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Banking Bill

As we heard, Amendment 198A would change the objective of the Bank of England in relation to monetary policy. I welcome the noble Lord’s considered, measured and sincere expression of views on a matter on which I know he has been much exercised for some considerable time. As noble Lords will no doubt be aware, and as the noble Lord, Lord Saatchi, has already explained, Section 11 of the Bank of England Act 1998 states that the Bank’s objectives for monetary policy are maintaining price stability and, ““subject to that””—the offensive words—supporting the economic policy of Her Majesty’s Government, including its objectives for growth and employment. The amendment would make these two objectives equal in weight. As the Government reaffirmed in the 2008 Pre-Budget Report, the existing monetary policy framework remains the right approach for these challenging economic circumstances. Its design gives the independent MPC the means to deliver price stability while avoiding unnecessary volatility in output. I do not agree that it would be beneficial to the UK’s economic policy over the medium term to amend the objectives of monetary policy and, in effect, to give the Monetary Policy Committee a dual mandate. As the noble Lord, Lord Newby, suggested, there would be one instrument and two targets. First, price stability is the MPC’s primary objective, with good reason. Price stability is a pre-condition for growth and full employment, so it must be achieved first and foremost if economic stability is to be secured. Secondly, the amendment is unnecessary as the remit for the MPC already provides for the committee to respond flexibly in difficult economic circumstances. The 1998 Act states that the Treasury shall, by notice to be provided in writing to the Bank at least once in every 12-month period, "““specify for the purposes of section 11 what price stability is to be taken to consist of, or … what the economic policy of Her Majesty’s Government is to be taken to be””." The Chancellor last wrote to the governor stating the purposes of Section 11 at the 2008 Budget. The remit letter stated: "““The framework takes into account that any economy at some point can suffer from external events or temporary difficulties, often beyond its control. The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the … target in these circumstances may cause undesirable volatility in output””." I also refer the noble Lord to the minutes of MPC meetings, which show the importance of GDP growth influencing inflation as a factor underpinning the committee’s interest rate decisions. I think that noble Lords will find that that is a consistent element in the MPC’s minutes. Thirdly, giving the MPC a dual mandate, with equal priority for both price stability and economic growth objectives, would risk markets and the public doubting that the MPC would act resolutely on inflation if there could be negative short-term consequences for growth, which could destabilise inflation expectations. This was clearly at the heart of the discussion in this House when the Bill was first debated. Inflation is pernicious; it steals from the weak and at times gives to the reckless. It is not something on which the Government would want to take a risk. We believe that commitment to a low and stable rate of inflation, as delivered by the MPC with much credit to the Bank of England and the members of the committee over the past 10 years, has played an important part in a period of exceptional, consistent economic growth. That period of growth has come to an end as a consequence of global factors. We found ourselves in a recession alongside most of the world’s major developing countries. It is difficult to believe that that can be laid entirely at the door of the MPC, let alone three words in the Act. Accordingly, I respectfully suggest to the noble Lord that he considers withdrawing his amendment, but before doing so, he might wish to speak to Amendment 198B.