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Bank of England (Amendment) Bill [HL]

My Lords, it is a great pleasure to speak in this debate and have the noble Lord, Lord Saatchi, back with us taking a leading part in debates on economic affairs. It is also a great pleasure to see the noble Lord, Lord McIntosh, in his place, because the Bill takes us back to the heady days of the Bank of England Act, when we were establishing the Monetary Policy Committee. That now seems a very long time ago. I fear that the noble Lord, Lord Saatchi, claims too much for the role of inflation targeting in the current crisis. He contends that economic actors across the whole piece have been duped by the myth that low inflation meant that all restraint could be done away with. That is a very convenient myth, because it means that bankers, commentators, analysts and government can slough off any responsibility for what has happened because they were mere passive imbibers of the myth. There are many claims to be made for and against the way that the Monetary Policy Committee has worked and inflation targeting, but I do not believe that our current crisis can be laid entirely at that door. There are many other component parts of the crisis, lax regulation being one of them. To use Keynes's phrase, there are "animal spirits", the part that greed always plays when people think that they can get away with something. To claim that if only the inflation rate had been somewhat different, things would be completely different now is an overstatement. I do not think that the Bill would achieve what the noble Lord wants, for two reasons. First, it introduces a degree of ambiguity into the role of the Monetary Policy Committee. What are its members trying to do when they sit every month? The great advantage of having a single target and a single aim is that there is a clear focus to decision-making. If we say that when they sit, they should be thinking about growth and employment, we could justify a much wider range of interest rate decisions than is the case when they have a single target. It will be very difficult to get it right if they are aiming at a number of targets with a single club. I take the noble Lord, Lord Saatchi, back to the heady early days of the Thatcher Government. At that point, inflation was very high. The noble and learned Lord, Lord Howe of Aberavon, introduced a series of Budgets the consequence of which was to increase unemployment in the short term by reducing public expenditure. His justification for that—we can argue about whether it was good or bad—was to reduce inflation and to squeeze excessive expenditure out of the system. Let us go back to 1979, 1980 or 1981 and imagine that you are on the Monetary Policy Committee with the Bill of the noble Lord, Lord Saatchi, in force. Inflation is raging. What would you do that is different from what the noble and learned Lord, Lord Howe of Aberavon, did? Do you say, "If we put interest rates up, unemployment will go up, therefore we will not do it", or do you say, "Inflation is so important that we will focus on that and accept that in the short or even the medium term, unemployment will rise"? That takes me to my second criticism of the Bill, which is that having caused a muddle it would then, in many cases, have no effect. If you are in the situation that we were in the early days of the Thatcher Government and you want to drive inflation down, you will do that almost irrespective of the short-term consequences for growth and unemployment. So I disagree with that element of the noble Lord's argument. The element that I agree with, but which is not actually influenced one way or another by the Bill, relates to how you define inflation. When reading the FT on Wednesday, I thought for a moment that the noble Lord, Lord Saatchi, had been able to persuade Martin Wolf of the value of his Bill, because the headline on his piece reads: ""Central banks must target more than just inflation"." I thought, "Oh dear, he is going to completely shoot down my arguments and support the noble Lord, Lord Saatchi". Actually, he does not. He argues, and I agree, that you need a definition of inflation that deals adequately with asset bubbles. When I was a member of the Economic Affairs Committee in your Lordships' House, the Governor of the Bank of England repeatedly came before us and explained why it would be completely irresponsible to take any account of asset bubbles in judging inflation and in setting interest rates. He has now done a 180-degree U-turn and agrees that it is now vital that we do so. I am very pleased that he has. I agree that that element of what the noble Lord is talking about is absolutely crucial for the future, and I hope, given that the contagion with which we are now dealing has spread across the EU, that the EU will move more quickly to redefine the CPI to take account of asset bubbles. If that had been done, interest rates would undoubtedly have been higher over recent years, and that, to a certain extent, would have reduced the bubble. If the noble Lord is to deal successfully with future bubbles and future irrational exuberance, as we all seek to do, he must realise that interest rate policy is one part of the picture and different forms of regulation are another. As is often the case, I very much agreed with Martin Wolf in his article on Wednesday when he described a number of things that are "out". He says: ""the choice, in the short term, is certainly going to be 'inflation targeting plus' … 'In' is likely to be 'leaning against the wind' whenever asset prices rise rapidly and to exceptionally high levels, along with a counter-cyclical 'macro-prudential' approach to capital requirements in systemically significant financial institutions"." Those two things together—taking account of asset bubbles in inflation targeting and having a better macro-prudential approach to the banks—will be a much more effective constraint on irrational exuberance and animal spirits than the system that we have had to date, but I fear that the noble Lord's Bill deals with neither of those issues.