Banking: Quantitative Easing

Lord Newby Excerpts

Wednesday 27th March 2013 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government whether they agree with Sir Mervyn King, the Governor of the Bank of England, that quantitative easing should be increased by £25 billion, as stated at the most recent meeting of the Monetary Policy Committee.

[Lord Newby]

My Lords, the Bank of England Act 1998 gives powers of operational responsibility for monetary policy to the independent Monetary Policy Committee of the Bank of England. It is for the MPC to make decisions on monetary policy, including the scale of quantitative easing, based on its own judgment and the balance of risks to inflation in the medium term.

[Lord Barnett]

My Lords, under Section 19 of that Act the Chancellor has power by order to stop the committee doing that just that. Can I assume that as he did not say he did, he does not oppose the idea of there being more QE? On the other hand, we have a new remit for the new Governor of the Bank of England. The Chancellor said:

“the Monetary Policy Committee may need to use unconventional monetary instruments to support the economy”.—[Official Report, 20/3/13; col. 935.]

Does that not mean that there will have to be a change to the Bank of England Act? Without it, how can there be such a change?

[Lord Newby]

My Lords, to deal with that last point I will say that we do not need a change in the Bank of England Act because its basic provisions—namely, of inflation-targeting, and this year, as in previous years, we have a 2% inflation target—remain in place. The Chancellor has suggested, in changing the remit, that it would be appropriate for the MPC to deploy new explicit forward guidance, including intermediate thresholds, in order to influence expectations and meet its objectives more effectively.

[Lord Lawson of Blaby]

My Lords, on the subject of the Bank of England’s remit, I warmly welcome the fact that the Government have firmly decided not to move away from the inflation target to a nominal GDP target, and have given very good reasons why that would be a disastrous course. Will the Minister take this opportunity to make it clear that neither the Government nor the Bank of England are pursuing a policy of exchange rate depreciation?

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[Lord Newby]

I can absolutely give that assurance.

[Lord Peston]

May I break the habit of a lifetime by saying how much I agree with the opening remarks of the noble Lord, Lord Lawson? In all the years we have known each other, I think that is a one-off. As far as I recall, the Minister did not take part in the deliberations on the 1998 Act. He is indicating that he did. Then he must remember that the noble Lord, Lord Barnett, and I spent a large part of our time trying to move the Monetary Policy Committee’s remit in exactly the direction in which the Government are moving it; and claim to be moving it, let me add—the relevant words are there in the speech of the Chancellor and that of the noble Lord, Lord Deighton. They have updated it. My knowledge of the English language is not that large, but I think that “update” means change. How have they produced this most remarkable sleight of hand? The noble Lord, Lord Barnett, and I were told regularly that we could not change the remit because amendments were not acceptable to the Government. How has the Chancellor produced an extraordinary sleight of hand and changed the remit without bringing it before Parliament?

[Lord Newby]

I do not think that there is any sleight of hand. Since 1998, the Bank of England has introduced a number of innovative measures within the remit and the terms of the Bank of England Act. Quantitative easing, which, in 1998, many of us could hardly spell, far less understand, has happened on a big scale and finance for lending has been introduced. These innovative things have been introduced under the terms of the Bank of England Act. The remit change reflected in this year’s statement by the Chancellor accepts that there have been a lot of changes since 1998 and suggests that the Bank should look at introducing further innovative operations.

[Baroness Kramer]

My Lords, the Minister will be aware of a recent speech by Spencer Dale, the chief economist of the Bank of England, which identifies the constraint on growth, not on the demand side but far more on the supply side, because the banks are not back to normal lending, so does he see monetary activism as a mechanism to return to normal lending or are we relying much more on actions such as the business bank? Is that where the Government’s emphasis should be placed?

[Lord Newby]

My Lords, we need to pursue more than one course at the same time. The Green Investment Bank and the new business bank are one way forward; further innovation by the MPC is another. We need the full range of tools at our disposal to promote growth.

[Lord Eatwell]

My Lords, given that interest rates have been at record lows for three years and that liquidity is high, with no notable impact on the overall rate of growth, will the Minister tell us exactly what the mechanism is by which this greater monetary activism will stimulate growth?

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[Lord Newby]

My Lords, the Bank can do a number of things. However, on the change in the remit, the idea of having intermediate thresholds, which the Fed and other banks around the world have adopted, is to give longer-term certainty about the path of interest rates, which, we hope, will stimulate business confidence.

[Lord Forsyth of Drumlean]

Did my noble friend see the report in the Financial Times on Monday that the Japanese company, Fujitsu, was going to invest £800 million in Britain, but that all that money will go to reducing the deficit on its pension fund? How much longer will we see artificial deficits being created because gilt yields are used to calculate the liabilities of pension funds, and these liabilities are being exaggerated by the effects of quantitative easing? When are the Government going to do something about this?

[Lord Newby]

My Lords, there is obviously a tension in respect of interest rates in that some people benefit from low interest rates and some people lose from low interest rates. It is the Government’s view that low interest rates are in the interests of the economy in promoting growth in a very difficult economic environment.

[Lord Hughes of Woodside]

My Lords, given that the Minister was in purdah the last time I raised this issue, can he now say what the possibility is of banks being allowed to levy negative interest on savings accounts? Who will be in charge of this, as the new Governor of the Bank of England has said that he was within days of doing this in Canada? Who is going to protect savings?

[Lord Newby]

My Lords, I do not think that anybody in the Bank of England and the MPC at the moment is suggesting that we move to negative interest rates.