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Mr. Radice: The Bill puts the matter simply. It states that the primary task of the Bank is to concern itself with inflation, but it must also consider the objectives of Government economic policy, which include growth and employment. It does not hand over everything; it gives the Bank a role.

Sir Michael Spicer: The hon. Gentleman puts the matter in terms that worry me greatly. Once the bank starts to think of matters other than the narrow remit of the monetary policy it should set in order to achieve a target given to it by politicians, we are in dangerous territory.

The hon. Gentleman is right to say that that is becoming the public perception of the way in which the bank will operate. I greatly admire Anatole Kaletsky, and agree with him on almost every aspect of European policy. I particularly agree with his article in The Times today, in which he exposed the fallacy of the leadership of the Confederation of British Industry and the figures it claims in support of its opposition to the single currency. That was a brilliant article. Last week he wrote a piece on the Bill in which he said:


He continued:


    "That is why it was right to raise interest rates yesterday but equally the Bank cannot afford to be acquiescent in high unemployment or snuff out economic growth."

Once we talk about the Bank being popular or unpopular, we are in extremely dangerous territory. We are talking, in effect, of handing over the task of politicians to not a surrogate but a real government. That course is being pressed by Labour members of the Select Committee, who probe those who come before us in an attempt to get them to say, as in a way the Chairman, the hon. Member for North Durham said just now, that there is a range of objectives that the Bank must take into account and have in mind when it is applying its interest rates policy.

In that approach, we are talking about a parallel Government. That causes me enormous worry, and that is one of the fundamental reasons why I am against the Bill and the path we are following.

In this instance, the Labour party cannot have its cake and eat it. If it claims enormous responsibility for having set up a mechanism because it did not trust itself to apply a proper inflation-price-stability policy--a mechanism for

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achieving that and guaranteeing it--it will have to accept that there may be a price to be paid in short-term unemployment.

Present conditions are relatively easy for the Government because the Conservative Government left this Administration with such a strong economy. As my hon. Friend the Member for Louth and Horncastle(Sir P. Tapsell) said, it is possible now to have four or five objectives in mind at one time because they can all be met simultaneously. The problem will arise for the Government--the time may not be too far off--when they suddenly find themselves, in their own words, having to make hard choices. When that happens they will try to fudge. At the same time they will try to bully the Bank. Not only that, they will try to cast the blame on it for getting things wrong. In those circumstances we are without democratic government. That is what worries me so much about the implications of the Bill.

7.32 pm

Ms Ruth Kelly (Bolton, West): I am grateful for the opportunity to take part in such an important debate. The move to grant operational independence to the Bank of England is certainly the most radical shake-up that has been seen in the operation of monetary policy since sterling's departure from the exchange rate mechanism, and possibly the most radical shake-up since the war.

I shall not engage in the argument as to whether low inflation or price stability is a good idea. Many reputable economists have argued that there is no long-run trade-off between prices and output--the objective of monetary policy should be to provide a platform of stability for savers and investors to enable them to plan their futures, an objective which, if met, could increase the long-run growth rate of the economy.

I was struck today by the comments of the right hon. and learned Member for Rushcliffe (Mr. Clarke), who asked why we should not continue the practice of the Chancellor of the Exchequer always taking decisions on interest rates. After all, the right hon. and learned Gentleman argued, he was always right and the Bank was always wrong about interest rates, whatever the facts of the case.

Anyone who argues that the right hon. and learned Member for Rushcliffe showed better judgment than the Bank is severely misled. He took risks. He was also lucky. His most important piece of luck was the unexpected and massive appreciation of sterling since last August, and who would argue that that was a good thing? The appreciation of sterling was the only factor that ensured that the right hon. and learned Gentleman hit his inflation target; without it, he would have missed it hopelessly.

Mr. Gibb: I agree with the hon. Lady that the rise in sterling has been damaging to large parts of the economy, but will she explain how the Government's proposal will lead to a depreciation of sterling?

Ms Kelly: I shall address the impact of interest rates on sterling later.

Under the previous Chancellor of the Exchequer, we saw a cavalier attitude to his inflation target in which economic propriety was sacrificed to political advantage.

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I do not accept for one minute that the right hon. and learned Gentleman did not think that he was taking a risk with inflation. He was certainly prepared to take a risk, and prepared to stoke up inflationary pressures within the economy. If the right hon. and learned Gentleman had been allowed to continue his policy, we could have seen the re-emergence of yet another unsustainable Tory boom named after a Chancellor.

It is not only the right hon. and learned Member for Rushcliffe who has played fast and loose with monetary policy, however. It seems that the practice is endemic to the office of Chancellor of the Exchequer. One just has to consider different countries throughout the world which operate in very different environments when considering bank independence, as my hon. Friend the Member for North Durham (Mr. Radice) said. Evidence suggests that independence is associated with lower inflation. Only one study suggests that it is connected with the growth of output. The implication is that it is possible to have low inflation without any loss of output or jobs.

Some will argue, of course, that the Bank has the opposite flaw--that it has a tendency to excessive caution. I suppose that many right hon. and hon. Members would adopt that argument. Indeed, I heard the right hon. and learned Member for Rushcliffe taking up that very point, but the facts do not support it. Contrary to popular wisdom, the Bank's record since 1992 when the current system was set up has been incredibly impressive. Its track record demonstrates that it has consistently been among the most optimistic economic forecasters. Since 1992 it has nearly always been in the bottom quarter of economic forecasters, being far more optimistic than it has been given credit for.

Indeed, the Bank's record shows that it was overly optimistic. Inflation outturns have consistently been in excess of the then Government's target of 2.5 per cent. over the past few years.

The Bank has independence, whereas Chancellors are prone to political manipulation--a fact that has been recognised. My hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) said that few decisions made by Ministers had been met with such acclaim as the decision to grant operational independence to the Bank. The immediate reward was half a point off gilt yields. If the Bank is successful over time in reducing inflation to meet the Government's inflation target, gilt prices could fall even further.

Gavyn Davies, the chief economist at Goldman Sachs, has estimated that, if yields on long bonds fall eventually by a full point, the Government's funding costs will be reduced by about £3.5 billion. That sum could be invested in the economy and could be used for extra public spending. A fall in bond yields would also reduce the cost of investment for private investors, and hence boost the economy in that way.

I accept that some people have fundamental points to counter Bank independence, including those who have raised the problem of co-ordinating monetary and fiscal policy. It is true that, if we had an all-knowing benevolent Government who took all decisions in the national interest with no prospect or hint of political interference, it might be possible to deliver price stability, but anyone who thinks that that has been happening over the past 25 years

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must have been living on another planet. Instead of stability, Government co-ordination has delivered boom and bust, unemployment and insecurity.

Mr. John Hayes (South Holland and The Deepings): Will the hon. Lady define more closely what she describes as "political interference" and the difference, in her estimation, between such interference and the exercise of political will as accountable to the electorate?

Ms Kelly: I think that I have defined exactly what I mean by political interference. I have argued that the right hon. and learned Member for Rushcliffe played fast and loose with monetary policy and risked stoking up an inflationary boom just because an election was approaching.

I shall now come back to the point about sterling, if I may. Some argue that relying so heavily on monetary policy to deliver the inflation target adds to the imbalance in the economy and contributed to the recent rise in sterling. I would draw their attention to the recent study carried out by Bank of England economists and referred to in yesterday's Financial Times, which showed that much less than a quarter of the recent rise in sterling since last August can be accounted for by monetary policy decisions, by expectations of future decisions or by anything to do with monetary policy.

I will now deal with the charge that the inflation target ignores output. It was very interesting to hear some people argue that the central bank should have nothing to do with output while others argue that it should have targets for growth and output. Some argue that it is necessary to supplement the inflation target with separate, different targets. There is a separate case for that.

It may be desirable to have targets to raise the underlying growth rate of the economy, but I would argue that output is not ignored when decisions are taken on interest rates. Those decisions are not completely technocratic--important judgments will be made in the short run between output and inflation.

My right hon. Friend the Chancellor has framed his inflation target in such a way as to ensure that it is impossible to hit with precision at every moment. Indeed, the Governor of the Bank of England has recognised that, operationally, he interprets the target as meaning that the bank should aim to hit it on average over time, that the way to judge him will be to look back in five years' time, or whatever, to see whether he has achieved an average rate of 2.5 per cent. over that period.

That means, inevitably, that the bank will have some discretion as to how it reacts to unexpected events which occur not just from month to month or year to year but from day to day. There will be events that impact on the economy, whether generated from the domestic economy or from abroad. Some of these completely unpredictable events--or supply shocks, such as a rise in the price of oil--will, if no corrective action is taken, reduce output and raise inflation. In those circumstances I would argue that it would be wise for the Bank to let inflation rise temporarily and not to exacerbate the short-term loss of output.

I completely disagree that such discretion is undesirable. Indeed, my right hon. Friend the Chancellor recognised this dilemma in his Mansion House speech, in which he set out a system whereby the bank would have to write an open letter if inflation breached the trigger points of 1.5 per cent. or 3.5 per cent. The Bank has to

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write an open letter to say what action it intends to take to return inflation to the target, and the time scale in which it intends that that should happen. He does not assume that the target will be met continuously.

As Mervyn King, director of monetary policy at the Bank, and soon to be Deputy Governor, argued in his lecture to the London School of Economics last week:


the alternatives.


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