Previous Section Back to Table of Contents Lords Hansard Home Page

City of London (Ward Elections) Bill

3.39 p.m.

The Chairman of Committees (Lord Boston of Faversham): My Lords, I beg to move the first Motion standing in my name on the Order Paper.

Moved, That this House do agree with the orders made by the Commons set out in their Message of yesterday.--(The Chairman of Committees.)

On Question, Motion agreed to.

Kent County Council Bill [H.L.]

Medway Council Bill [H.L.]

City of Newcastle upon Tyne Bill [H.L.]

The Chairman of Committees: My Lords, I beg to move the second Motion standing in my name on the Order Paper.

Moved, That the promoters of each Bill have leave to suspend any further proceedings thereon in order to proceed with it, if they think fit, in the next Session of Parliament, provided that notice of their intention to do so is lodged in the Office of the Clerk of the Parliaments not later than 12 noon on Tuesday 9th November and that all fees due on or before that day have been paid;

That such Bill be deposited in the Office of the Clerk of the Parliaments not later than 12 noon on the second sitting day in the next Session with a declaration annexed, signed by the agent, stating that the Bill is the same in every respect as the Bill at the last stage of the proceedings thereon in this House in the present Session;

That the proceedings on such Bill in the next Session of Parliament be pro forma in regard to every stage through which the Bill has passed in the present Session, and that no new fees be charged to such stages;

That the Private Business Standing Orders apply to such Bill in the next Session only in regard to any stage through which the Bill has not passed during the present Session.--(The Chairman of Committees.)

On Question, Motion agreed to; and it was ordered that a Message be sent to the Commons desiring their agreement thereto.

Mental Health (Amendment) (Scotland) Bill

Lord Hogg of Cumbernauld: My Lords, I understand that no amendments have been set down to this Bill and that no noble Lord has indicated a wish to move a manuscript amendment or to speak in Committee. Therefore, unless any noble Lord objects, I beg to move that the order of commitment be discharged.

4 Nov 1999 : Column 993

Moved, That the order of commitment be discharged.--(Lord Hogg of Cumbernauld.)

On Question, Motion agreed to.

Monetary Policy Committee: Select Committee Report

3.40 p.m.

Lord Peston: My Lords, I beg to move the Motion standing in my name on the Order Paper.

It is with a certain amount of pride and a great deal of pleasure that I introduce today's debate. I am sure that I speak for all noble Lords in saying how delighted we are that no fewer than four new colleagues will make their maiden speeches today. We look forward with great interest to hearing what they have to say.

At the outset, I thank our clerk, David Batt, without whose administrative skills little would have been accomplished and certainly the report would not have been published on the due date. Our thanks are also extended to our special adviser, Professor Wickens of York University. Having been one of the first, if not the first, economist to advise a parliamentary committee, I am aware of how difficult and frustrating such a task can be. Perhaps I can use a form of words that is often placed in the first footnote of an academic article: we are indebted to Professor Wickens for removing so many mistakes from our report, but he is not responsible for those that remain.

I shall make three general propositions. First, the committee was determined to avoid party political matters in all its deliberations and in its conclusions. We succeeded in that aim and I have no intention of making any party points today at all. I hope other noble Lords will follow my example.

Secondly, although the membership of your Lordships' committee, as one journalist put it, is exceedingly high-powered and knowledgeable on matters of economics, finance and industry, we did not allow our personal views to come between us and the witnesses. Our recommendations followed from what we heard, not from what we had decided beforehand.

Thirdly, although I have remarked only half jokingly that your Lordships' committee could run monetary policy at least as well as the Monetary Policy Committee, we were at pains not to second-guess those who have responsibility for such matters. At no time did we comment on any individual decision and I do not propose to do so today, tempting though it may be to tell your Lordships what I think of the recent increase in the rate of interest that has just been announced.

I am convinced that we have succeeded in our remit and have met the standards that we set ourselves. More to the point, we have met the standards that your Lordships have set for other committees. That is most important, as the committee was a new departure for the House of Lords. I am convinced that the experiment was necessary so that this House can make a full contribution to the scrutiny of economic policy

4 Nov 1999 : Column 994

in its new form. If your Lordships accept the view that we have been successful, at the beginning of the new Session noble Lords can place the committee on a permanent basis. Let me add with my usual modesty that I put in no claim for myself or my colleagues in regard to membership of the committee.

Our purpose was strategic. It was to take an overall view of the policy-making process, interpret what was happening and subject it to critical scrutiny. Monetary policy now has a statutory basis which in British terms is somewhat unusual. As the aims of policy and, to some extent, the means were set out in an Act of Parliament, we have been concerned with textual exegesis.

Not surprisingly, the remit of the Monetary Policy Committee has been interpreted in more than one way. We have noted that our witnesses have not been in full agreement as to what the remit is, let alone what it should be. I admit that I was more confused at the end of our inquiry about what the expression "subject to that" meant than I was at the beginning. I am coming to the conclusion that Section 11(b) of the Act is meaningless. That will need further investigation and explanation in the future.

Similarly, as the dynamics of the economy are such that monetary policy works with a complicated set of time-lags, present events are relevant only in so far as they are good indicators for the future. A simple example is that one does not control today's housing boom by tightening policy today. It is a commonplace of the theory of economic policy that if a boom were about to end anyway, tightening policy now would exacerbate the downturn rather than mitigate it. Policy making that ignores the dynamics can destabilise the economy. That is hard for the public to understand.

Therefore, I agree with the Bank of England that if low inflation is the remit--my purpose today is not to argue about that--we cannot relax if the current rate of inflation is at the right level. We must always look at where we are going and not where we are. The MPC keeps on telling us that, but a careful scrutiny of its minutes plus the evidence of its activism suggests that it sometimes forgets its own avowed doctrine. Even an unreconstructed Keynesian like myself cannot help but raise an eyebrow at the frequency of interest rate changes.

The committee has seen its task as one of critical interpretation. We say in terms, and I repeat in terms, that we support giving operational independence to the Bank of England for monetary policy and that the policy so far has been a success. That was agreed on a non-party basis. It is hoped that such a view is more widely accepted across the political parties. If it is of any help, I see the new approach as evolutionary and not a radical break from the past.

The committee also says that such a new departure inevitably implies that all relevant bodies learn from experience and adjust what they do from time to time. It would be a disaster for our country if, in due course, necessary changes were not made to monetary policy institutions and techniques on the grounds that that would imply that the original set-up was imperfect. By

4 Nov 1999 : Column 995

the nature of things, human institutions are imperfect and need adjusting from time to time. If it turns out that economic experience leads to the conclusion that the remit needs changing, let it be done without concern for the Treasury's amour propre. Equally, if the mode of operation of the MPC needs to be changed, it must be changed without concern for the feelings of the powers that be. I hasten to add that it is not my view that such changes are needed immediately. I simply make a general point on the rational approach to economic policy.

I must now emphasise one or two technical points arising from the report. The committee was concerned about the level of inflation, and it hopes that priority will be given to further examination of that topic. It is especially alive to the difficulties that arise if the inflation index to be aimed at differs from that which is used for index linking in a wide range of contracts.

Secondly, the exchange rate remains a difficult problem. It is part of the transmission mechanism and cannot be ignored. However, the economics and econometrics of the exchange rate are fraught with difficulty. We seem to be told that the exchange rate is inevitably unpredictable, but we are also told that there is such a thing as the correct rate for the pound. That too is a subject to which we must return.

Thirdly, we must look more carefully at the real side of the economy and its connection with inflation. On the one hand, the employment consequences of policy are worthy of further scrutiny, especially the question of the restoration of full employment. On the other hand, there is the problem of the underlying or sustainable growth rate of the economy.

I was intrigued to read in a newspaper the other day that it may be that the underlying rate of growth of the economy has risen from 2.2 per cent to something nearer 3 per cent. I would dearly like to believe that. However, with my usual pessimism, I must note that we have regularly experienced such false dawns for the past four decades. If, however, the Treasury has some new hard evidence on that, the sooner we hear it the better.

More generally, important though that is, I do not believe that hitting our inflation objective will automatically lead to full employment and maximum real growth. It may be a necessary precursor, but a precursor to what? Improving the way in which markets work, including labour markets, is a help, but there remains a gap which fiscal policy should fill.

I do not insult your Lordships. I take it for granted that all noble Lords have read every part of the report and every page of the evidence and, therefore, do not require me to summarise it today. Nonetheless, I need to make a couple of remarks on topics that we touched upon but need to examine more deeply in the future.

Macro-economic policy varies in its impact on different sectors and regions of the economy. There is the obvious problem of the tradable goods sector hit by a high exchange rate, but not all firms within it suffer in the same way. It also should not be forgotten that the service sector can suffer too, if not directly,

4 Nov 1999 : Column 996

then indirectly because of the adverse effects on its manufacturing customers. I believe that the manufacturing service distinction is a good deal more difficult to make than is sometimes thought by other people. There is the equally serious problem that controlling the boom in the south may make it harder for other regions to experience boom conditions at all. I remain unrepentant in my view that the membership of the MPC is far too biased in a southerly direction.

There is also the rather technical question of the nature of policy itself. The Bank intervenes via short term interest rates. I am not at all clear quite what role the money supply in any form plays. It is, therefore, very difficult to compare our policy making with that of the European Central Bank. The Federal Reserve Bank also seems to operate in much wider terms and with regard to a broader range of financial assets. A new inquiry must take account in particular of the United States experience.

A topic which it is now possible to explore concerns precisely what causes members of the MPC to differ in their votes for or against a particular policy initiative. I have no interest in the analysis ad hominem, only in the general nature of the differences. In particular, we need to know whether differences in voting arise because of different assessments of likely future developments of inflation, different attitudes to risks with regard to deviations from the set target due to unpredictable shocks, or different assessments of the way in which policy works, i.e. the transmission mechanism. Of course, what should not occur at all is that the members should differ because one or other of them wishes to reduce the emphasis placed on the inflation target itself. Any member of the MPC who did that would be breaking the law and infringing an Act of Parliament--one of the stranger consequences, for an economist, of this whole matter having a statutory basis.

This takes us on to another difficult policy question. Economic theory tells us that, in a dynamic world, policy itself must be dynamic. By that I mean that the correct decision is to be formulated in dynamic terms. In ordinary language, it means that the Monetary Policy Committee must have in mind a time path for interest rates and not merely a level for any one month. As I understand it, it has set its heart against doing much, if anything, more than announcing its monthly decision, as it has done today. This is presumably connected with the effects that saying more may have on the stability of financial markets. I believe that the MPC needs to be very carefully scrutinised in these respects. In particular, it is my belief that, since most financial markets are largely a means and the real economy is the end which determines human well-being, the uncertainty surrounding the path of interest rates cannot be ignored.

Finally, we refer in our report to the need for the Bank to monitor how the MPC works and, more generally, for the Treasury to monitor how macro-economic policy works overall. We stress that all such monitoring must be placed in the public domain. We would press the authorities most strongly in that regard. In this connection, I was interested to read the

4 Nov 1999 : Column 997

Treasury's latest effort, The New Monetary Policy Framework. This document too is worthy of tough, critical scrutiny. However, the chief task confronting your Lordships in the next couple of years is to concentrate on how policy evolves and, reverting to our central philosophy, to advise on how we learn from experience.

I end as I began. Without boasting, I believe that we did a good job and did not let your Lordships down. The job is inevitably incomplete. I believe that we can continue to make a contribution in the future. For the moment, however, I commend this report to your Lordships.

Moved, That this House take note of the report of the Select Committee on the Monetary Policy Committee of the Bank of England (HL Paper 96).--(Lord Peston.)

3.55 p.m.

Lord Saatchi: My Lords, first, I take this opportunity to congratulate all the members of the Select Committee, especially their chairman, the noble Lord, Lord Peston, on producing an impeccable and timely report. The standard of the report comes as no surprise, considering what an exceedingly distinguished economist Lord Peston is. It would be a shame to let this moment pass without also thanking in particular my noble friends Lord Poole and Lord Weir, whose expertise may be lost to this House as a result of the reforms. How sad that would be.

The Select Committee system is one of the most respected aspects of our parliamentary procedures. Readers of this report will quickly see why that is so. The noble Lord, Lord Desai said last night that Select Committee reports were indeed educational documents and should be distributed widely to schools and universities. Having read this report, I concur.

I am looking forward greatly to this debate, not only because so many of the country's most distinguished economic experts are in your Lordships' House to debate it, but also, as the noble Lord said, because we shall have the pleasure of four maiden speeches.

The Bank of England was once likened to,

    "a giant iron flywheel set in motion years ago that it would take a determined madman years to stop".

The question posed by this report concerns what effect the new MPC system will have on that great wheel.

It is widely agreed that, so far, the MPC has done well to sustain inflation at the optimum rate. However, there are very difficult explanations as to why this is so. First, some say that the wheel was made of pure gold when the MPC took over. I refer, of course, to the golden economic legacy of the previous administration.

Proponents of this view point to the fact that between 1993 and 1997 inflation was less than 4 per cent, the longest period of low inflation for 50 years. Roger Bootle, for example, said that the closeness of

4 Nov 1999 : Column 998

the inflation rate to target in the first period of the MPC was,

    "a tribute to the previous regime of decision-making"

by the Conservative government. Others, however, say that the MPC's apparent success is pure luck. This was the version provided by Professor Goodhart in his IEA lecture entitled, "Luck for the MPC".

So is it luck, or is it the miraculous workings of "the new paradigm", in which technological changes are reducing business costs to the point where old-style inflation no longer exists? Or is it because the MPC has been, as the noble Lord, Lord Peston said, "activist" and has, since it was set up, made 14 changes to interest rates--15 including today's--compared to four times in the same period for the US Federal Reserve and only twice for the ECB and its predecessor central banks?

Behind all these different versions of events lies a nagging question: what is the true legitimacy of the MPC? This question, like all questions of legitimacy, is related to the circumstances of birth. During the debates in your Lordships' House about the reform of this House, the Government consistently relied for the legitimacy of its proposals on its firm manifesto commitment. But what is the status of a Government action for which there is no manifesto commitment? What then? The fact is that the Government suddenly announced their intention to make the Bank of England independent and to form the MPC on 6th May 1997, five days after being elected on 1st May. This haste, this lack of prior consultation, this manifesto silence, must raise concerns about the independence and accountability of the MPC.

Of whom is the MPC independent? To whom is the MPC accountable? Presumably the MPC is intended to be independent of the executive. But it seems from the report that the only person to whom it is accountable is the Chancellor.

How can the MPC be independent of the person to whom it is accountable? Is not that why my right honourable friend the Shadow Chancellor suggested that the legitimacy of the MPC might be improved if it were accountable to Parliament? He takes the view that we currently have the worst of both worlds--a halfway house which is neither independent enough of the executive nor accountable enough to Parliament.

The Labour Party said that its objective with the MPC was that,

    "Decision making on monetary policy is more effective, open, accountable and free from short-term manipulation".

But let us consider for a moment the method of selection of MPC members--to which I know my noble friend Lady O'Cathain will return in a moment in more detail--to see how well it fits with that aim. Currently, the Chancellor has the right to hire seven of the nine members. Does he also have the right to fire them? In a way he does because, as their term of office is for only three years, reappointment requires the Chancellor's support. We should remember that members of the Bundesbank serve for eight years, and of the Federal Reserve for 15 years. As the report says,

4 Nov 1999 : Column 999

the members of the MPC are the only members of any central bank that serve a shorter term than the government of the country.

It is worth recalling that in his submission on the reform of this House my noble and learned friend Lord Mackay of Clashfern took the view that 15 years was an appropriate period of appointment to overcome the potential for political pressure and ensure true independence. But instead, as the Select Committee said,

    "we have no knowledge of the field that was considered before the latest appointment was made, and we even have difficulty elucidating the procedure that was followed".

Then there is the related issue of the composition of the MPC mentioned by the noble Lord, Lord Peston. At the moment MPC members are renowned economists and experts in their field, but some would like to see a more representative group of people, perhaps including some with experience in manufacturing. The Select Committee raised exactly that concern over what it said was,

    "the limited range of experience of the present MPC, both the academics and the Bank's members".

But whoever are the members of the MPC, a key point will always be the objectives they are set. In his now famous letter to the Bank Governor, Eddie George, the Chancellor outlined his objectives for the MPC. That letter has now achieved iconic status and is on display in a glass case in the Bank's museum. The Bank of England Act followed later. But is it not slightly baffling that if we look at the contents of the glass case and compare it with the Act, we find that the wording of the two documents is subtly different? That was referred to in the report.

Between 6th May 1997 and 1st June 1998 when the Bank of England Act came into force, a change was made. The Chancellor's letter says:

    "The monetary policy objective of the Bank of England will be to deliver price stability (as defined by the Government's economic policy) and, without prejudice to this objective, to support the Government's economic policy, including its objectives for growth and employment".

But when the objective was then formalised by the passage of the Bank of England Act, Section 11 of the Act read as follows:

    "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".

So while the letter makes clear that the meaning of the term "price stability" will be defined by the Government, the Act is silent on who will do the defining.

That opens up two levels of potential difficulty. First, over the correct definition of price stability; secondly, over any possible conflict between the Bank's two objectives. As the CBI said in its submission to the Select Committee,

    "it is not possible to achieve two targets with one instrument".

And as the report states,

    "It is a matter of elementary logic that except in rather special cases the number of achievable targets is limited by the number of instruments".

4 Nov 1999 : Column 1000

Perhaps we have seen some of these difficulties at work in the public disagreements among MPC members about, if your Lordships will allow me a corruption of Comrade Lenin, "who controls the research controls the facts, and who controls the facts controls the policy".

While we are looking at the words in detail, perhaps I can draw your Lordships' attention to another document. I remind your Lordships of the exact words of the Chancellor's letter. It says,

    "The ... policy objective of the Bank will be to deliver price stability ... and, without prejudice to this objective, to support the Government's economic policy".

The document I hold in my hand says,

    "The primary objective of the Bank shall be to maintain price stability. Without prejudice to the objective of price stability it shall support the general economic policies of the Community".

The words are strikingly similar, but the document in my hand is the Maastricht Treaty dated 7th February 1992, which I seem to remember the Labour Party opposed.

My final point concerns the issue of co-ordination between monetary and fiscal policy. The Chancellor knows what he is planning to do from one day to the next, but to what extent is the MPC informed of this? The events of last summer led many to conclude that there is a lack of communication between the Government and the MPC. As paragraph 32 of the minutes of the MPC's meeting of July 1998 stated,

    "The case for a reduction in rates became less clear in the light of the Government's recent announcements on fiscal strategy which raised new doubts about the medium term inflation outlook".

But how does the MPC know what the fiscal stance of the Government is? Do the members read the Prime Minister's speeches? Do they study the body language of the Treasury official who sits in on their meetings? If they read the Prime Minister's speeches, they would be reassured that the Government have no plans to increase tax at all. Yet, as we know, the Government are increasing tax. The tax burden is rising from 35.4 per cent to 37.6 per cent during the lifetime of this Parliament. According to the OECD today, taxes are rising faster here than anywhere else in Europe.

We all know that the Government's policy is to take full advantage of the present complicated tax structure and the astonishing plethora of tax credits, allowances, exemptions, reliefs, deductions, disregards and indexations, alteration of which allows such scope for hidden tax increases, which the Shadow Chancellor famously dubbed "stealth taxes". Is that not how the Government achieved the feat of increasing tax without ever announcing a tax increase?

As the minutes of the MPC's meeting in July last year clearly stated,

    "The case for a reduction in rates became less clear in the light of the Government's recent announcements on fiscal strategy, which raised new doubts about the medium term inflation outlook".

It was precisely that practice of the Government which led the Treasury Select Committee in another place to ask the Government to display greater transparency in

4 Nov 1999 : Column 1001

their tax policies. That was why the Director General of the CBI described,

    "the corporation tax changes which were very carefully [portrayed] as a reduction in tax rates but were actually a tax increase, exploiting the fact that the number of people in the world who understood dividend tax credits is remarkably few, which allows the Chancellor to increase taxes whilst appearing to cut them".

The concern is that the Government have woven such a tangled web in their tax policies that the MPC itself might get caught up in it.

The decisions of the Monetary Policy Committee probably have a more direct effect on people's lives than those of any other body in the country. They affect everyone with a home loan, everyone with a credit card, every saver and every business in Britain. This superb report raises some fundamental issues, a few of which I touched on today, and I look forward greatly to noble Lords' contributions to this crucial debate.

4.7 p.m.

Lord Ezra: My Lords, I am pleased to have participated in the work of the Select Committee under the able chairmanship of the noble Lord, Lord Peston, who so effectively introduced our debate on the report, and I listened with great interest to the searching questions asked by the noble Lord, Lord Saatchi.

The role of the Bank of England in securing price stability has been a matter of interest to me personally for many years. Over the past decade I have asked a number of Questions on the subject. In particular, in an Unstarred Question on 16th December 1992 at col. 626 of Hansard, I asked Her Majesty's Government whether they considered,

    "that additional responsibility should be given to the Bank of England to assist in securing long-term price stability".

I proposed then that a Select Committee should be set up to analyse past trends on prices and inflation, to review what was being done in other countries to contain inflation and to make recommendations. I regret to say that this was turned down by the then government, who took the view that, "We have the right policies and we have no plans to abandon our traditions".

I was therefore very pleased when the present Government decided shortly after the general election in May 1997 that the Bank of England should be given operational responsibility to deliver price stability, as defined by the Government's economic policy. This was subsequently formalised in the Bank of England Act 1998.

I believe that that period of over two years which has elapsed since then has justified the Government in giving the Bank operational independence in this matter. There is widespread agreement, endorsed by the Select Committee, that the Monetary Policy Committee has generally performed its task successfully. In recent weeks there has been some criticism, as referred to by the noble Lord, Lord Peston, that the committee has, perhaps, changed interest rates too frequently. It has done so more than a dozen times--indeed, well over a dozen times after

4 Nov 1999 : Column 1002

today's increase--since it was established. In the same period, the Federal Reserve in the United States only made four changes, and the Bundesbank, followed by the European Central Bank, only made three changes. It may be that in the future the MPC will make less frequent changes in interest rates. However, having said that, there is no doubt that what it has done has kept inflation very much in line with the Government's policy of 2.5 per cent.

What is remarkable about the operations of the MPC is the unique degree of transparency which is practised. The publication of the minutes of meetings a fortnight after they are held is an exceptional achievement. Like many noble Lords, I have served on the boards of various companies. I cannot recall a single case where we have received the internal minutes within a fortnight, let alone had them published within a fortnight. So I think that this is exceptional. The transparency adopted by the MPC exceeds that practised by the ECB and the Federal Reserve.

I believe that the operations of the MPC so far, particularly the transparent way in which they are undertaken, has led to perhaps its biggest achievement, which is to reduce inflationary expectations. One of the major factors leading to the big increases in inflation in recent years was the expectation on the part of enterprises, trade unions and the general public that inflation would continue to rise at a high level. I personally suffered from this while I was chairman of the National Coal Board. We had to negotiate with the unions and, whatever we said, they denied it, and replied, "Inflation is going up at this rate and we have got to have at least that, plus". That was the framework within which we operated at the time. However, the situation is quite changed. Inflationary expectations are now very much in line with the Government's low inflation objective. This is undoubtedly something quite exceptional in our recent economic history.

Another aspect which impressed me during the course of the Select Committee's inquiry was the detailed analysis of economic and financial developments conducted by the MPC, both at national and regional level. In my opinion, this has meant that increasingly over the period the decisions the committee reached on the level of interest rates have been informed by a wide-ranging analysis of trends throughout the country, while also taking into account international developments.

In my view, the general conclusion is that the MPC represents a success story. However, we must bear in mind that this is being done at a time when low inflation has been achieved throughout the developed world. What is also uncertain is how this system would operate in the light of major external supply shocks. There was much discussion in the Select Committee, as the noble Lord, Lord Peston, and my other colleagues will recall, about this; for example, in paragraphs 1.43 and 6.12. I believe that the conclusion reached was that we could probably cope better with external shocks with the present system in operation than without it. That may be so. When we interviewed the governor of the Banque de France I specifically asked him if he

4 Nov 1999 : Column 1003

thought we were now better equipped to deal with shocks, such as the oil crisis in the 1970s. He said that he thought,

    "we would certainly have the right response".

That is how he felt about the matter. But, of course, we do not know. Time will tell--if and when we have the next major supply shock.

Another issue which took up much of our time was the relationship between monetary and fiscal policy. By its very nature, the fixing of interest rates has to be done on a national basis and cannot take account of regional variations. So the question was: could this be corrected by fiscal policy? Generally speaking, the Government's approach to fiscal policy is that it should set a long-term framework and, therefore, specific short-term interventions would be minimised. None the less, there could clearly be a need for such interventions when major sectoral or regional imbalances occur.

We had much discussion about the composition of the MPC and the respective roles of the external and internal members; indeed, both the noble Lord, Lord Peston, and the noble Lord, Lord Saatchi, referred to this. I was a little surprised to learn that the external members were generally full time on the job, while the internal members, who had their Bank of England responsibility in addition, were therefore part time. This is a complete reversal of the position on the normal board of a company. As the noble Lord, Lord Saatchi, said, in recent days there is reported to have been lively discussion within the MPC about the facilities which should be made available to the external members. It would be of interest if the Minister, when responding, could let us know where matters stand in that regard. We raised the question of the selection of external members and thought that it ought to be more open than it is. No doubt this also will be mentioned by the Minister.

Finally, there was the question of the relationship with the ECB and the euro. During our visit to Frankfurt, when we spoke to the President of the ECB and his colleagues, it appeared that the procedures which they pursued were similar in many respects to those of the MPC. However, as I mentioned earlier, the degree of transparency was noticeably less, which the President of the ECB explained by stating that he did not consider it desirable that the position taken up by members at any one time should be revealed as this could inhibit subsequent changes of position. I do not believe that our experience has shown that that is necessarily so.

The issue of how, through monetary policy, we should prepare for eventual membership of the euro zone and how we might work towards a greater convergence was not pursued in the time available to the Select Committee. I believe that this could well form the subject of a future inquiry.

4 Nov 1999 : Column 1004

4.18 p.m.

Lord Londesborough: My Lords, I am grateful to the noble Lord, Lord Peston, for introducing this report to the House. I am especially grateful for this opportunity to be one of the last ever hereditary Peers to make a maiden speech, just days after taking my seat--or, to put it another way, just days before losing my seat. I believe that, by tradition, one is granted a final wish before facing the firing squad. Mine is to speak on monetary policy before the trigger is pulled. It is actually a subject with which I am well acquainted, as I have spent the past 15 years building a publishing business where exports account for 90 per cent of sales.

I know that I speak for much of business when I say that our current monetary policy is severely restricting this country's ability to compete in the market-place both at home and overseas. We are losing our competitive edge just at the time when global competition is intensifying.

As we know, interest rates, which have gone up again today, remain much higher than in Europe and in America and show little sign of convergence. How much longer can UK business be expected to shoulder steeper borrowing costs than our competitors? But far worse, particularly for exporters, high interest rates have contributed to three years of increasing strength in sterling, both against the deutschmark and latterly the euro and, of course, the US dollar. For business sectors operating on margins of 10 per cent, an overpriced pound has virtually wiped out profits, forcing some to quit foreign markets altogether.

Where we compete against the Asians, the Latin Americans, the east Europeans, sterling has appreciated by as much as 50 per cent. Next time your Lordships pop into Marks and Spencer to purchase your wool-rich socks, might I suggest that you check the label first? I fear that it is more likely to state "Made in Slovakia" than "Made in Britain". Indeed we heard this week that M&S is now "disengaging" from a supply relationship with Daks Simpsons it can no longer afford and outsourcing offshore instead. The net result, I believe, is as many as 800 lost jobs.

I know that the MPC shares employers' concerns over how long one can finance an average wage rise of 5 per cent per annum when factory gate prices are falling and retail prices have barely risen by 1 per cent. With low unemployment, employers are being forced to offer higher wages to recruit effectively, adding further upward pressure on wages. You can only stretch company finances so far. If your Lordships believe that you are listening to the whinges of yet another businessman crying wolf, you need only to glance at our balance of payments figures to see how these micro-economic difficulties are impacting on the economy at large.

The trade deficit in goods for the first half of this year alone stands at an appalling £14 billion. Our exports of goods were 10 per cent. down on the first half of 1997, in spite of two years of relative economic growth. There has been a fragile recovery in exports in the past couple of months, but I know that I am not alone in believing that this is only a temporary

4 Nov 1999 : Column 1005

phenomenon. With our new found appetite for cheaper imports, even the surplus in services is showing signs of peaking. The result is that our current account balance has dived into the red and we have seen £10 billion vanish from our foreign reserves over the past two years.

I am one of a small but, I believe, growing minority who believes that the forces of disinflation are gathering force. Many retailers can grow only by cutting prices in the current climate. With the advent of the Internet and electronic commerce, which brings with it greater price transparency, British goods and services are in danger of losing further market share. It takes only a couple of clicks on the Internet to make an instant price comparison, and in the case of Britain generally an unfavourable one.

Controlling inflation must always remain a priority, but what about the Treasury's key stated aim of "promoting enterprise"? Tax breaks and small business incentives are all very well but they do not begin to address the problem of a very uneven playing field. My question to the Minister is the following: could he inform this House how the Government intend to respond to this threat posed by greater international competition? Are exporters simply expected to adapt through miraculous productivity advances, or can we expect a more balanced macro-economic environment?

I conclude by urging the MPC to take much greater account of the huge interest and exchange rate burdens currently borne by business and industry. If monetary policy does not address these factors, we shall continue to price ourselves out of the market and ultimately damage growth, investment and jobs. The global economy, I suggest, is changing and I respectfully suggest that inflation is no longer to be regarded as Public Enemy No. 1. I thank your Lordships for your indulgence.

4.24 p.m.

Lord Barnett: My Lords, I am delighted to have the opportunity to congratulate the noble Lord on an excellent maiden speech. In saying that I know that I speak for many noble Lords in the House. It is good to hear from the coal-face, as it were, what is really happening. There is one way to get interest rates down fairly quickly, but I know that the Front Bench opposite would not necessarily agree with that.

We are told that this is the noble Lord's first and last speech. Therefore I cannot say, as we usually do on these occasions, that we look forward to seeing the noble Lord often in the future. However, we can thank him sincerely for an excellent contribution to our debate. We have heard that he runs what I understand is a small business. He will understand why I very much believe that small is beautiful, both in business and elsewhere! We wish the noble Lord success in his business. That will not just be good for him but also for the country.

The report was clearly summarised by my noble friend Lord Peston, our excellent chairman, who referred to page 53 of the report which contains the

4 Nov 1999 : Column 1006

summary of recommendations. I mention the page number just in case some readers have not yet got there. It is first my duty, I believe, to congratulate and support my noble friend Lord Peston in pressing that this Select Committee relating to the control and accountability of the Monetary Policy Committee should be a permanent committee of your Lordships' House. I hope that that proposal will be supported on all sides of the House.

I say with respect to the Treasury Committee in another place that it is, like the noble Lord, Lord Saatchi, much more party political and therefore less objective. I was sorry that the noble Lord, Lord Saatchi, could not help making party political points. As the noble Lord is new to the job I hope that I may tell him that making party political speeches on every occasion--even on non-party political occasions--does not help the party he supports. I repeat that my noble friend Lord Peston called for a permanent committee. I agree with that because as much as I believe that the chairman of the Treasury Committee in another place, Giles Radice, is an excellent chairman--almost, if not quite, as good as ours--he finds it difficult to be objective. If one reads the reports of that committee, one finds that on every occasion vote after vote after vote is taken before a report is agreed. On the other hand, our reports are discussed in depth and in detail and are always agreed unanimously and are therefore more commonsensical--if I may put it that way--and thus more objective. I strongly hope that our Select Committee will operate on a more permanent basis.

I turn to the report itself. We all know the central objective; namely, the objective given to the Monetary Policy Committee to maintain, if it can, a 2.5 per cent level of inflation. I believe that there is some lack of clarity about what consideration the Monetary Policy Committee should give to the Government's economic policy. The Monetary Policy Committee of course considers every aspect of economic policy and every bit of data that is available, although I gather that four independent members of that committee do not receive quite as good data as the executive members. However, that is another matter that we can no doubt deal with later.

Of course one accepts the constant reiteration by both the Chancellor and the Governor of the Bank of England that price stability is necessary for growth and employment to succeed and be sustained. However, there is confusion over the language used constantly and in many different areas about the price stability target and how far that supersedes the Government's own economic policy. I give a few examples. My noble friend Lord Peston referred to Section 11 of the Act and said that it was meaningless. He may be right. The words in that section were mentioned also by the noble Lord, Lord Saatchi. I refer to the words, "subject to that"; that is to say, subject to the price inflation target, the Monetary Policy Committee should consider the Government's own economic policy.

In paragraph 1.38 of our report we refer to the background notes of the Treasury in 1997. They state that the MPC should consider without prejudice the

4 Nov 1999 : Column 1007

objective of price stability and that it should support economic policy. In paragraph 1.40 we quote the Governor of the Bank of England. He said that of course it was "continuously addressing" the problem of price stability and inflation. He went on to say that "through that" it supported growth and demand. The Governor told us that he prefers that particular formulation rather than the one in the Bill.

We are told in the new monetary policy framework document, which was issued recently, that

    "price stability is not an end in itself".

That is fairly obvious. But we get many obvious statements in government documents, so we should not be too surprised about that. I notice that it even makes my noble friend who is to reply smile.

It may be meaningless to my noble friend Lord Peston, but the Bill must surely be the main legal instrument of the Monetary Policy Committee. Or is it? I am bound to ask the Minister that question. The Government refused to accept an amendment moved in Committee by myself and my noble friend Lord Peston which sought to delete the words "subject to that". I notice that the noble Lord, Lord Saatchi, has not yet looked at this matter. The amendment was not supported too strongly by the Opposition Front Bench at the time. I am not now asking the Government to clarify the situation in a new Bill--that would be asking far too much in the busy Session to which we can look forward--but I do ask them to take note of Section 12 of the Bank of England Act. It states:

    "The Treasury may by notice in writing",

do a variety of things. I know the Minister is very persuasive. Perhaps he could persuade the Chancellor to consider writing a letter to clarify the situation in relation to price stability and the Government's economic policy.

The heart of the Bill concerns the transfer of monetary policy from the Chancellor to the Bank. In practice, while there is no longer a "Ken and Eddie Show", there is a "Gordon and Eddie Show"--but, as we know, that is held in private on a fairly regular basis. I am sure that they discuss all the various aspects of fiscal and monetary policy--including, almost certainly, the question of the exchange rate, to which the noble Lord, Lord Londesborough, referred.

Perhaps I may say a brief word about that. No one--not even a body as distinguished as the Monetary Policy Committee or our distinguished committee--could decide the appropriate rate. What is the right rate? I have not heard anyone--especially these days--say what is precisely the right rate to help the businesses referred to by the noble Lord, Lord Londesborough, and others.

Given what we say in paragraph 7.22 of our report, and given that we might join EMU in the next few years, we shall have to consider what should be the right rate. That is obvious. If the Government were to say that it is not a matter of "if" we join the single

4 Nov 1999 : Column 1008

currency but a matter of "when"--I mention that for the benefit of my noble friend Lord Bruce of Donington--

Next Section Back to Table of Contents Lords Hansard Home Page