Monetary Policy Committee: Inflation

Lord Deighton Excerpts

Wednesday 13th February 2013 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government what is their response to the proposal by Mark Carney that the Monetary Policy Committee’s inflation target should be flexible.

[The Commercial Secretary to the Treasury (Lord Deighton)]

My Lords, the Chancellor set the remit for the Monetary Policy Committee at Budget 2012 to target inflation of 2% as measured by the 12-month increase in the consumer prices index. Inflation targeting has served the UK economy very well.

[Lord Barnett]

The Minister did not quite answer my Question, my Lords. He will know that Mark Carney, the new governor, has said that,

“flexible inflation targeting offered the best chance of boosting growth while maintaining price stability”.

Does the Chancellor agree with his new governor, who he has said is the best in the world?

[Lord Deighton]

My Lords, if I did not quite answer the Question directly it was because the Question implies that we currently do not have flexible inflation targeting, but I believe that that is precisely what we have already. The remit given to the MPC actually lays out the conditions which provide for adjustments, given what may happen with shocks and disturbances, so that we can take a longer time to reach the inflation target. To my mind, that is a definition of flexibility.

[Lord Peston]

Dare I say to the Minister that he is mistaken? The word flexibility does not appear anywhere in the Bank of England Act. He is entirely right that the Monetary Policy Committee behaves as if it does have a flexible inflation target—the trouble is that it does not, and therefore it is acting illegally. For a great many years my noble friend Lord Barnett and I have been trying to get the Bank of England Act modified so that what the MPC is doing—which, as the Minister says, is quite right—turns out also to be legal.

[Lord Deighton]

I do not really want to get into a semantic argument about the definition of flexibility, and I do not know whether it appears in the original Act. However, to my simple understanding, the remit and the MPC’s behaviour clearly demonstrate significant flexibility, which is what you would expect in a policy tool to cope with our difficult and challenging economic circumstances.

[Lord Lawson of Blaby]

I support my noble friend the Minister in everything that he said and I greatly look forward to the court case which the noble Lord, Lord Peston, is about to bring against the Bank of England. I am sure that that will give us great entertainment value. Is my noble friend aware that to jettison the inflation target at this time or at any other time would mean a loss of financial market credibility and a loss of political credibility for no gain whatever?

[Lord Deighton]

I thank my noble friend for his expert endorsement. He is absolutely right: our inflation target has served this economy extremely well. The Chancellor and the incoming governor as well as the existing governor have been clear that it would take a very high hurdle to climb over to find a better structure than the one that we currently have.

[Lord Howarth of Newport]

My Lords, particularly after the bad experiences of previous decades, this—like any—Government should always bear in mind that if we again lost control of inflation, the consequences would be impoverishing, divisive and altogether malign.

[Lord Deighton]

My Lords, I could not agree more with the noble Lord’s observation. There is nothing more insidious than inflation, which is why sticking to our inflation-targeting mandate, which the independent Monetary Policy Committee pursues with great skill and judgment, is absolutely the right thing to do.

[Lord Davidson of Glen Clova]

My Lords, given the objective that the MPC is set by Her Majesty’s Treasury, how does the Treasury propose to modify the inflation rate target, since it appears that it needs to accommodate Mr Carney’s new desire for flexibility? Or—harking back to something that has already been said—is it that the flexibility already exists because it accommodates the Bank of England’s failure for more than two years to meet its statutory inflation target?

[Lord Deighton]

My Lords, it is extremely clear from the MPC’s own minutes how it treats that trade-off. With the House’s indulgence, I will read the most appropriate lines:

“The Committee discussed the appropriate policy response to the combination of the weakness in the economy and the prospect of a further prolonged period of above-target inflation. It agreed that, as long as domestic cost and price pressures remained consistent with inflation returning to the target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation”.

That is the perfect mandate for flexible inflation targeting.

[Lord Flight]

My Lords, how credible does the Minister think it is that the Bank of England could unwind £380 billion of QE and sell £380 billion of gilts, in the event of velocity of circulation recovering and the economy picking up, so as to stabilise the money supply?

[Lord Deighton]

My noble friend raises an important question: the technical unwind of the quantitative easing strategy, which is not something which would appear imminent. However when it does take place it will be done in full consultation with the Debt Management Office to ensure that we minimise any volatility to the gilt markets.

[Lord Stern of Brentford]

The Minister sees virtue in flexibility in monetary policy. Will he comment on the virtue of flexibility in fiscal policy?

[Lord Deighton]

The noble Lord is absolutely right to point out that there is an array of policy tools at our disposal. The unfortunate reality with respect to fiscal policy is that, given the enormous debts and deficit which we have had to contend with and have sought to consolidate, our room for manoeuvre is significantly diminished.