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Banking Bill

At present the definition of price stability is specified in writing to the Bank of England at least every 12 months and is not specified or restricted in any way in the Bank of England Act 1998. The Chancellor last wrote to the Governor of the Bank of England on 11 March 2008 to specify the inflation target as 2 per cent as measured by the 12-month increase in the consumer price index. It would be inappropriate for this mechanism to be constricted by the Act in the manner suggested. It is important that monetary policy decisions are based on the most relevant and accurate measure of inflation. To meet this objective there has been only one change in the inflation target since the inception of the MPC, in 2003. The proposed amendment would remove the existing flexibility, which could be to the detriment of the monetary policy framework. The inclusion of the cost of property assets is one of the most challenging areas in constructing a consumer price index and has been debated at great length by economists and statisticians around the world. Its inclusion is even more challenging in the UK, where the current target measure of inflation, the consumer price index, is harmonised across more than 30 European countries, as the noble Lord, Lord Saatchi, acknowledged. The independent Office for National Statistics and national statistical offices of other European member states are working with Eurostat, the statistical office of the European Community, to assess the most appropriate approach to including in future an index of owner-occupied housing costs in the CPI. However, at present there remains no international consensus on how to include the cost of property assets in this calculation. The noble Lord, Lord Saatchi, said that they should get on with it. I thoroughly agree, as did the Chancellor of the Exchequer in his recent Mais Lecture. While there exists no suitable measure of inflation that includes the cost of property assets, the noble Lord’s amendment would not only remove the flexibility which benefits the current monetary policy framework; it would damage the framework by forcing the adoption of an unsuitable inflation measure. I thank the noble Lord, Lord Newby, for reminding us that in the world of central banking there has been considerable scepticism about whether it is possible to control both consumer price inflation and asset inflation through interest rates. Mr Alan Greenspan was clearly of the view that it could not be done and suggested that the best that the Federal Reserve bank could do would be to clear up the mess after asset bubbles had burst. He has now reflected on whether that was the right conclusion and has reconciled his earlier observations with reality by suggesting that he made assumptions about the behaviour of employees and boards of directors in banking organisations that proved to be too theoretical and lacking in a full awareness of human behaviour. The Governor of the Bank of England, Mr Mervyn King, expressed similar doubts in the past about the wisdom of the Bank of England seeking to control market valuations. However, there has been a change of view in the central banking community throughout the world. It is possible that the time will come for the amendment of the noble Lord, Lord Saatchi. He may require a more complex series of proposals to achieve his goal. However, it is entirely laudable to aspire to his objective of ““never again””. We should draw inspiration from that goal. However, at this stage his amendment is premature. The next trigger point may be a report from Eurostat and other statistical bodies, including our own national statistical office, on mechanisms by which owner-occupied housing could be incorporated into an inflation index. If a consensus emerged around that, the Chancellor of the Exchequer would be bound to take it into consideration in determining how to phrase the inflation objective. But until that work is complete—I repeat that I share with the noble Lord, Lord Saatchi, a wish to see them press on and bring this work to a conclusion—it would be too soon to go as far as his amendment suggests. Therefore, I would respectfully ask him to withdraw his amendment.