Economy: Inflation and Unemployment

Lord Ryder of Wensum Excerpts

Thursday 27th October 2011 Lords Chamber

[Lord Sassoon]

My Lords, the first clear objective of the Government is to stick to the fiscal reduction plan that we have set to make sure that the UK’s interest rates remain low, so that we are not in the position in which countries like Italy find themselves today. It is absolutely fundamental to growth that we keep interest rates low and stick to our fiscal discipline. Secondly, we must have monetary activism and credit easing, a combination of measures that the Bank of England has taken by extending the asset purchase scheme by £75 billion. The Chancellor has said that we will come forward with further credit easing measures in the autumn Statement. The third issue, which will further be addressed in the November Statement, is, critically, to press on with supply-side reforms that will underpin medium-term balanced growth. Those are the three clear strands of the Government’s policy to which we will stick.

[Lord Ryder of Wensum]

My Lords, if my noble friend is in favour of keeping an inflation target, why does the Governor of the Bank of England fail to match it year after year? If my noble friend is in favour of keeping that target—which there is no purpose in having if it is never matched—what are the advantages of inflation?

[Lord Sassoon]

My Lords, the critical point is that, as my noble friend knows, the target for the Bank of England is a medium-term target. The Bank of England is wholly transparent about the situation in its quarterly inflation reports. In the latest reports, it has set out what the pressures have been on inflation in recent quarters and where they will be in the immediate future. Some of those pressures naturally come out of the figures over the next six months. It is quite right that the Governor and the MPC have and are committed to that target. It is important to realise that it is a medium-term target, and their judgment is that it is more likely that inflation will undershoot rather than exceed 2 per cent in the medium term. Indeed, that judgment is supported by the great majority of independent forecasts that I have seen.