Finance: Interest Rates

Lord Barnett Excerpts

Tuesday 18th March 2014 Lords Chamber

Asked by

[Lord Barnett]

To ask Her Majesty’s Government whom they consider ultimately responsible for United Kingdom interest rates.

[Lord Newby (LD)]

My Lords, the UK’s monetary policy framework, set out in the Bank of England Act 1998, gives operational responsibility for monetary policy to the independent Monetary Policy Committee. Decisions on setting the bank rate and the remuneration rate on reserves are for the judgment of the MPC. It uses its macroeconomic tools to aim to meet the inflation target of 2% in the medium term.

[Lord Barnett (Lab)]

My Lords, the noble Lord did not quite answer my Question, about where the ultimate power rests. The Bank of England Act, which he cited, is worth quoting. Section 19(2), on reserve powers—as he knows, the Treasury never gives away old powers without some reserves—says:

“An order under this section may include such consequential modifications of the provisions of this Part relating to the Monetary Policy Committee as the Treasury think fit”.

In those circumstances, surely the noble Lord must accept that the real power rests with the Chancellor, who has power as he thinks fit. Will he be so kind as to tell us, first, why he normally never answers the question properly and, secondly, whether he now accepts that the Chancellor has the ultimate power, as my Question asked?

[Lord Newby]

My Lords, interest rates are set by the Monetary Policy Committee. The noble Lord quoted rather selectively from the Act. If he had read Section 19(1) instead of Section 19(2), he would have found that the Treasury’s powers to which he referred are applicable only if they are,

“required in the public interest and by extreme economic circumstances”.

In the absence of “extreme economic circumstances”, the Treasury has no reserve powers.