To ask Her Majesty's Government what proposals they have concerning the relationship between the Chancellor of the Exchequer and the Governor of the Bank of England in his capacity as chairman of the Monetary Policy Committee.
The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, Her Majesty's Government have no proposals to change the relationship between the Chancellor of the Exchequer and the Governor of the Bank of England in his capacity as chairman of the Monetary Policy Committee.
I welcome the Answer from the noble Lord, but does it include what the Chancellor told the Treasury Select Committee; namely, that he is going to follow the policy of the previous Chancellor, which would not prevent him reducing or increasing quantitative easing, although he has the powers? Then again, the governor also said in his letter to the Chancellor, published on
My Lords, first, it is for the Bank of England to make any proposals on quantitative easing if and when it wants to, and the Chancellor will then look at them. I am certainly not going to deconstruct and provide a commentary on the exchange of letters yesterday. However, the noble Lord, Lord Barnett, indeed identifies some of the points made by the governor in the letter, where he clearly sets out the down-side risks and refers to questions about the "margin of spare capacity". On the other side, he refers to possible "upside risks", particularly in relation to inflation expectations. However, I suggest that noble Lords read the letters, rather than have me interpret them.
My Lords, I can confirm to my noble friend that sustainable and low interest rates are absolutely what businesses need to enable them to invest and to support the recovery. I will make a further point before the noble Lord, Lord Myners, jumps up. Last week he chided me for not giving the data on relative interest rates. However, the context then was not relevant. It is very relevant to the Question this morning. The latest data from yesterday on our performance on relative interest rates-the 10-year sovereign borrowing rate since the general election-show that the UK continues to outperform the US. We have narrowed our spreads against the 10-year bund by 39 basis points since the general election at a time when the French, for example, have widened their spread by 10 basis points. Therefore, on relative interest costs, which are a key indicator of whether the markets believe the Government are on their economic course, the news continues to be that we have the confidence of the markets.
Will the noble Lord confirm that it is vital never to confuse the price level with the inflation rate? If the price level goes up as the result of a deliberate policy by the Government to raise VAT, there is no reason to interpret that as a rise in inflation. Therefore, it would be entirely idiotic for the MPC to raise interest rates at any time solely because the Government had raised VAT. Does the noble Lord agree?
My Lords, again, I do not want to be drawn into either economic debate with the noble Lord, Lord Peston, or commentary on the governor. The governor indicates that the rise in VAT was one factor behind the rise in inflation, but I should point out that the rise in VAT to which he was referring was the one under the previous Government and not the present rise to 20 per cent. However, I take the noble Lord's point about the nature of one-off rises such as that.
My Lords, the Minister has now introduced the new protocol of answering my questions one week later, but I suppose that that is better than the previous policy of not answering them at all. Is not the reality that the Government's fiscal policy is pushing the UK back towards recession-a direction which no other major economy in the world is currently following-and that the only thing supporting demand at the moment is very low interest rates? Business welcomes that, although savers are less enthusiastic. However, we are taking big risks on inflation as a consequence of the policy which the Bank of England is having to adopt in order to counterbalance the fiscal policy of this Government.
Absolutely not, my Lords. The direction of the Government's fiscal policy and the stability of that policy is one of the fundamental certainties which enable the Monetary Policy Committee of the Bank of England to set a firm course for monetary policy. The worst thing we could do to make the MPC's task harder would be in any way to create uncertainty in government fiscal policy. Therefore, what my right honourable friend is doing in getting the deficit under control with very clear and early measures enables the MPC to do its work in relation to the inflation target.
Does the Minister agree that, although the Monetary Policy Committee has a single target imposed on it-the 2 per cent inflation target-in practice it has been behaving as though, like the Federal Reserve, it has a multiple target, with responsibility not merely for price stability but for stabilisation or employment? It may be a very good thing that the Bank of England has not been increasing interest rates, as it might have done if it had been following a single price stability target over the past couple of years, but are the Government not concerned at the discrepancy between the formal position and the actual practice on which our monetary policy is currently based?