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Mr. John D. Taylor (Strangford): I am thoroughly enjoying the right hon. and learned Gentleman's speech and I agree with most of it. However, I do not understand the consistency of being against an independent bank in the United Kingdom but in favour of control by an independent bank in Europe.

Mr. Clarke: Making a European central bank politically accountable internationally would probably require an international council of Ministers, which, as the French wish, would produce more political intervention. If there is a European central bank and if we participate, I should prefer us to build on the point that I was making. Accountability to Parliament did not previously involve the House of Commons holding the Chancellor to account the day after an interest rate increase. I cannot remember that happening. Accountability for monetary decisions depends on openness and transparency.

There is a great deal to be decided about the European central bank. It has to determine its monetary targets and its inflation target if it wants one. It has to decide how it will proceed. There is no reason why Europeans should be more hesitant than Americans in demanding proper minutes and that individual governors should proclaim their opinions. There must be proper openness in their discussions. The Treasury Select Committee should be no less hesitant about interviewing the governor and members of the executive committee of a European bank than it is about the Bank of England at the moment, particularly if the Governor of the Bank of England is one of the members. That is how the Bundesbank operates. The members of the board are the heads of the state banks of the various Lander. They offer themselves to account when they go back home.

That all has to be worked on. I am discussing the Bill. It does not modernise procedures. It is not a considered step on Bank of England independence. It does not create a new anti-inflationary climate. It is the result of four days of dynamic action and an attempt by the Chancellor to be a macho new reforming Chancellor. We have been placed in the hands of a monetary committee that is showing every sign of overkill in pursuing its target. The Bill should be rejected because it is a gimmick, not a worthwhile addition to the country's armoury of economic powers to deal with its problems.

5.45 pm

Mr. Giles Radice (North Durham): The shadow Chancellor's speech was rather ambiguous and uncertain. I was surprised when he ended up recommending that his party vote against the Bill. The right hon. and learned

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Member for Rushcliffe (Mr. Clarke), the former Chancellor, made a better fist of putting the case against the Bill, although I should like to take him up on a couple of points.

I congratulate the Government on their good sense and courage in giving the Bank of England operational responsibility for setting interest rates. It was the right thing to do and they were right to do it straight away.

The Treasury and Civil Service Committee, of which I was a member, reported on the issue in December1993. That report helped to lay the groundwork for the Government's policy. We recommended giving operational independence to the Bank. The Chancellor has generously recognised our work.

We started with open minds. Having taken evidence from many sources and examined experience overseas, we were persuaded by the arguments for independence. There was a Conservative majority on the Select Committee. The conclusion was supported by all but one of the Labour members--the one who is in front of me at the moment--and by the Liberal Democrat member. Our model has now been accepted by the Government.

Lord Lawson put strongly to us the key argument that Bank independence enhanced the credibility of monetary policy. Whatever the right hon. and learned Member for Rushcliffe may say, nobody--least of all the markets--trusts politicians to set interest rates, particularly in the run-up to an election. The Chief Secretary also pointed that out to the Select Committee.

Who is to say that the people are wrong, from the track record? When Roy Jenkins was Chancellor, in the run-up to the 1970 election--which the Labour Government lost--he took a tough line. The right hon. and learned Member for Rushcliffe, a number of whose policies--particularly those on Europe--I admire, ran a relatively tight ship for two years, recovering from his rather poor inheritance as Chancellor. But in the run-up to the election, he relaxed public spending. He should have increased interest rates at the beginning of 1997, as I said during the Budget debate at the time, so I am not being wise after the event.

Ms Abbott: My hon. Friend has repeated the well-rehearsed point that politicians cannot be trusted with interest rates. Will he explain, therefore, the intellectual rationale for trusting politicians with the other levers of monetary policy--fiscal policy and so on?

Mr. Radice: It is not a purely intellectual argument, but one about practice. One has only to look at the record. That is why so many countries have been giving banks operational independence in respect of monetary policy.

Mr. Mitchell: It is in fashion.

Mr. Radice: It is not a question of fashion, but rather the result of practical experience. If my hon. Friend the Member for Great Grimsby (Mr. Mitchell) will settle down for a moment, I shall give him part of the argument.

Operational independence can help to create a virtuous circle. Such independence enhances credibility, making it more likely that inflation targets will be achieved as the behaviour of the main players is influenced. In time, that enhanced credibility allows lower interest rates. As Lord Lawson said,

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    "If monetary policy remains in the hands of politicians, the markets demand an interest rate premium."

The right hon. and learned Member for Rushcliffe knows that very well. The Select Committee looked into the matter and found that countries with independent central banks had a better inflation record than those without.

A serious counter-argument has been put by my right hon. Friend the Member for Llanelli (Mr. Davies) and by the right hon. and learned Member for Rushcliffe, who questioned whether operational independence would lead to a more deflationary policy. In other words, would it lead to overkill? Some safeguards against this have been written into the Bill. For example, reasons have to be given if the inflation target is overshot or if there is an undershoot--in other words, if inflation is too low. If there is overkill, the Monetary Policy Committee has to inform the Chancellor why. That was not mentioned by the former Chancellor--in my opinion, unfairly, as it is written into the Bill.

The primary role of the Monetary Policy Committee is to bear down on inflation, but the committee must also support the Government's economic policy, including the objectives of higher and stable levels of growth and employment, so it cannot ignore those factors. As I have said, the greater the credibility of monetary policy, the lower interest rates can be, increasing the stability of the system and producing a good environment for growth and employment. That is the basic rationale for the system.

The model presented to us in the Bill also increases the openness of decision making. The right hon. and learned Member for Rushcliffe was gracious enough to admit that there is no golden age of accountability to which we can refer back. Under the old system there was a formal ability to question the Chancellor about interest rates, but he was not very forthcoming in replying to it. I remember Lord Lawson telling us:


That was a perfectly valid constitutional position, but it does not tell the House very much about the reasons behind the policy. If Chancellors thought they could get away with saying that, they did so.

I accept that, acting on a suggestion from the Select Committee, the right hon. and learned Member for Rushcliffe published the minutes--all credit to him for that. They were sometimes quite revealing, but sometimes they were not. One had the impression that there may have been a meeting beforehand between officials from the two bodies and that some of the conflict did not come out into the open. It is fair to say that decision making remained fairly opaque.

Under the new system, there is increased openness. First, the Chancellor sets inflation rates and has to answer to the House and the Select Committee. Secondly, there is a full publication of minutes and votes. Therefore, any differences and divisions will be clear. The Select Committee will certainly insist on that. Thirdly, the non-executive members of the reconstituted court of the Bank will review the performance of the Bank and report to Parliament. That will be one opportunity for Parliament to examine the Bank's performance on monetary policy. Lastly, the Select Committee will have an enhanced role.

The Select Committee has been given a greater role than in the past. Although we have asked the Governor of the Bank of England to give evidence previously, in future

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it will be done on a very different scale. We are committed to at least two dedicated sessions on the four inflation reports each year, and there could well be as many as four. I can announce to the House that the next one will be when the Governor and the members of the Monetary Policy Committee give evidence on 27 November. If there is division, we shall want to question representatives of the Monetary Policy Committee to find out the reasons for any differences and so get them out into the open. I agree that the best way to achieve an accountable system is to have an open system.

We shall take evidence on the inflation target from my right hon. Friend the Chancellor, who is responsible for setting it, and the Governor, who is responsible for implementing it. We will do that every year. If there is an open letter from the Governor to the Chancellor on the reasons for the divergence of inflation from its target, we shall take evidence from the Chancellor and the Governor. If the Chancellor uses his power to override the Bank, we shall take evidence from him. We shall also take evidence from the non-executive members of the court on their assessment of the Bank and the Monetary Policy Committee. So the Select Committee will have an enhanced role and a much greater programme of hearings and reports to the House on the performance of the Monetary Policy Committee.

In a sense, the Select Committee is also on trial. [Interruption.] Although my hon. Friend the Member for Great Grimsby wants me to be a terrorist, I shall not, even for him. However, we shall have to ask sustained and serious questions about the performance of the Monetary Policy Committee. There are very many able people on the Select Committee, and they will do that most effectively.

We have also said in our report on accountability that there should be confirmatory hearings. The right hon. and learned Member for Rushcliffe has some reservations, but we believe that such hearings would be good for the independence of the Monetary Policy Committee and strengthen the relationship between the Bank and Parliament. Of course, when somebody is appointed, we can have a hearing and issue a report to the House on that person's suitability. The fact that we can and shall do it--even without formal powers being written into the Bill--could influence the Chancellor were he thinking of putting his granny or whoever on to the Monetary Policy Committee. So we hope the Select Committee will contribute to some extent, but it would be much better if formal powers could be written into the Bill.


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