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Bank of England: Interest Rate Policy

Volume 831: debated on Wednesday 12 July 2023

Private Notice Question

Asked by

To ask His Majesty’s Treasury what assessment they have made of the impact of the Bank of England’s interest rate policy.

My Lords, we constantly monitor the UK economy’s performance and outlook, and we acknowledge the pain that rising interest rates are causing for many households. However, setting interest rates is the responsibility of the independent Monetary Policy Committee of the Bank of England. The Government do not comment on the conduct or effectiveness of monetary policy. We will continue to support the MPC as it takes action and focuses on making the tough decisions necessary to tackle inflation.

My Lords, I fully understand the need to respect the independence of the Bank of England, but that it is not the same as denying it being subject to proper accountability. The Bank of England was responsible for a huge increase in the money supply through quantitative easing—which resulted in part in the inflation that we are now experiencing—despite warnings from Andy Haldane, its chief economist at that time, that that would result in inflation. Andy Haldane is now suggesting that there may be an overreaction and overcorrection in putting interest rates up to the extent that they are being. This will cause misery to millions of people. The Bank of England should surely be accountable for this.

My Lords, I agree with my noble friend that the Bank of England should be and, indeed, is accountable for the decisions that it makes, but it is not for government to comment on the conduct or effectiveness of monetary policy. He is right that high levels of inflation and, therefore, high interest rates, are causing pain. That is why the Government are taking action to support people at this difficult time, including the mortgage charter, agreed by my right honourable friend the Chancellor, that covers around 90% of the market and gives people options when they are facing higher mortgage rates to make sure that their payments continue to be affordable.

My Lords, I have great sympathy with the Question from the noble Lord, Lord Forsyth. I would like to hear from the Minister that there will be no attempt to compromise the independence of the Bank of England, but that that does not mean that improvements cannot be made; for example, to counter what many of us think is an underlying flaw of groupthink and lack of diversity that leads the Bank to decisions that could be made more optimal with a different set of parameters.

Does the Minister also recognise that the Government themselves could influence inflation far more effectively if they focused on doing so? For example—to name just three actions—they could have dealt with the staff shortages that have so driven inflation; they could have done a great deal more, much earlier, to deal with price gouging by many of our major supermarkets; and they could have kept in place the energy price support scheme, which helped SMEs hold down their prices. Will the Government then take responsibility for their share in not taking those steps to stem inflation?

On the noble Baroness’s first point, my initial Answer set out that the Government continue to be committed to the independence of the Bank of England. She is right that government policy can also affect inflation. The OBR said that the energy price guarantee brought inflation down by around two points. Our labour market supply measures, including expanding access to childcare, were the biggest supply side impact in a Budget that the OBR has ever measured. If we were to provide direct subsidies to mortgages, as the Liberal Democrats propose, that would have an inflationary effect, meaning that interest rates would be higher for longer.

My Lords, if the Government feel unable to comment on Bank of England policy, to whom is the Bank of England accountable?

The Bank of England is accountable to both the Government and Parliament. The noble Baroness referred to a report being done by the Economic Affairs Committee in this House. I am sure we will pay close attention to the outcomes of that.

Has it occurred to my noble friend’s Treasury colleagues that the stream of increases in Bank of England interest rates is both deflationary, obviously, and inflationary, in that every 1% increase in the interest rate adds between £15 billion and £20 billion to government debt servicing? Also, since the Government have up to £30 billion or £50 billion per increase in the RPI level, any impact of these interest rate increases on RPI further increases government spending. We really are looking at a double-edged sword. Other, more direct measures are obviously needed to reduce RPI, the pressure for pay demands and all sorts of other inflationary effects.

While I will not be tempted by my noble friend to comment on the conduct of monetary policy, I agree that, in the context of high inflation, fiscal responsibility and keeping government borrowing under control are absolutely essential. That is why the Government are committed to that.

My Lords, what is it about the Government’s handling of the economy that means that, with near 0% growth, inflation is still high, despite the Prime Minister promising to halve it, and higher for longer in the UK than in many similar economies? How does the Minister think that 1 million households facing a £500 a month increase to their mortgage payments by the end of 2026 will cope? How concerned should we be at the Government’s voluntary agreement with the banks, which means that over 1 million households will miss out on the support that Labour’s mandatory scheme would have brought?

My Lords, growth is better this year than predicted and expected by some. The UK is not alone in facing high inflation. Core inflation in the UK is lower than in more than half of Europe, but we face particular underlying factors that interact with the global challenges causing inflation. The energy shock has been felt more keenly in the UK because of our historical dependence on gas, and we have labour market tightness, due in part to a rise in activity during the pandemic. That is why we are focused on measures to tackle these problems. I talked about the energy price guarantee, which brought down inflation by around two points, and our measures to address childcare. I say to the noble Baroness, reflecting the point from my noble friend, that fiscal responsibility and government borrowing have a part to play in this. That is why Labour’s plans to spend £28 billion a year of additional borrowing would be inflationary and make the problem worse.

My Lords, would the Minister not agree that, although independence of the Bank of England is all right, what we need is competence? The Bank of England was more competent when it was not independent than it is now when it is.

Much as noble Lords continue to ask me to comment on the conduct of monetary policy by the Bank of England, as I said, the Government do not comment on the conduct or effectiveness of monetary policy. We continue to support the MPC as it takes action, and we focus on making the tough decisions necessary to tackle inflation.

My Lords, does the Minister not realise that this mortgage rate misery comes on top of the huge increase in the cost of energy and the continued increase in food prices and other costs? How do the multi-millionaires who run this Government find out how ordinary people are affected?

The noble Lord does not reflect on the action that has been taken by this Government that has supported those who struggle most to meet the rising cost of living, with more than £90 billion of support last year and this year focused on those who need it the most, including the energy price guarantee, direct support with energy bills and cost of living payments worth hundreds of pounds to millions of families across the country.

Is the Minister aware that the Select Committee has received abundant evidence that central bankers talk too much?

I am not aware of all the evidence that the Select Committee that the noble Lord refers to has received, but I am sure that once the Select Committee produces its report the Government will read it with interest.

My Lords, many people recognise that we have an independent Bank of England, but we also have a Bank of England that is supposed to meet a target of 2% inflation. Given that the Bank has continuously failed to meet that target—I understand also that government can contribute to this—one would expect the Bank either to comment on government policy which it saw as inflationary or, at the same time, to be accountable for not holding to its target. Given what the Minister says about tempting her or otherwise to talk about the Bank of England and its policy, it is important that people understand that when the Bank fails to meet its target it has to be held accountable to someone, and many noble Lords have not seen that accountability.

My Lords, when the steps were taken to make the Bank of England independent, measures were also put in place to ensure that it is accountable to the Government and to Parliament for its decisions.

My Lords, the Minister has referred to the drivers of inflation, but she did not mention greedflation—the fact that, as the OECD figures which came out this week show, British company profits were boosted by almost one-quarter between the end of 2019 and early 2023, faster than nearly any other state’s. In the last Question, we referred to the fact that we have a huge lack of competition across our economy. Four, five or six big companies dominate all the sectors, often cross-owned by hedge funds. Are the Government going to do something about greedflation?

While the Government do not recognise the picture that the noble Baroness has painted, we are looking carefully at the data and ensuring that competition is working properly. That is why my right honourable friend the Chancellor met the major regulators last week or the week before, I believe, and agreed a plan of action in each of those areas to ensure that consumers are getting a fair deal.

My Lords, on the subject of talking too much, as the noble Lord, Lord Rooker, has just raised, how helpful was it when the Prime Minister at the beginning of this year set a personal pledge to halve inflation from 10% to 5% when the Bank of England was forecasting 3.9% and holding a target of 2%? What does that do for the credibility and independence of the central bank?

My Lords, the Government have always been clear that we want to halve inflation by the end of this year on the path to delivering the 2% target to which the noble Lord referred. The primary driver for that is action by the MPC, which the Government support, but it is also important that the Government make sure that fiscal policy acts in support of monetary policy and that we take action in the short term to bring down inflation; for example, through the energy price guarantee. It is important too that we take action on some of the longer-term drivers of inflation; for example, through improving energy security and supply and tackling things, such as labour supply, which are part of the drivers of where we are today.