---

Bank of England (Amendment) Bill [HL]

My Lords, I pay tribute to my noble friend Lord Saatchi for yet again challenging the House. I wish that he would spend more time in your Lordships' House enlivening our debates. As my noble friend reminded us, the issue that is addressed by his Bill was debated at length when the Bank of England Bill 1998 was considered in your Lordships' House and in another place. Some wished the price stability objective to be subordinate to the Government's general economic policy and others wanted to link them together more firmly. The Government did not budge then and, indeed, have batted away the intermittent questioning of the monetary policy objective ever since. I think it fair to say that the Government have had more trouble with those on their own Benches than they have with us on these Benches over the years. The noble Lord, Lord Barnett, who unfortunately cannot be in his place today, has raised this issue frequently. In preparing for this debate, I sought to answer the hypothetical question: if the Act had been phrased in the way in which my noble friend's Bill suggests, would the Bank of England have acted any differently? Would we have avoided at least some of the economic mess in which this country is now mired? I am not convinced that the policy outcome would have been better. There were calls throughout the period when interest rates were around 5 per cent for them to be cut in order to support one or other sector of the economy. It was always alleged that growth in the business sector was being held back because of the impact of interest rates—the CBI and other business groups were vociferous about this—but if interest rates had been cut at that point, monetary policy would have been looser, which would have added further fuel to an already overheated economy and to asset prices. We would therefore not have avoided the bust that we are now in. I do not believe that the Bank's monetary policy objective has been handled perfectly. For example, the decision by the then Chancellor to switch the inflation target from the RPIX to the CPI undoubtedly loosened monetary conditions at the wrong time. Moreover, as my noble friend and the noble Lord, Lord Newby, reminded us, asset prices are not captured at all in the target, which means that asset price bubbles can grow unhindered by a policy response. Even if these asset bubbles are noticed, asset prices are not a focus of policy. Neither of these issues—the change to the CPI and the absence of asset prices—would have been cured by the change in wording that my noble friend's Bill proposes. If there is a weakness, it is the way in which the Government specified inflation to the Bank, rather than the Act itself. There are also questions about the Bank's ability to forecast inflation two years out, which is how the Monetary Policy Committee has generally interpreted its price stability remit. The Bank made forecasts of inflation and of other economic variables, such as growth, and its record cannot be regarded as outstanding. The Bank will doubtless say that the global credit crunch invalidates a comparison between what has been forecast in the past and what has actually turned out, but there remains an uncomfortable fact that the Bank did not see the economic downturn or its severity. It is not alone in that, but it cannot claim any forecasting high ground. As two-year forecasts are a prime driver of interest rate policy, this is a serious issue. My noble friend Lord Higgins, who also cannot be in his place today, has often reminded us that monetary policy is much more than interest rates, which control the price of money, and he has urged the importance of a focus on the money supply. The Bank of England has statistics on the money supply, but the question in the absence of a target or a benchmark is whether it got the prominence that it needed. Certainly it seemed not to until the money supply growth ground virtually to a standstill. We have a longish list of other things that we need to look at again in relation to the Bank of England. Some of these were debated during the passage of the Banking Act earlier this year when I moved some amendments which the Government rejected. We do not believe, for example, that the tenure and reappointment provisions for the Governor are optimal in the context of supporting the independence of the Bank of England. We believe that the Bank should be given a more prominent role in financial stability, and in particular should have a formal ability to call time on debt, and we are not convinced that the tripartite arrangements, even after the Banking Act, are robust enough to prevent future banking crises. We are also far from convinced that the new arrangements for the Financial Stability Committee are well designed. I am not saying that the idea behind my noble friend's Bill is not worth examining further. I think it would be a good idea to review very carefully all the issues that surround the Bank of England and the tripartite authorities and to consult widely on whether changes and further legislation are necessary. On the basis that the next general election turns out in the way in which my noble friend and I fervently desire, I cannot promise him that our party will have this as one of our priorities. He will well understand that there are many other pressing issues surrounding the economy, as we debated at length yesterday. However, I am quite confident that he will continue to remind us of the inadequacies of the Bank of England's remit, and I hope that he will get a more sympathetic hearing from the Treasury team that will be in place in a little over a year's time than I anticipate he will get from the Minister today. In the mean time, I have a suggestion for my noble friend. Last year, he authored a Centre for Policy Studies pamphlet, entitled Enemy of the People, which contained a devastating critique in the form of a charge sheet based on the Prime Minister's tax and benefit policies. There were seven counts on the charge sheet. I do not suppose that the Minister has read it but, to give him a flavour, the first count was: ""Conspiracy to enslave United Kingdom citizens by making them unnecessarily dependent on the State"." I do not think that the Bank of England's remit will of itself provide such a dramatic charge sheet, but it would be interesting, if my noble friend had the time available, to create a similar charge sheet to capture the Prime Minister's role in the creation of asset bubbles, overindebtedness and boom and bust generally. The Bank of England is part of that. My noble friend is much more inventive than I am, but I suggest something along the lines of: "Conspiracy to impoverish UK citizens and to burden them with debts for a generation".