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Mr. Gibb: Did the hon. Lady not say in the Treasury Select Committee that how far the Bank of England deviates from its inflation target, how it deals with output in dealing with shocks, are political issues, but that the Bank of England appears to have great discretion here?
Ms Kelly: I would argue that these decisions are fundamental to the way in which monetary policy is carried out. It is for those precise reasons that I would argue that proper accountability of the Bank is essential. In fact, precisely because of these responsibilities, the Treasury Select Committee has been given much greater powers to examine the Bank's policy and to hold it to account.
The Select Committee system is recognised by Parliament and operates in the normal fashion. It is for those reasons that, although I support the Bill and support the granting of independence to the Bank, I argue that the hand of Parliament should be strengthened so that a Select Committee can properly carry out its responsibilities and hold the Bank to account.
In particular, I suggest, as the Treasury Select Committee has suggested in its recent report, that members of the Monetary Policy Committee have the opportunity to come before the Select Committee in confirmatory hearings after their nomination to the Monetary Policy Committee by the Chancellor. I do not believe that such hearings would deter applicants. Given our assessment of the situation, it is clear that some of them would welcome the opportunity to appear before the Select Committee to clear up any points of potential public controversy.
Such a system would enhance transparency and aid accountability. It would also shield the Chancellor from any charges that appointments might have been made on party political grounds.
It is also vital--here I agree with my hon. Friend the Member for Hackney, North and Stoke Newington--that extra resources should be granted to the Select Committee so that it can correctly discharge its responsibilities and ask questions about the trade-offs that the Bank has made between output and inflation in the short run.
Mr. Andrew Tyrie (Chichester):
It was a pity that my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) was not here to answer some of the allegations made about him by the hon. Member for Bolton, West (Ms Kelly). Some of those allegations were very strong, and I am sure that when he reads them in Hansard he will be very disappointed that he was not here to answer them.
I am sympathetic in principle to the idea of central bank independence, but I cannot support these half-baked proposals. I shall explain why in just a moment. Before I do, I want to clear up one issue that has been bouncing around in the House this evening: whether the decision to go ahead with independence was a breach of the Labour party's pledge in its manifesto. The manifesto says pretty clearly:
I want to make three points. First, I want to explain why Bank of England independence has become such an issue only over the past 15 years. Secondly, I want to explain why the proposals in the Bill are a bit of a dog's dinner and why they probably will not deliver independence--I would be much more sympathetic to them if I thought they would. Thirdly, I want to suggest how, with the help of the Treasury Select Committee, the proposals could be made a little more palatable.
For most of modern economic history--that is, the industrialised and relatively free trading period of the last 150 years--monetary policy was set by an external anchor: the exchange rate. For most of that time the monetary anchor was the gold standard, or Bretton Woods in the post-war period. National monetary policy was subordinate to the external anchor, so central bank independence did not matter very much.
It was only after Bretton Woods collapsed that the debate about central bank independence gathered pace, both here and abroad--a period during which many countries decided to create independent central banks, and
a time during which successive Britain Governments had directors at the International Monetary Fund who were busy encouraging all countries to adopt independent central banks.
After the collapse of Bretton Woods, our politicians soon had British monetary policy in a mess, which began to be sorted out only when the IMF arrived in 1976. Even so, attempts to find a substitute for the exchange rate anchor have had a mixed track record. Monetary base control was rejected as too crude, so it was never tried. Targeting the monetary aggregates became difficult with financial deregulation. Before long, policy became extremely discretionary, and it appeared that all depended on what the Chancellor thought.
The problem for Britain with the discretionary approach, especially as other countries separated monetary policy from short-term political control, was that the UK's policy appeared to carry less and less credibility in the markets. A credibility gap was opening up between our monetary policy on inflation and those of the best-performing countries. It was a measurable gap in terms of bond yield differentials. Of course, part of the premium we were paying reflected policy mistakes, but the policy makers are just as likely to make misjudgments whether they sit in Threadneedle street or in Whitehall.
The main purpose of central bank independence is not to call upon superior minds to do the job--I do not think that they are better ones in Threadneedle street--but to close the credibility gap and deal with the belief that politicians might be meddling in monetary policy with political objectives in mind.
The crucial question is whether the Bill's proposals close the credibility gap. Do they really distance the Chancellor from decisions on short-term interest rates? That gap will be reduced only to the extent that people believe that the Bank is fully independent, and that is where these proposals are at their most deficient: there are too many get-out clauses--too many opportunities for the Government to meddle.
It is, of course, right that the Bank should be obliged to act in accordance with overall Government economic policy--as set out in clause 11. The statutes of most central banks include something similar. Even the Bundesbank's statutes carry a similar injunction. The problems start with the fact that only operational responsibility is being given to the Bank; the inflation target will continue to be set by the Chancellor. As I have just said, he loosened the inflation target as one of his first gestures.
Then there is the so-called override whereby, at least temporarily, the Chancellor can assume direct control over interest rate policy. Presumably, he would want to do that only when he could not achieve his objectives by relaxing the inflation target. It is a draconian power.
Most worrying of all--other hon. Members have referred to this--is the term of office given to the Monetary Policy Committee. Of its nine members, five are effectively controlled one way or another by the Bank of England. Six--of whom two come from the group controlled by the Bank--are appointed for a term of only three years. Even the Governor and the Deputy Governors are appointed for only five years. That compares with the Bundesbank council, which has an appointment period of eight years, and with the US Federal Reserve board, to which appointments are for 14 years.
If the main purpose is to generate belief in the markets that interest rate policy will not be subject to short-term political considerations, it is as plain as a pikestaff that the terms of office should be longer than the life of a typical Parliament. Seven years sounds sensible; three will not do. As it happens, the Chancellor of the Exchequer made exactly that point, in a speech in May 1995 when in opposition, about his proposed advisory monetary policy committee's membership. He agreed that seven years would be right, so why on earth is that number not in the Bill? The fact that the Government seem reluctant to budge on any of these points must mean that, at the first sign of trouble, markets may once again open up the credibility gap.
What can we do if the Bill does not find support in the Lobby tonight? We shall have to rely on the Treasury Committee--I was pleased to hear some of the remarks of the hon. Member for North Durham (Mr. Radice) on that. The Committee will have to make the best of a botched job and at least inject some accountability into the proposals. These arrangements give the Committee some scope to exercise that power, although there is no mention of that in the Bill--I gather from an earlier response to an intervention that that is for technical reasons. Incidentally, giving Parliament a more direct role in this area is an innovation; Parliament has never had a direct responsibility for the creation of money, or for the operation of monetary policy: both have always been matters for Executive--and before that Prerogative--control.
"We will reform the Bank of England to ensure that decision-making on monetary policy is more effective, open and accountable."
That may seem fairly clear, were it not for the fact that almost identical words were used by the Prime Minister when he was Leader of the Opposition. In a speech in 1995, he then went on to say that, after those reforms had been put in place:
"We will then watch the track record of the Bank before deciding what, if any, further steps should be taken towards greater operational responsibility for the Bank in interest rate policy."
It is absolutely clear that the public were misled by the manifesto wording. That is a disgrace. It is nothing more than we might expect. There was, of course, another remark from the then Leader of the Opposition along the lines, "We have no plans to raise taxes at all." How does that sit alongside the raid on pension funds? Or, to go back to the manifesto again, a line immediately above the one about the Bank, which says:
"We will match the current target for low and stable inflation of 2.5 per cent. or less."
Within a few weeks, that target was changed to a band, making inflation of 3.5 per cent. permissible. Those breaches of pledge do not register with the electors at the moment, but they will in time--as will the arrogance of the Chancellor, for example, when he reluctantly came to the House to announce Bank of England independence.
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