policy Committee should look not just at inflation targeting but at the wider economy. This is excellent news. However, is it wise that the governor should tie himself down to a specific level of 7% unemployment, after which interest rates are to be raised, unless inflation is going out of control? When does the Minister think that the 7% will be achieved? Secondly, would it not have been wiser to have had a wider remit taking into account other aspects of the economy, not just inflation targeting?
As the noble Lord says, the governor is now looking at unemployment in terms of when interest rates might change, but there is no iron rule that the moment unemployment rates hit 7%, interest rates will go up. There are three potential arguments which would mitigate against that, of which by far the most important is if the outlook for inflation was higher. As to when we might reach 7%, in August when the Bank of England published its report suggesting this, it thought it would be in the third quarter of 2016. The good news is that since then the economy has grown more quickly, and the consensus is now settling around summer 2015.
My Lords, will the Minister cast his mind back to when your Lordships debated what is now the Bank of England Act? My noble friend Lord Barnett and I put down an amendment precisely to achieve the flexibility which is in this command paper. We were not told that the flexibility was already there, which is what the command paper says. We were told that we were idiots, and that the remit of the Monetary Policy Committee was to hit the inflation target—only after that could it look at anything else. The Government have produced a sleight of hand here. I favour it, let me add, but it is a sleight of hand.
Will the noble Lord consider the central question which arises in this context, bearing in mind that the two greatest liberal thinkers of the 20th century, Lord Beveridge and Maynard Keynes, both placed the attainment of full employment at the centre of government macroeconomic policy? Can the noble Lord tell us whether under the new regimen that we are now offered, there is any hope within my lifetime—younger Members may have something more to look forward to—that we shall at last get back to what those two great thinkers said: full employment is a must?
My Lords, I am sure that the noble Lord welcomes the fact that, for the first time, the Bank of England is looking at the employment rate as a way of deciding on the speed at which interest rates might change. I am sure he would agree, as Keynes probably would, that the quickest way to bring the rate of unemployment down is to get the growth rate moving more quickly. I am sure that he will be pleased that all the projections of growth are now being revised rapidly upwards. The IMF, for example, last week revised upwards its growth rate for this year from 0.09% to 1.4% and for next year from 1.5% to 1.9%.
In the discussions that the Minister is having with the Chancellor and the Governor of the Bank of England, are they focusing on what the extent is of imported inflation or deflation compared to domestic inflation? It was largely a failure to understand that domestic inflation was far higher than the mixed bag that led monetary policy under the previous Government to go off the rails.
My Lords, in recent years, there has been a very different mix of imported and domestic inflation, and we have not seen any significant degree of domestically generated inflation. That remains pretty much the same today. Fortunately, we are a very long way from the 1970s and 1980s, when domestically generated inflation was the single biggest problem of macroeconomic management.