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Lord Mackay of Ardbrecknish: My Lords, I agree that I did not address that. In Committee we discussed other matters such as exchange rates and, by removing "growth and employment", just referring to the economic policy of the Government. I include all

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aspects of the Government's economic policy and not just those listed here. I rather hope that the noble Lord might support that as an idea.

Lord Boardman: My Lords, this debate shows the fallacy in the Government's thinking in separating monetary policy from general economic policy and handing over monetary policy to the Bank of England, leaving the Bank of England to operate quite independently and without any safeguards except those in the Bill to which we shall come in due course. We are leaving the Monetary Policy Committee to make its own assessment of monetary policy without regard to any detailed knowledge of the economy. Indeed, before this was thought about last year, the Chancellor did that in his assessments of economic and monetary policy by weighing one matter against the other. That was standard practice. He is now handing over the monetary policy to the independent monetary committee and saying, "It has nothing to do with me. I will get on with the economic policy".

That has led to this confusion which we have here where it is "subject to" certain economic factors. Indeed, according to my noble friend, in the other place the words "subject to" seem to have been omitted altogether from its thinking. It is quite impossible to deal with monetary policy divorced from economic policy. The two factors must be borne in mind together.

The amendment of the noble Lord, Lord Barnett, is perfectly sensible, but I prefer that of my noble friend Lord Mackay. However, they both have the same purpose in mind; that is, to separate economic policy from monetary policy, which is to have priority. If the Government's intention is that the Bank of England will manage monetary policy and the Chancellor of the Exchequer will manage economic policy, so be it, but let that be clear on the face of the Bill. That is what the amendments in the name of my noble friend Lord Mackay aim to achieve and I support the purpose of those amendments.

It is extremely unfortunate that that confusion has arisen. I am perhaps digressing slightly, but it will be far worse if there is a European central bank. I hate the thought of what would happen in those circumstances. However, that is a different subject which I shall not develop. I support the amendments of my noble friend Lord Mackay.

Lord Stewartby: My Lords, at the risk of being called in aid again by the noble Lord, Lord McIntosh, I must say that I do not believe that the Government's wording of Clause 11 is too bad. The task which the members of the Monetary Policy Committee will have to discharge is extremely difficult. The foggier the criteria that they must follow, the more difficult it will be for them to do it. You cannot follow two birds at the same time without the risk of missing both of them. After all, those chaps do not have two barrels; they have only one. They must be very closely focused on the target which they are trying to hit.

I should have preferred this clause to stop at the end of Clause 11(a)--"to maintain price stability", because any respectable monetary economists who are likely to

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be appointed to the committee are bound to take into account the surrounding economic circumstances. It goes without saying that they would do that.

To the extent that the Government have felt, perhaps with a bow in the direction of some of their supporters, that they should include a direct reference to the economic policy of Her Majesty's Government and growth and employment, then I would find it least difficult to accept the wording which the Government have chosen; namely, that that should be subject to the principal objective of maintaining price stability. I would prefer the version of my noble friend Lord Mackay, because it is rather more explicit. In setting a task for the Monetary Policy Committee, the Government need to be as explicit as possible. Its members have a very difficult task. As my noble friend Lord Howell said, there are widely divergent views about the nature of economic growth and performance at present with one sector apparently advancing very strongly and the manufacturing sector finding extreme difficulty as a result of the strength of sterling.

The problem that arises if one introduces any reference to supporting economic policy is that the relationship between price stability and economic policy in the short run is so difficult to establish. If the members of the Monetary Policy Committee are to have to look over their shoulders all the time at the precise implications of movements in interest rates, growth and employment and other aspects of economic policy, they may be side-tracked from their principal and overriding objective; namely, the maintenance of price stability. That is something which will be specified.

In answer to the noble Lord, Lord Bruce of Donington, I should say that the way in which price stability is to be understood by the Monetary Policy Committee will be by way of a missive from the Treasury by notice in writing. At this stage, even that is not established. But assuming that the Treasury, by notice in writing, will give sensible instructions to the Bank, then those instructions need to be as simple, straightforward and comprehensible as possible. The members of the committee will have regard to those wider issues but it is essential to have the clarifying phrase in Clause 11(b), either "subject to that" or, as I prefer, the wording of my noble friend Lord Mackay. However, it must be made quite clear that the committee has a primary objective of price stability and not a more vague, generalised economic objective.

Lord McIntosh of Haringey: My Lords, I have a problem; namely, whether to speak to the debate or the amendments. They are rather different. I believe that I owe it to your Lordships to do both. Therefore, perhaps I may start by speaking to the amendments. Clause 11 says:

"In relation to monetary policy, the objectives of the Bank of England shall be--

(a) to maintain price stability, and

(b) subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment".

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The effect of the amendment tabled in the names of my noble friends Lord Barnett and Lord Peston would be to make the clause read:

"The objectives of the Bank of England shall be to maintain price stability as a pre-condition of supporting the economic policy of Her Majesty's Government, including its objectives for growth and employment".

Amendment No. 10 follows on from that, and I will deal with it separately. On the other hand, the amendment of the noble Lord, Lord Mackay, would make the clause refer to the objectives as being,

"to maintain price stability and to support the economic policy of Her Majesty's Government",

but only in so far as it can do so without prejudice to paragraph (a). I want to suggest to the House that those three are all virtually the same; there is no significant difference between them. Although there have been differences in debate, I am delighted that, from one side, my noble friend Lord Barnett and, from the other, the noble Lord, Lord Mackay, have come round to the Government's position in the wording of their amendments.

What is the Government's position and what possible disagreements are involved? The key to it lies in the remarks made by the noble Lord, Lord Boardman. I do not agree with him. He suggested that you cannot make a distinction between economic policy in general and monetary policy in particular. I believe that you can and you have to, if you are doing so in the context of setting monetary policy targets for the Monetary Policy Committee of the Bank of England. That is the key to the difficulties which the noble Lord, Lord Mackay, had about the Chief Secretary's remarks in response to Mr. Dafydd Wigley on Second Reading on 11th November last year in another place.

The Chief Secretary meant that the Government's central economic objective is,

"to achieve high and stable levels of growth and employment".

That quote comes from the Pre-Budget Report of November 1997. What we are saying in Clause 11, when talking about the objectives of the Bank of England in relation to monetary policy, is that price stability is the most appropriate contribution that monetary policy can make towards sustaining high and stable levels of growth and employment.

Of course, there are other aspects of economic policy which are not being devolved to the Monetary Policy Committee of the Bank of England. The Budget is evidence of that fact. That committee was not invited to write the Budget. But, in the limited sense of monetary policy and the role of the Bank of England, it is correct to say, as we have said, that price stability is the most appropriate contribution that monetary policy can make to sustaining high and stable levels of growth and employment. Therefore, monetary policy must come first in the statement of objectives and the statement of general economic principle has to be set out after that, following the words "subject to that" in the clause.

My noble friend Lord Bruce said there is much doubt as to what price stability is. Clause 12 spells out that price stability is, as Humpty-Dumpty would say, "what I intend it to mean"; in other words, the Government

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actually spell out in Clause 12 what price stability is to be taken to consist of--namely, 2.5 per cent. inflation, neither much more nor much less.

5.15 p.m.

Lord Mackay of Ardbrecknish: My Lords, I apologise to the Minister for intervening. I listened to an economics professor say quite clearly that price stability had to mean zero inflation; but 2.5 per cent. inflation is not price stability. Inflation may be more stable than it has been at some time in the past, but it is not price stability. I recommend the professor of economics.

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