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Lord Cobbold: My Lords, I am in the camp of those who welcome the Bill. I agree with the noble Lord, Lord Peston, that it was a forthright step of the new Labour Chancellor last year to grant operational independence to the Bank of England in the management of monetary policy.
Although I welcome the move towards independence, I cannot but feel a touch of sadness in respect of the other main feature of the Bill which deprives the Bank of its supervisory role over the banking system. This role, historically shrouded in the mystique of a relationship built up between the Bank and the City over the centuries, inevitably deprives the Bank of an important part of its traditional role. By and large, with some exceptions, it has performed that role with skill and discretion over the years, earning the respect not only of the City but of central banks and financial institutions throughout the world. There are good
There are some interesting contrasts, as was pointed out by the noble Lord, Lord Roll, between this Bill and the Bank of England Act 1946. In addition to nationalising the Bank, that Act formalised for the first time the Bank's powers of regulation of the banking system which are now being taken away. The 1946 Act, in the drafting and subsequent implementation of which my father played a key role as deputy governor, was introduced by the post-war Labour Government which, like our present Administration, had a very large majority. As had been noted by other noble Lords, attitudes at that time were very different.
While we are influenced by 50 years of battling with inflation, it was the great depression of the 1930s and its consequences that drove their thinking at that time. When the Bill was given its Second Reading in your Lordships' House in January 1946, Lord Pethick-Lawrence, for the Labour Government, made it clear beyond doubt that major decisions on monetary policy, domestic or external, were the final discretionary responsibility of the Chancellor of the Exchequer rather than of the Bank of England, which was not responsible to any body of public opinion. New Labour has certainly come a long way since then.
It is interesting also that in the House of Commons debate on the 1946 Act, Robert Boothby quoted Abraham Lincoln's famous statement that the privilege of creating and issuing money is not only the supreme prerogative of the government, it is the government's greatest opportunity. Money will cease to be master and become the servant of humanity. Democracy will rise superior to monetary power.
We have all learnt, possibly with one or two exceptions--for example, the noble Lord, Lord Shore--from the inflationary bruises of the past 50 years. We have seen and understand now the temptations of democracy. But certainly those old sentiments die hard and are still manifest in the Bill that we are considering today.
Indeed, as has already been said, Clause 11(b), gives the Bank a second objective beyond, although subject to, the maintenance of price stability; that is, to support the economic policy of Her Majesty's Government, including their objectives for growth and employment. Furthermore, in Clause 19 the Treasury retains reserve powers to give the Bank directions in respect of monetary policy if it is satisfied that the directions are required in the public interest and by extreme economic circumstances.
The implications of those reserve powers go beyond the purely philosophical. The Government have expressed their intention to join the European single currency if certain economic criteria are met. But one criterion they must meet in those circumstances is that the national central bank is independent and its statutes must be compatible with those of the new European central bank. It is doubtful, whether, with the reserve Treasury powers, the Bank of England, under the terms of this new Bill, will meet those criteria. Therefore,
In practice, the Bank has already been operating for some months under the new monetary policy regime. It is significant that this week we have seen minutes of the first meeting of the MPC where there has been a difference of opinion on whether or not interest rates should be raised. There can be no doubt that the real tests of independence are still to come.
Indeed, I am concerned as we look ahead to a situation in which perhaps 11 nations have joined a single currency, with sterling remaining as a satellite currency on the outside. The sterling money market is deep and very liquid. There is a great variety of derivative instruments in which to operate. Sterling is indeed a trader's currency, a playground for foreign exchange dealers and for hedge funds. In the circumstances, and given differing phases in the economic cycles of this country and the euro area across the Channel, sterling could suffer from bouts of extreme volatility. In that event, the monetary committee of the Bank may be faced with some extremely difficult choices.
I am optimistic by nature and I wish it well but it will require very close liaison between the Treasury and the Bank to ensure that independence wins for the Bank the long-term respect of the British people.
Lastly, in that context, I believe that the Government should quickly announce the re-appointment of the present Governor. I understand that there may be something in the Financial Times this morning which I have not seen. That would be a confidence-inspiring gesture. With the difficult times which I believe may lie ahead, the Bank is best placed if it is in the hands of someone as experienced and respected as the present Governor.
Lord Randall of St. Budeaux: My Lords, I should like to look at the Bill before us today, which I fully support, in the context of Britain's entry into the European monetary system to see how it can contribute to that process. I appreciate that that does not fall entirely within the scope of the Bill and I recognise that there will have to be further legislation for that purpose. Nevertheless, the courageous and imaginative step of my right honourable friend Gordon Brown, Chancellor of the Exchequer, in creating an independent Bank of England in relation to monetary policy, is certainly a necessary step towards EMU membership.
Rather than making a wide-ranging economic speech today, I should like to look at some of the specifics in the Bill before us. I start by referring your Lordships' House to Part I, Clause 1, which refers to the court of directors of the Bank of England.
Presently, the Bank of England has a governor, a deputy governor and 16 directors of whom four are executive. Under this Bill, there will be a governor, two deputy governors and 16 directors all of whom will be non-executive. All those non-executive directors will form a committee of non-executive directors. It is
We know also that that committee of non-executive directors will have the power to set up specialist sub-committees for scrutiny, monitoring and reviewing. I believe that that is extremely significant. But also the committee of non-executive directors in particular will be empowered to review whether the monetary policy committee is doing its job properly--for example, whether it has carried out sufficient data collection about what is going on in the regions in order that the task of formulating monetary policy can go ahead properly. Therefore, it would seem that the new committee of non-executive directors will have a powerful scrutiny function.
The question that arises in my mind is how exactly the MPC and the committee of non-executive directors will work together, as they seem to have overlapping responsibilities. I very much hope that in Committee we shall be given a clearer understanding of that; alternatively, perhaps the Minister could comment on that in his winding-up speech.
It is clear that the committee of non-executive directors will have as its chairman a senior non-executive person who will be appointed by the Chancellor of the Exchequer to look after the interests of the shareholders of the Bank; that is, of course, the Government. The upshot is that we have a Bank of England advisory committee--namely, the monetary policy committee--which appears to have responsibility for advising the governor on monetary policy, being reviewed by the committee of non-executive directors headed by a very senior chairman appointed by the Treasury.
What is the consequence of that? It is that the Government, in devolving powers for determining interest rates to the governor of the Bank of England seem to be retaining influence over monetary policy through the MPC via the committee of non-executive directors. That is very significant.
The question that arises is whether the Government's approach to influencing monetary policy is reasonable. I believe that the answer must be an emphatic "yes". In fact, I wonder whether it even goes far enough. Perhaps I may explain to the House why I take that view. In the near future, there is no doubt in my mind that Britain will be joining the EMU. I was in Brussels on Monday talking to the commissioner responsible for such matters, and the thinking levels which prevail in Brussels and those which prevail in Britain seem to be at such variance that it makes such visits worth while. However, the European Bank itself will be extremely independent. If one looks at the Maastricht Treaty and the other treaty articles, it will be seen that, in treaty terms, the bank is unchallengeable. So the control of monetary policy will rest with the European Central Bank, and the committee of the ESCB (the European system of central banks).
It is interesting to note that the executive of the European Central Bank will have five members and the committee of the ESCB, if I may put it that way, will have about 11 voting members, each of whom will be governors of the banks from the member states which have joined the EMU. So we are in a position, quite unlike that of the Federal Reserve, where the representatives of member states on the ESCB will have more votes than the executive directors of the ECB. That means that the power will rest with the ESCB.
Therefore, in the UK case, that means that the Governor of the Bank of England, currently Eddie George, will be a voting member of the ESCB and part of the group which determines interest rates and elements of monetary policy. The conclusion that I draw from that part of the Bill is that the monetary policy committee and the committee of non-executive directors will be key organisations in influencing the governor and, therefore, the ESCB. In that case, I believe that the Government are absolutely right in strengthening the committee of non-executive directors because its influence will be so very important when we join the EMU in the near future.
The question I would ask in that respect is whether the Government have gone far enough in emphasising the calibre of the members to be appointed to the Bank of England. It is a crucial committee. The Government have emphasised the importance of high qualifications for the senior member of the committee of non-executive directors, but I wonder whether we can go further. I shall be interested to hear the view of my noble friend the Minister on whether he feels that perhaps more could be said in Schedule 1 to the Bill about the calibre, or even experience, needed by members of the court. I am not suggesting that the schedule should go into too much detail on this, but I should have thought that we ought to have people with good sound banking experience, and certainly with good sound experience in scrutiny work. Those qualities should be mandatory, but I am not sure we necessarily need such detail in the Bill; but, my goodness, we should have an understanding in that regard. Does the Minister agree that the calibre of all non-executive directors is just as important as the calibre of the senior non-executive director appointed by the Chancellor of the Exchequer, which is referred to in the Bill? My inclination would be to table an amendment either in Committee or on Report. Nevertheless, I shall seek the advice of my noble friend in that respect.
I should like to say a few brief words about Clause 3(4) under which the Chancellor of the Exchequer may designate one of the directors to chair the subcommittee of non-executive directors. That person will indeed have considerable influence with the Treasury, the Bank and, ultimately, with the ECB and the ESCB. Perhaps my noble friend the Minister could tell the House what the working relationship will be between the senior non-executive director and the two deputy governors. One of those governors will have direct executive responsibility for monetary policy to support the Governor, while the other one will have responsibility for financial stability. So there is considerable overlap
I turn now to accountability and transparency about which I feel most strongly. I have in mind Clause 4 of the Bill which touches on the question of accountability. Again, in Brussels, I see a changing position in that area. When one talks about a strongly independent central bank, that does not seem to be consistent with the notion of accountability and transparency. Much debate is taking place on the matter with which I personally agree; namely, that one can and must have accountability and transparency with this banking system. Certainly, in order to carry the people along with the whole question of EMU and central banks, the EU believes that there is a need to be open about the affairs of the ECB and the ESCB.
At present, the proposals are that the ECB must produce a report every three months on the activities of the ESCB. Moreover, annual reports will be produced for the European Parliament, the Commission and, I believe, the Council of Ministers. Again, I may be wrong--and, if so, I shall seek my noble friend's advice--but deliberations certainly take place in the governing council of the Bank of England which are still being run in a confidential way. Such matters refer to monetary policy arrangements. I noted most carefully the remarks of my noble friend in his excellent opening speech that the quarterly report requirement would be put into statute. I believe he also said that other reports would be produced.
However, having said that, I should be grateful if my noble friend can tell me whether, despite what he said in his opening remarks, he believes that there will be further pressure for the Bank of England to be more open in its deliberations than is the case at present, although Britain will initially be outside the EMU. Does my noble friend agree that it would be desirable to look again at the question of openness in the Bill, so as to at least match the standards currently being considered in the European Union even though we will not be joining EMU in the first wave? There were other matters that I wanted to raise but time is cutting me short. I believe that the Bill is an excellent one and deserves the full support of this House.
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