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Lord Peston: Perhaps I might just interrupt my noble friend once more. I promise him that it is the last time on this amendment. I understand fully what he says. He is having no difficulty in arguing his point, but I wonder if he appreciates the consequences. Taking a specific example: it may well be that the Monetary Policy Committee this week interpreting price stability in the way it does will raise interest rates. The result, many of us would predict, will be dampening down in aggregate demand in the economy, a slow-down in the rate of increase of gross domestic product and possibly a rise in unemployment. My noble friend Lord McIntosh of Haringey would say that that is all short term. All I am asking him to appreciate is that presumably that is short term. At least in the short term, since the Government cannot possibly want an increase in unemployment, we are saying that what we mean by compatibility is that in the long term those people will be back to work.

I will not go back to the old cliche again that in the long term we are all dead, but in the short term, I remind my noble friend Lord Mackay, that those people are actually unemployed. Whatever one says about the long term, they are the ones that bear the cost. As long as noble Lords appreciate what this means, then we have done our job and clarified what the policy-making involved here will do.

I have an ulterior motive. What this applies to will apply to the European Central Bank under EMU, where I am much more frightened of what might happen with this kind of approach, much as I am a strong supporter of EMU. My point in intervening was to make sure that my noble friend understands what it is he is committing himself to when he says, as he is about to, that he rejects this amendment.

Lord McIntosh of Haringey: I am not committing myself to anything other than to what the Bill clearly states. There is no difficulty about understanding it.

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We are setting the proximate target and we are providing the Bank of England Monetary Policy Committee with the means--the control--of short-term interest rates in order to achieve that target, it is accepted.

Price stability is the most important contribution which monetary policy can make to sustaining high and stable levels of growth and employment. Other policies may make other contributions, but it is monetary policy which is the subject of the Bill and with which we are concerned today. Our legislation ensures that price stability is the primary objective, but subject to this goal the Bank must also support the Government's other economic objectives. That is the basis on which this has been framed, and that is why the words "subject to that" are necessary in the Bill.

Lord Mackay of Ardbrecknish: I think we have had an interesting debate. I hope the Minister has not minded the teasing out of this. It is complex and it is absolutely central to what the duties of the Monetary Policy Committee are going to be. The Minister has clearly said that my interpretation of the clause appears to be the correct one. I will therefore ignore what the Chief Secretary said in the other place and listen to the noble Lord, Lord McIntosh of Haringey. If you are on track for (a), yes, you can worry about (b) and see what you can do about that, but you must be on track for (a). I was interested in the quote--and I will read it in detail--from the Bundesbank, because it seemed that the Bundesbank was doing exactly the same thing but the other way around. It was, however, still making monetary policy its principal objective.

So I am a little wiser and even better informed after this debate. If I may say so to the noble Lord, Lord Barnett, my colleagues down the corridor, interestingly, had this debate around replacing the word "support" with "pursuing"--"to pursue the economic policy of Her Majesty's Government", which was quite an interesting nuance on what we have just discussed. For the moment, we will all read rather carefully in Hansard what the Minister has said and we may well return to it. I rather suspect, however, that I am more cheered by listening to him than are his noble friends. With that, I withdraw the amendment.

Amendment, by leave, withdrawn.

7.15 p.m.

Lord Mackay of Ardbrecknish moved Amendment No. 17:

Page 5, line 16, at end insert ("and a stable and competitive exchange rate over the medium term.").

The noble Lord said: I accept that I responded to aggressive "bunching" with aggressive "debunching", if that is the best way to describe it. On the other hand, this is slightly separate from the important point we were discussing as to what took primacy. I want to add, at the end of objectives for growth and employment,

"a stable and competitive exchange rate over the medium term".

I have taken these words from those of the Chancellor himself to the Treasury Select Committee, when he said,

"We want a stable, competitive pound over the medium term".

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I thought that a good place to look for some sensible words that the Minister might not disagree with! I am telling him where I took them from, in case he does disagree with them!

I am, of course, adding another objective, which I am doing because the exchange rate is extremely important. British manufacturing industry at the moment would perhaps say it is one of the most important things for them. They are probably more concerned about that than about the interest rate rises themselves or their consequences. I know that the pound was rising while I was still a Minister. My recollection is that I twice had to respond to my noble friend Lord Paul who drew this to my attention as something which was damaging British industry. He asked what was the policy of the then Government on exchange rates.

Indeed, the noble Lord, Lord Ezra, for the Liberal Democrats, was on to this particular subject on a number of occasions. I could go on and point out a quote from the Birmingham Post about manufacturing industry in that part of the world being concerned about exchange rates. Looking slightly further ahead, although it is not down here, it does say "including" and I presume it must include exchange rates.

What happens as we get nearer to EMU, which I feel pretty certain we will be joining, as I said before? I make no observation about the policy, simply that if we are to join it, is the pound to float right up to the point of joining? Will we be shadowing? Will we be in the ERM? Will that influence the Bank? Will it have to take that into account when looking at its primary objective of price stability?

I know the Minister may well not wish to specify too many things here and I remember these arguments on a number of occasions. The danger is that if you specify too much, it is assumed that anything not specified was not meant to be included. There is always that danger, which I appreciate. However, the Government have specified growth and employment. I am wondering why they have not decided to specify exchange rate, which is very dependent on the decision made by the Bank on price stability. I beg to move.

Lord Peston: My judgment is that this is an important amendment and, although I was acerbic earlier, I am sorry that we did not discuss it under the general rubric of the objectives of the Government. I am particularly concerned about it because there is an interesting article in the Financial Times today pointing out precisely the consequences of using interest rates, I assume, to maintain price stability. This is what the Monetary Policy Committee is about. It appears that simultaneously in the economy, the economy at large is booming, in the sense that there is too much demand, which is the whole point of the restrictive interest rate policy. On the other hand, the manufacturing sector is well into recession, at least according to this article, and we have a most peculiar state of the economy which simply derives from the nexus between the interest rate and the exchange rate. I add again that in my view, in so far as monetary policy affects price inflation, it certainly does not do it directly. The original monetarist's view seems to me to be theoretically

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preposterous and totally refuted by the available data. It does it either via the exchange rate or by damping down aggregate demand in any event.

Going back to the earlier debate, although I do not wish to go into it in full detail, this is as good an example of the conflict as one could possibly imagine. Let us assume that the Monetary Policy Committee claims it can see some signs that the inflation rate may well be going up and beyond the band. Therefore, it feels that it has to tighten interest rates. Someone present then puts up his hand and says, "What about the objectives for growth and employment?", to which reference is made in Clause 11(b), and that would be true if the Bill were already law. He says, "Ah, but the words 'subject to that' appear. Therefore we have looked at it but the 'subject to that' provision says that we must give priority to price stability. Therefore, if that means destroying another bit of UK manufacturing industry, so what?". My noble friend Lord McIntosh believes that, in the long run, manufacturing industry somehow revives itself, but all the evidence is that it does not. It is damaged once and for all. That is precisely why what we have been debating is so important.

Clearly, the noble Lord, Lord Mackay of Ardbrecknish, does not want this on the face of the Bill; at least that is how I interpret it. He wants to air this as an example of the kind of problem that arises here. I am glad he does that but the point of it is so that my noble friend the Minister and his honourable and right honourable friends can reflect further on what this means. When we come onto the monetary consequences of fiscal policies, we shall be making similar points.

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