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Lord Barnett: --I believe we would see very quickly an impact on the exchange rate. We would start to see the lower interest rates and lower exchange rate referred to by the noble Lord. I hasten to add that that is not the view of the committee; that is my personal view.
Finally, I turn to the decisions of the Monetary Policy Committee on interest rates. We know that it increased them again by a quarter of 1 per cent today. Our chairman said that we do not second-guess the decisions being taken; however, we do consider how and why those decisions are taken. Have the decisions been right so far? Considerable comment has been made about that question--much of it contradictory.
I refer to an article in the Financial Times, which appeared as recently as 29th October. It referred to the National Institute of Economic and Social Research. It was not clear in the leader whether it was referring to the views of the national institute or its own views. Let us take it that it was either. The leader started by saying that maybe the lowering and raising of rates was all a waste of time. Given that we are told that it takes two years for changes in interest rates to have an impact, it would seem that we should thank the former Chancellor, Ken Clarke, for some of the inflation levels we have today. I would hasten to do that.
But then we are told in the same leader that the Monetary Policy Committee has presided over the smoothest recovery since the 1960s. It goes on to say that perhaps it was luck as much as good management. Maybe it was luck; few people know how it has happened. However, we are then told at the end of the leader that the steep rise in rates was needed in 1997. I am sure members of the Monetary Policy Committee will be glad to know that they were not totally wasting their time on reducing or increasing interest rates. Were the decisions taken by the Monetary Policy Committee right? We have heard that the Financial Times or the national institute--or both--consider that the recovery has been smooth and that inflation has been around the target set by the Chancellor.
Again reading the Financial Times argument about the lack of research facilities for the four independent members, we should examine the way in which the members are chosen--not only the independent members but also the executive members. Are they chosen on a basis of hawks and doves and balance? Is that the way in which they are chosen? It would be interesting to know. I would like very much to know. Whatever happens, I certainly agree that the Chancellor should not intervene in any argument about facilities.
I hope that the argument put by the Deputy Governor-- that it is all part of the mandate that the independent members do not get the additional services they need--will not prevail. The matter is far too important for that. I hope that we will not be told by the Minister that the reason for them not getting the extra facilities is lack of resources. That would be quite disgraceful; the issue is so important. If it is a part of the mandate--as we have been told it is--I hope that that mandate will be changed. That cannot require legislation.
Viscount Weir: My Lords, perhaps I may add my congratulations to the noble Lord, Lord Londesborough, on a truly excellent and most interesting maiden speech. I should also like to say what a pleasure it was to serve on the committee, not least because of the admirable way in which the noble Lord, Lord Peston, chaired our proceedings.
The work of the committee was of the greatest interest to me personally, in particular because for 12 years I served as a director of the Bank of England. There is a great difference between the way monetary matters are dealt with today and how they were managed during my time at the Bank. I can clearly recall one of the three splendid Governors under whom I served gloomily remarking, "I am sorry to say that we are having some difficulty with the other end of town". Given the trying economic circumstances prevailing at the time, I more than suspect that the Governor's urbane remark was a euphemism to disguise a difference of opinion of heroic proportions. However, I believe that the new arrangement, and the independence given to the Bank to carry it out, is a real improvement on the old system. It is a great pity, and perhaps a criticism of previous administrations, that something of that kind was not introduced very much earlier.
However, one is also bound to remark how often fashions can change in economic management and how the key issue of the day never seems to be the same for very long. Indeed, former Chancellors are now Members of this House, some of whom in their day awaited the balance of payments figures with dread.
In the time available it will not be possible to touch on many aspects of the report. I shall confine myself to one or two points. First, the well-aired problem that may be called the cobbler's or the shoemaker's dilemma; that is, the almost insoluble difficulty of finding one shoe to fit every size of foot. Even within an individual country, a single monetary policy may be excellent for one part of the economy but is almost certain to be difficult and unsatisfactory for other parts. For example, although there is debate and uncertainty among economists as to the precise relationship between interest rates, monetary policy and the exchange rate of a currency, it is certain that there is a link. Thus, British industry, and in particular exporters, argue that our interest rates today are higher than they should be simply because they make sterling disproportionately strong and they therefore cause considerable difficulty, not only for our manufacturing industry but also for agriculture.
Regardless of whether interest rates alone are the cause, the committee heard striking evidence from witnesses from, for example, British Steel that the current exchange rate was simply making the UK an unsuitable place for that kind of company, with a huge export position, to carry on manufacturing, even when, by the relative standards of the industry such as man hours and energy consumption per tonne, British Steel is extremely efficient in world-class terms.
Surely that is a worrying outcome when so important an industry as steel can barely export anything at all at a profit, as has been the case for prolonged periods in recent times, and when for external reasons over which the industry has absolutely no control, its massive and first-class capital investment produces hardly any economic return at all. The same considerations apply to other sectors of manufacturing industry in the UK.
However, at the same time there is no one in the service, financial or retail sectors who suggests that the exchange rate is at all troublesome. Sympathetic as any of us may be to the difficulties that monetary policy via the exchange rate may cause for basic industries like steel, I have almost as much sympathy for the other side of the question. A proposition that unfortunately all too frequently has been demonstrated in the past is that you do not generate real growth in national wealth by devaluation, whether it occurs by deliberate action or through other circumstances. If our goal is to have a high real wage, high added-value economy--and surely that should be a national aim--that cannot be built on the back of a depreciating currency.
To say this may not be at all helpful to those most affected, but my real sympathy for industries which complain about the exchange rate--I have to admit that I myself have done so often in the past--and which complain about interest rates and a monetary policy that is too tight for comfort has to be tempered by those other considerations.
Clearly, for an individual state like the UK it is difficult to set a single monetary policy to suit everyone, even when ironically the goal of that monetary policy is simply to achieve price stability and a proper and low rate of inflation, which is an objective beneficial to, and supported by, everyone in the industrial sector.
What of course follows from the difficulties posed by a single monetary policy for all the different groups in our little island is how much more difficult that same situation must be for a common monetary policy within Europe. For example, today, both in terms of growth and inflation rates, there are very considerable differences between Germany and Ireland.
When such differences widen to an unacceptable degree, then obviously one way in which countries can compensate for that situation is by their national flexibility in fiscal policy. But here is the rub, because quite central to the vision of some important European politicians today is fiscal convergence. If fiscal convergence is achieved to a real degree in Europe, then surely much of that flexibility will be removed and a common monetary policy will become distinctly more difficult to operate without causing considerable problems, many of which will be political in their consequences. I suggest that our Government bear that particular dilemma very much in mind.
Secondly, there appears to be--happily, I would add--absolute agreement that fiscal and monetary policy must march in step and complement each other. That is a commendable idea and it is evident that the Chancellor has rightly emphasised his commitment to that course.
I hope that noble Lords will not feel that I am being awkward or political or doubtful of the Chancellor's sincerity when I say that, from the point of view of industry, the evidence that that desirable partnership is actually working is a little thin. Surely if the exchange rate is causing difficulties for our manufacturers and if monetary policy is a strong factor driving the exchange rate, then it could reasonably be expected that fiscal policy and other policies that have economic and cost consequences for industry would be so designed as to have some compensating effect. But high fuel taxes, proposed energy taxes, expensive changes in pension costs, working time directives and the like are all pulling in precisely the wrong direction. As for the simile of marching in step--I was in the Royal Navy so I never
As for the current controversy, which is not very helpful to public confidence, regarding the resources made available to the independent members of the Monetary Policy Committee, someone picturesquely remarked to me the other day that it was as if some of the priests in an ancient heathen temple complained that after the animals were sacrificed they could not foretell the future because the other priests would not let them borrow the magnifying glass to have a proper squint at the entrails. I think that a matter like this should have been settled within the Bank of England and that we should not make too much of it.
Finally--here I confess to being just a little political--one thing that it seemed to me was fairly clearly demonstrated to your Lordships' committee was that changes in monetary policy take a couple of years or so to work through in full. Perhaps, therefore, while we can most certainly congratulate the Chancellor on giving independence to the Bank in the way he has done, he in turn might deploy his undoubted and well-known generosity of spirit by thanking his predecessors for bequeathing him for much of his time in office so balmy an economic climate in which to bask.
Lord Lipsey: My Lords, one cannot enter your Lordships' House for the first time without being struck by the warmth of the welcome one receives not only from one's own side but from all sides of the House and indeed from the staff. That came as a surprise to me despite the fact that I have worked in the Houses of Parliament for a very long time. It was 1972 when I first started at the other end, working for the late Anthony Crosland MP as his political adviser. I finished only quite recently when I signed off as political editor of the Economist. In my time I have been up in the Galleries and for many arduous hours as a political journalist down in the Bars pursuing my trade. But I have never been in the Chamber before.
In recent years I have been plagued by something of a nightmare. It is that I am chatting away to so many people that I have known in one capacity or another down the years only for one of the larger attendants to materialise behind me, place his hand on my shoulder and march me off to some unnamed fate. So if in the course of my remarks today I cast the odd nervous glance over my shoulder, it is not that I fear that I am being stabbed in the back; it is that which I am remembering.
When the committee so ably chaired by my noble friend Lord Peston was first mooted, it is fair to say that the Treasury viewed it with a certain nervousness. The Treasury feared that it would double-guess the Monetary Policy Committee, which it was admirably well qualified to do. At least three of its members--my noble friend Lord Barnett and the noble Lords, Lord Burns and Lord Roll--had conducted monetary
I had at first thought to devote my remarks to the subject matter of Chapter 3 and of the learned Appendix 3, which I am sure all your Lordships have mastered, on the relative merits of the retail prices index being measured by the arithmetic mean and by the geometric mean. Indeed, I thought to inject a suggestion of my own--that we should instead use the harmonic mean. However, my noble friend Lord Peston pointed out to me that that was the same as the geometric mean, and so I thought better of it. Instead I shall confine myself to two more general remarks.
The first is perhaps illustrated by the story, with which I am sure your Lordships are familiar, of the man who jumped off the top floor of the National Westminster Bank Tower. I believe his name was Wanless. As he passed the 12th floor at a rate of knots, he was heard to mutter, "Not very much seems to have happened yet". Something of that analogy applies to the work of the Monetary Policy Committee. I do not mean that its work has been easy--far from it. I did not envy the decision it had to make this morning when the indicators from asset prices, particularly in the south-east, seemed to require an increase in the rate of interest, whereas other indicators--perhaps the exchange rate and certainly the employment figures for the north of England--might indicate leaving the rate where it was or even cutting it. I do not say that the decision was easy. But that is as nothing compared with what the MPC will face when, as will inevitably happen--perhaps I may be permitted a bit of Balls here--the economy faces an exogenous shock.
The best example of that in recent years was the oil price hike of the early 1970s when the need to combat inflation suggested that the interest rate should be going up while the need to combat unemployment suggested that the rate should be going down. The authorities were completely flummoxed by that; the government, who I then advised, made a complete hash of it; and it took us some years to dig our way out of the hole and leave the golden legacy we left in 1979. We will only truly see the mettle of the new arrangements when such a shock comes along and the really tough decisions have to be made by the Monetary Policy Committee. So far, so good, but the real test is yet to come.
My second point concerns the euro. I am aware of the convention that a maiden speaker must say nothing controversial. In my case, on the subject of the euro, that is very easy because it is a subject on which I am a convinced "Don't know". What should be non-controversial is that it is inevitable that the euro will have an impact on the conduct of our domestic monetary policy. We will not be able clearly to separate the two. It is noticeable that the Treasury, when it produces its regular monthly monetary bulletins, now calls them euro zone. Certainly, the
It was a hint of things to come that the two committees should both meet today. They were daring to take their decisions before reading the deliberations of your Lordships' House. But the two committees met today and reached their decisions--both rates going up at the same time. That could be a harbinger of what is to come. I believe that developments in the euro suggest that that may happen rather more rapidly than we have hitherto thought. Perhaps I may give some examples. Among the "ins", the talk now is of cutting the period of dual running of national and euro currencies. Among the "nearly ins", Greece has now wrestled its budget deficit down below the 2 per cent of GDP that seems to make entry possible. It will be knocking at the door very soon. Norway is an "out", and a eurosceptical "out", but now it seems that both the Government of Norway and public opinion in Norway are moving increasingly in favour of entry. We see simultaneously a broadening and a deepening of the euro and its strength. Economists are always wary of trends--which have a nasty way of reversing themselves just when one thinks they are most clearly established. But the present tendency seems to be in that direction. That will have a tremendous impact on this country in terms of the conduct of monetary policy.
If we look ahead, say, five years, it is a moot point as to whether the Governor of the Bank of England would have a greater impact on monetary conditions here if he remained primus inter pares on the Monetary Policy Committee or if he were to become just one member among others on the monetary policy authorities in Europe. I do not know which way matters will go, and I do not say that that will happen. It is a moot point as to which position would give him the greater power over monetary policy.
Enough of gazing at the crystal ball. I feel comforted and am glad at the prospect of the committee of the noble Lord, Lord Peston--even though he is prepared to give up the chair; and I am sure that that will be resisted strongly in the light of his first report--being re-formed for years to come to provide us with the kind of excellent report that is before the House today.
Baroness O'Cathain: My Lords, it is a singular honour to congratulate the noble Lord, Lord Lipsey, on a memorable, stimulating maiden speech. It was most impressive, made as it was without a single note and without hesitation or deviation. Although the noble Lord has only recently joined us, I am sure I am not alone in feeling that I have known him for a very long time through his writing as a serious journalist. He is a serious, challenging and informative journalist, and we have heard a serious, challenging and informative speech. On behalf of the whole House perhaps I may say that we welcome him and look forward to regular serious, challenging and informative contributions from him in the future.
Like other noble Lords, I want to pay tribute to the noble Lord, Lord Peston, for his chairmanship of the Select Committee. It was a most interesting experience; indeed, it was wonderful to be a member. I hope, as other noble Lords have said, that the Select Committee will continue.
In my contribution, I intend to concentrate on Chapter 7 of the report; namely, the issue of the selection of members of the Monetary Policy Committee. Although the recommendations made in the report concentrate on the appointment of independent members, I want to refer to the overall composition of the Monetary Policy Committee. The noble Lord, Lord Barnett, touched on the subject, but I want to deal with it in greater depth.
Section 13 of the Bank of England Act 1998 stipulates that the membership of the Monetary Policy Committee is to consist of the Governor of the Bank of England; his two deputy governors--two members appointed by the Governor, both having executive responsibility within the Bank of England, one for monetary policy analysis and the other for monetary policy operations; plus four members appointed by the Chancellor--the "independent" members.
To offer a personal observation--one which, I confess, I did not make during our deliberations-- I believe that, whereas the current membership of the Monetary Policy Committee works well (at least, so I thought until I read the comments in the press at the weekend), it could lead to problems.
When I put my name down for this debate, I did not realise how topical the issue of the structure of the MPC would be when it took place. I am somewhat bemused to see that there appear to be some tensions between the independent members and the members who have dual responsibility; namely, as members of the Monetary Policy Committee and also as full-time employees/executives of the Bank of England. I suppose with hindsight that is not surprising.
I find it "not surprising" because, based on my experience of working at board level in industry and commerce over many years, I know that being an executive or non-executive director of a company is not identical to being a member of the MPC; but the duties, responsibilities and issues addressed at board level do bear some similarity to those addressed by the Monetary Policy Committee each month.
The strategy to achieve the objectives of the body are constantly uppermost in the minds of the directors: the analysis of the external circumstances which have impinged, and are likely to impinge, on the strategy is discussed; documents from the company's economist, finance directorate and operations directorate to support the in-house view are produced and deliberated upon--not unlike what we were told in evidence is the general modus operandi of Monetary Policy Committee meetings. So far so good, but in my experience a board works best when the non-executive directors have a greater number of members on the board than the executive directors.
That view is borne out by experience in the US, where all major corporations have a large majority of non-executive directors as members of the board. That may seem an irrelevant point, but I think not. Faced with a united phalanx of five "insiders", the four "outsiders" (that is, the independent members) could sometimes feel outnumbered, or even--dare I say?--intimidated.
I am sure that that is not necessarily the situation that pertains in the present Monetary Policy Committee. However, we must not lose sight of the fact that membership of all institutions (including, sadly, this House) can and does change fundamentally from time to time. Our report looked not only at the operation of the Monetary Policy Committee since its inception, but made specific recommendations in regard to its future operation. Perhaps that is an issue that should be addressed in the future. As a "kite flyer", should the Monetary Policy Committee have three members of the Bank and five independent members?
That leads me neatly to the specific issue that I want to address; namely, the selection of the independent members. Just to refresh the memories of all noble Lords who, I know, have spent the long, hot summer reading the report, perhaps I may reiterate the relevant recommendations and make some further comments on them.
Secrecy in making any appointment is bound to lead to accusations of "cronyism". Whether one likes it or not--and I personally loathe it--the press and other media seem to have a reflex action which activates the baying of that word any time a press notice giving information about another appointment to a review body, a health authority or any other quango is issued. As an aside, I heard on the radio just a few days ago that press notices are now issued by this Government at the rate of one every nine minutes. Fanned by the media, cynicism abounds. I do not believe that cronyism was involved in any of the appointments to the Monetary Policy Committee. But some are not as convinced as I am.
In order to avoid any smidgen of such cynicism, would it not be better to be much open about selection? This is supposed to be an "inclusive" Government. I think it would be to their advantage to avoid the charge of being exclusive in such appointments. And from the point of view of the members, it does not help establish the "independence" of the "independent" members if they are seen to have been appointed in what could be called a cloak and dagger manner.
I am very aware that the Monetary Policy Committee members are assiduous in trying to obtain up-to-date economic intelligence from sectors and regions. That involves lots of travel, hours of external meetings and masses of data. But if someone on the Monetary Policy Committee had first-hand experience of that disparity between sectors and regions and was based in the regions, it could add in a significant way to the knowledge base on which decisions are taken.
My noble friend Lord Saatchi drew attention to the fact that appointment to the Bundesbank is for a term of eight years and to the US Federal Reserve for 15 years. However, we decided that five years is probably the best length of appointment, both from the point of view of the Monetary Policy Committee as a whole, needing infusion of new blood, and indeed from the point of view of the individual members. Too long an involvement in the rarefied and constrained atmosphere of the Monetary Policy Committee could
We made a third recommendation: that the renewal of appointments should be rare if not impossible and that appointments should continue to be staggered. This recommendation is both essential, particularly the one about continuing to be staggered, and common sense. Continuity is important and the introduction of new members should be planned in such a way as to ensure that there is never more than one member climbing up the learning curve at the same time. It was inevitable that, at the commencement of the work of the Monetary Policy Committee, each independent member was faced with the problem of how to become effective and efficient as soon as possible. To be as successful as they have been shows what they are made of. However, future appointments, particularly if they are made in the same covert manner, might not be as successful.
While we agreed that renewal should be rare if not impossible, in order to achieve the staggering of appointments, renewal might have to be undertaken in one or two cases. In such a situation, renewal could be made for a year or two at the most to provide a hand-over period to ensure that there would be minimum disruption to the work of the Monetary Policy Committee.
Lord Goldsmith: My Lords, I rise with trepidation. There are two reasons for that and both are connected with the fact that I am a practising barrister in my day job. If noble Lords detect some poignancy in the use of the word "day" (having regard to the hours your Lordships have been keeping since I had the privilege of joining this House) you would be right.
The first reason for trepidation is that it might be thought that, as a professional advocate, I would experience no nervousness at standing to speak before your Lordships. That would be wrong. There are many similarities between what I do and your Lordships' proceedings, but there are significant differences. Perhaps the most significant is that I do not rise to argue someone else's case; I do not rise to say on instructions what the answer should be, but to try to express my own opinion. That opportunity is something of a novelty for someone who is normally a paid mouthpiece for others. I hope that it is one that I shall not abuse.
I should like to echo the words of my noble friend Lord Lipsey in thanking so many Members of your Lordships' House for the kindness, welcome, warmth and help that I too have experienced since becoming a Member of your Lordships' House. People said that I would find the House welcoming. I think you have to experience it to realise how true that is. I am so touched, as he is, by the fact that that warmth and friendship is not simply from those on these Benches but from all quarters of the House and, having regard to present events and uncertainties, from all Members of your Lordships' House whatever the route by which they have reached this House, if I can put it that way.
I thank also the officers, staff and attendants for the help they have given me in trying to find my way around. I cannot say that I have yet succeeded, but at least I am beginning to know which parts I do not yet know my way around, if you follow my meaning.
My second reason for trepidation is that I rise on a debate among so many distinguished experts, including economists and others who understand the subject. I come at this as a layman. I hope that it is of some comfort to my noble friend Lord Peston and to those who served with him on the committee that, as a layman, I found the report, to which I would, if it is not presumptuous, pay tribute, readable, interesting and clear. It told me much about the workings of the Monetary Policy Committee and the difficulties, for example, in relation to exchange rate targeting.
In one sense, no apology is needed for daring to speak on this subject before your Lordships because, although the matters covered in the report are technical in many areas, the subject on which they touch is absolutely critical and of the greatest importance to all people in this country. When, days after the election, the Chancellor of the Exchequer announced the decision to give operational independence to the Bank of England on monetary policy, like many others I felt that it was a bold, decisive and right step. It is encouraging to see that the experts on your Lordships' committee endorse that decision.
The report reminds us that, in the 1970s, inflation ran as high as 27 per cent at some points. That strikes home with me because that was when I was starting off in a career and starting a family, and the difficulties of considering how to plan a future against bust and boom and great uncertainty were considerable. I very much hope that my children, who are beginning to approach the same stage, will be able to make their decisions against a background of stable growth and high employment, which the Chancellor has identified as consequences of the present monetary policy.
The point on which I want to focus and on which perhaps I may have a little to contribute has already been touched on briefly by the noble Lord, Lord Ezra, and in rather more detail by the noble Baroness, Lady O'Cathain. It is the question of the appointment of the independent members of the Monetary Policy Committee. The report is convincing on the undoubted quality and distinction of the present members of the committee. It must also be right, indeed the statute so provides, that the appointments must be made by the Chancellor of the Exchequer, and nothing that I say is intended to undermine those propositions.
There are two points that I want to make and I draw a little on my experience of the law in the context of the appointment of judges, a matter which is controversial and on which I do not intend to embark this afternoon. However, there are some parallels which can be perhaps drawn. One is in relation to the openness of the appointment procedures. The report shows--it was very much part of the Government's policy--that this new development should be open and accountable. In moving the Second Reading of the Bill which became the Bank of England Act, my noble friend Lord McIntosh of Haringey emphasised that point. It would be a great shame if the strong statements which have justifiably been made about accountability and transparency were undermined simply by a lack of understanding of how the appointment process works. I note that at paragraph 7.13 the report, although not in any way doubting the quality of recent appointments, expresses some concern that the appointment process was not understood.
In the evidence, certain of the witnesses, including the noble Lord, Lord Desai, questioned whether advertisements might be used. The same issue arose in the law. In 1995, when I had the privilege of being one of the officers of the Bar, we had to consider, and make recommendations on, the appointment of judges. We found ourselves, a little to our surprise, recommending that even High Court judge appointments should be advertised. We took the view that that did not demean the office; that it was not incompatible with approaching individuals who were known to the Lord Chancellor; and that it certainly did not in any way mean that the noble and learned Lord was not the right person to make the appointment. However, it did mean that the constituency of potential appointees could be wider. It seemed to us that there could be
I come to the second question, on which some time has already been spent, of full-time as against part-time appointments. I note that the committee was surprised at the start of its investigation to discover that some of the independent members were full time. I respectfully suggest that that might have seemed, at the time of the passage of the Bill, to be an improbable result. However, as the report shows, some of the independent members are full time although the Bank of England's own members are part time. In a sense, the "away team" has in some ways become more at home than the "home team".
There is no doubt that considerable time must be spent on the work of the committee and any suggestion that it is a job that can be done by turning up once every three months and giving a bird's eye view of the economy is plainly wrong; but the fact that certain members of the committee are able to fulfil their responsibilities part time indicates that being full time may not be an inevitability.
If I have understood the position, and particularly the evidence of the deputy governor, Mr Mervyn King, at questions 305 to 307, the question that arises is whether measures to avoid conflicts of interest restrict choice. It appears that only an academic post is considered to be compatible with membership of the committee. As the report says, in effect, an external member must either be an academic or a retired person or, if from a business background, must resign and sever his links with his former environment. I am in no position to judge whether others with different skills are right to be appointed to the committee, but I am concerned about whether that apparent rigidity limits the choice available to the Chancellor.
I entirely recognise the commercial sensitivities of such appointments, to which reference has already been made. However, I note that the Gouverneur of the Banque de France, in giving his evidence at question 1391, identified as members of what had been his expert team, chief executive officers in the insurance and banking industries, as well as of small and medium-sized businesses. I wonder what procedures are in place there to avoid the same questions arising.
There may be such procedures. I refer, for example, to the full disclosure of interest which, in the case of agents or judges, may deal with what would otherwise be conflicts of interest. So too, "Chinese walls" can sometimes operate well. One must consider the circumstances, but they are well used by financial institutions in the City of London. Their effectiveness is recognised in the core conduct of business rules, published by the Financial Services Authority. As the Law Commission stated in its 1992 consultation paper on fiduciary duties and regularity rules, they require effective and detailed organisational arrangements, but they can sometimes work. Indeed, your Lordships' House in its judicial capacity in January of this year in Bolkiah v. KPMG held that in principle Chinese walls might even operate in litigation. I am not saying that
Lord Burns: My Lords, my first task is a very pleasant one. It is to congratulate the noble Lord, Lord Goldsmith, on a maiden speech of great clarity and insight. I think that I speak on behalf of all noble Lords when I say that we very much enjoyed his transition from paid hack to independent thinker and that we all look forward a great deal to hearing more examples of his independent thinking and to having the benefit of his insights on a range of issues. I shall return a little later to some of the points that he mentioned, with which I very largely agree.
It has been a great pleasure to participate in the committee and I pay tribute to the noble Lord, Lord Peston, for bringing the committee to such a wide measure of agreement. When we started, it looked highly unlikely that we would come to the degree of agreement that we had reached by the end, and it is fair to say that we all learned from each other as we went along. I regard that as being a very important part of serving on such a committee.
I find it useful to separate into two groups the issues that we covered. The first relates to the economics of monetary policy, and the second to the institutional arrangements for delivering that policy. There is now a fairly wide measure of agreement on the economics. In particular, it is generally accepted that the main purpose of monetary policy is to deliver low and stable inflation. Of course, that does not mean that everything is plain sailing. If inflation goes above target for whatever reason--whether world prices or forecasting errors--at some stage there will be difficult issues to address relating to how quickly to bring inflation back to the targets. There are still some very serious analytical issues with which policy-makers will have to deal when there are conflicts of objectives, including the behaviour of unemployment and, as we have heard today, the exchange rate.
So, there is still plenty to argue about. I do not think that the economics profession is finished on the subject of monetary policy, and I very much doubt whether what we now seem to accept as a general agreement about many of these issues will remain for ever. For the moment, however, there seems to be a fairly broad level of agreement.
There is now also fairly widespread agreement about the institutional arrangements for delivering the economics. The report is very much directed towards the second group of issues, and that is where I should like to focus my remarks.
The report argues that the new arrangements have worked well, and it is right that the successes should be acknowledged. Inflation has been close to the target throughout the period; unemployment has continued to decline to levels not seen for many years; in particular, long-term interest rates and inflationary expectations are very much closer to the target than before. Those are the real achievements of the new system. Speaking from the viewpoint of a traditionally cautious civil servant, there are dangers in making excessive claims about the system. It is still early days. It is difficult to separate out how much of the success is due to the MPC arrangements, how much is due to the earlier framework of inflation targets and the published minutes on inflation--we came to describe them as "The Ken and Eddie Show"--and how much is due simply to favourable world conditions.
I tend to agree with the noble Lord, Lord Lipsey, in his excellent maiden speech, that the real challenge will arise when world inflation picks up. From that point of view we have been going through a remarkably benign period. I do not make these points to belittle the achievements of the new arrangements, but experience suggests that if the contribution of any innovation is over-estimated it leads to greater disappointment when the innovation comes up against tougher circumstances. We can be in no doubt that this regime will face tougher circumstances.
In the same light, we should also look at the committee's recommendations that seek to point out weaknesses in the new arrangements in a number of areas. This is not a matter of questioning the basic idea of independent monetary policy, but trying to ensure that it is more likely to continue to be successful. I should like to raise a number of issues on which the committee touched. First, as to the inflation target, I am broadly happy with the formulation of the objectives of the MPC. The inflation target regime was introduced at the end of 1992. The new arrangements have moved us to a symmetric target which is a distinct improvement, but I caution that we should not go overboard on the success of the inflation targets.
The committee also spent some time discussing the whole question of the co-ordination of fiscal and monetary policy. At various stages in my past career I have argued that one of the reasons for leaving monetary policy with the Chancellor is that it enables him to look at the subject of fiscal and monetary policy together. A number of questions were raised as to whether the new arrangements would cause difficulty in that area. As we heard more and more evidence and were taken through the process--for example, that fiscal policy was basically an annual process, that monetary policy was an ongoing process and what mattered was that each of the participants had a clear view of what the other was doing when making decisions--the conclusion at which I arrived was that, if the information was available to the policymakers, there should not be a problem on that front. If people want to disagree with a policy choice that is one matter, but I am not sure we received any evidence that the wrong policy had been chosen because the incorrect information was available.
However, when we come to the question of the appointment of members of the MPC I have more concern. I share some of the concerns of the noble Baroness, Lady O'Cathain. I strongly support the principle that members should have,
I also support the committee's recommendation that appointments should be made in a more open fashion. At a minimum we should encourage people who believe that they have the qualifications to put themselves forward for consideration. The process of trawling through "the usual suspects"--of which I have had considerable experience--can easily become blinkered and give the unfortunate impression that choices are made from a very narrow circle. I strongly support the recommendation that external appointments should be for five years and normally not renewable. Often, political influence arises much more through the process of re-appointment than initial appointment.
The response of the Government is that there is no reason why well-performing members should not be re-appointed, but how is that to be judged? I believe that the present three-year term sits very unhappily with a process where it is accepted that the time lags mean that changes in interest rates take two years to have their full effect. Therefore, we shall be judging people's performance on very little data. We know their voting records but do not know the quality of the arguments advanced because that part of it is anonymous. I believe that that is a recipe for suspicion, grievance and the appearance of passing judgment when it is impossible to do that fairly. I strongly believe that if we want members to be independent and avoid the threat of an implicit judgment on their performance we should have the courage to give them sensible terms of appointment and rotate membership.
I made reference to the noble Lord, Lord Goodhart, and asked how it was possible for him to do a job in two or three days a week which took other people five days a week. To that there is no answer. One asks: how do they fill the rest of their time? Research is one approach but that needs support. That is where the problem appears to arise. Furthermore, the idea of a
One possibility is other suitable part-time appointments within the public sector. Another is the base and research institutes or university departments with their own budgets for research assistants. The intellectual stimulation would then be taken away from the bank and we would avoid the feeling, which is clearly beginning to drift in, that somehow they are full-time and part of the bank, but, when it comes to resources poor relations compared with the executive members.
My final point relates to the conduct of the meetings. I return to a point I made previously, but, unfortunately, I was unable to persuade the committee. It relates to attribution in the minutes. I fully accept that as regards the interchanges during much of the meetings it would be counterproductive to identify who said what. I can see the argument that what matters is the emerging consensus. However, it is curious that when it comes to the summing-up we do not know why individuals were persuaded to move in one direction or another. The independent members appear to have no reservations about talking to the press or giving lectures setting out a framework of their views, but, when it comes to the meeting, all of a sudden they become extraordinarily coy about who said what. Indeed, after tracing some of the speeches one can identify certain speakers with certain paragraphs. Therefore, I hope that in the interests of transparency we shall see some progress on that aspect.
I believe that the new arrangements have settled in well. The committee has been able to point to a number of areas. I hope that your Lordships' House will play an on-going role in monitoring the performance of the committee and will continue to be able to make suggestions.
Lord Woolmer: My Lords, I stand before you to speak for the first time and have three causes for trepidation and one cause for a strong sense of deja vu. Trepidation because I speak to an outstanding report. Trepidation because I follow three excellent maiden speeches. Trepidation because as a former director of Leeds United, I have to tell your Lordships that the team kicks off in Moscow at six o'clock tonight and, unusually, I shall not be there to watch the game.
I have a sense of deja vu because 20 years ago the Treasury Select Committee was established in another place and I had the honour to be a founding member. I remember well the contributions of the noble Lord, Lord Higgins, to those debates and I am delighted to see him on the Benches opposite tonight.
Two of the advisers to that Select Committee were Dr Alan Budd and Professor Willem Buiter. He was then called William, but I notice that he is now called Willem. I must ask him when the change took place. Perhaps it was in order to become a member of the committee. Your Lordships will not be surprised to know that the Select Committee, in one of its first investigations, considered monetary control and monetary policy. That is only 20 years ago. Your Lordships might forgive my sense of deja vu.
While I began life as an economist, in later life I have become more acquainted with business and management. I have the privilege of being the Dean of the Business School at the University of Leeds. As a result, I well understand the concern of those in industry of the impact of monetary policy on their sector. A number of witnesses alluded to the impact of monetary policy differentially upon industry and upon regions. However, if the implication is that monetary policy should be looser and inflation should be higher, I cannot agree. Adding 2, 3 or however many per cent to the inflation rate would not improve the performance of the manufacturing industry; nor would it improve the performance of individual regions with individual problems.
If anything, low and stable inflation enables us to see what the real position is. It enables us to cost the magnitude of doing something about these problems. Casual thinking about inflation is not a substitute for clear analysis and debate about the cause of real differentials in industrial or regional performance.
However, as regards the exchange rate, I sensed less clarity and agreement within your Lordships' committee than in other parts of the report. At one stage, the committee advised us that it is important not to exaggerate the problem of the value of the pound, reminding us that the pound sterling against the deutschmark is still below its level 10 years ago. At other times, it told us that even economists have no idea what determines the exchange rate and that with free markets the exchange rate is always right. Indeed, it advised us that, in any case, the authorities are not able to control the exchange rate. Yet I felt that it had chided the Monetary Policy Committee a little on not taking the exchange rate seriously enough. In the light of the advice of the committee, perhaps it is sensible not to try to do anything about the exchange rate, at least until we move, if at all, towards entry to the European common currency.
Conan Doyle has already been quoted tonight and I felt that at times there was in the report the dog that did not bark. Often, the question is whether the Monetary Policy Committee or anyone else can do a great deal about the exchange rate or even about interest rates. We live in an increasingly interdependent world. We all know that; it is common place to say it. In economic terms, we live extremely close to the European Union and my noble friend Lord Lipsey made some telling points in that regard. Also in economic and capital market terms, we live extremely closely to the United States. The degree of independence of the world economy, and our
The committee explored the benefits of low and predictable inflation. I share the view with most, if not all, in this House that those benefits are considerable indeed. It makes transparent and readily understandable the real costs and benefits of our choices and decisions in the present and over time. But given the importance of confidence and expectations regarding the rate of inflation and of its stability, I should like to see that explored more by the committee, perhaps in its future deliberations.
The frequently voiced concern about allegedly low annuity rates indicates that there remain at least some people in society who do not really believe that the rate of inflation will stay at 2.5 per cent or below. Wage negotiators must still go into talks having to aim at a nominal rate of wage increase, about double that of productivity, in order to ensure that inflation does not erode the otherwise gain they would receive from their increased productivity.
Therefore, inflation and expectations about inflation have not gone away. Perhaps they are only dozing and waiting for other events to happen. How do expectations and confidence regarding the rate of inflation in this country compare with those in other EU countries? How do our wage negotiators and our companies, in their wage negotiations, really see their expectations and how does that compare to elsewhere? How does that impact upon decisions in wage and product markets?
The committee asked the House to consider whether it might be helpful for the committee to be made permanent. For my part, I found its report helpful and a solid basis for taking forward consideration of these matters in future. I hope that the House in due course will feel able to support that suggestion.
Lord Poole: My Lords, I begin by congratulating the noble Lord, Lord Woolmer, on his excellent first contribution to your Lordships' House. I must say that I particularly agreed with his observations, for example, on exchange rate matters. I am sure that with his long experience of local government, the other place, and, indeed, football, he will bring great wisdom and insight to our deliberations in the years to come. We welcome him.
It was a great privilege to serve on the committee under the chairmanship of the noble Lord, Lord Peston. It was really splendid from time to time to be joined by the noble Lord, Lord Roll, from whom I certainly learned a great deal, as I believe did my colleagues.
As your Lordships are aware, in our report we concluded that the MPC has played its hand fairly well. However, the truth--as has been remarked upon by a number of previous speakers--is that we do not really know as yet how robust these arrangements will
As the bank says, and others have noted, the lag between monetary policy action and its full effects can easily be two years. In that case it is indeed true that, for the majority of its existence, the apparent success of the MPC in getting inflation down close to its target can, in my view, be more properly attributed to decisions taken by my right honourable friend Kenneth Clarke when he was Chancellor, than to anything done by the MPC itself.
It pays to look at the numbers. Of the 29 countries in the OECD, only five have an inflation rate over 3 per cent: Mexico, Iceland, Poland, Turkey and Hungary. If those countries are taken out, the OECD average is in fact 2.2 per cent, which is virtually identical to our own rate of inflation as measured by the RPIX, of 2.1 per cent. In other words, one could, if one was being unkind, say that all that has happened is that we have shared in the general international phenomenon of low and comparatively stable inflation rates, and therefore one could reasonably ask whether the MPC has actually achieved anything at all.
Our report states that a 2.5 per cent inflation target is appropriate at the current time. The noble Lord, Lord Peston, will know that I agree with that statement. None the less, it raises some difficult issues, about which, frankly, the Government must be much more honest. The Government repeatedly say that this inflation regime amounts to the maintenance of "price stability", an expression which even appears in the Government's response to our report. In effect, the Chancellor has set the MPC a task not to ensure price stability, but rather, to keep prices rising at not more than 2½ per cent per annum.
If that is price stability, then, like the president of the ECB and one member of the MPC, I am a Dutchman. Over 20 years, inflation of 2½ per cent per annum produces a cumulative increase in price level of 64 per cent. At that rate, the price level will double in about 28 years. I happen to live in Clapham, and from my omnibus--the 137--that hardly looks like price stability. It is just more stable than it used to be.
It seems to me that there are two possible explanations, but only one of them amounts to a reasonable one. One explanation is that the official RPI measure overstates inflation, so that 2.5 per cent is somehow really a number much closer to 1 per cent. In that case, if one is aiming for price stability, accurately measured, then one does indeed need to aim for some small positive inflation number. However, next to no one believes that the RPI overstates inflation by as much as 2½ per cent per annum.
Therefore there is, in my view, a second explanation, which implies that there are good--although perhaps not necessarily compelling--arguments why the authorities should in fact aim for a positive rate of inflation even when it is properly measured. That is of course most easily expressed by the idea that "a little bit of inflation does you good".
As we took evidence, I came to believe that that indeed is the argument implicitly accepted by the Government. In other words, while they talk continually about price stability, the Government are deliberately aiming for inflation, albeit at a low rate. I understand that argument, and I accept that it is probably right at the moment, but somehow it does not sound satisfactory and I have a feeling that there is unfinished business here. At the very least, it is unsatisfactory continually to refer to this regime as one which maintains price stability, because that is grossly misleading. In the end, such misleading use of language can only undermine public confidence.
I believe that that goes to the heart of the matter. It was clear to most, or probably all, of us on the committee, that the old academic certainties which believed that there was a strong causal link between changes in interest rate levels and inflation have now been shown to be, frankly, less than certain. Although the MPC goes to huge lengths to analyse the economic runes, I, at least, am unpersuaded that anything approaching science is really at work. Until the MPC has safely guided us through some unexpected major economic shock without inflation running away, I personally shall believe that its work is more about the psychology of market management than the appliance of science.
If inflationary expectations have been reduced--and they certainly have--it is because interest rate decisions have been taken out of the political arena. That is the MPC's success, and, if I may say so, this Government's. It is now generally believed that inflation is being tackled, with the effect that it indeed is being tackled, with long term inflationary expectations now falling.
If I am right that credibility is at the heart of the matter, the row which has broken out between the independent members of the MPC and senior bank officials over access to the bank's research resources is, in my view, far more dangerous than it looks. All the fuss in the press is a quite unnecessary shame, particularly if it is fed principally by the independent members, as I suspect that it may be. They have done all of us, and the Government, a disservice.
Let us face it: the row is about the current annual budgeting process within the bank. It is about resource allocation. As a matter of fact, the Act clearly states that it is a matter for the court, not the Governor, or the MPC, to decide. This is an internal issue which has been blown up in a way that may undermine the very thing which is making the MPC so successful: the credibility based on its collegiality.
In passing, one cannot help but observe that when the MPC was established, incidentally, the exact status and role of these independent members was unclear. I am led to understand that the Chancellor envisaged that they would indeed, as some have said that they should, retain full-time positions outside the bank--that is, to continue to be real people. In the event, only one, Professor Charles Goodhart, has done that. In practice, the other three have become full-time
As regards the independent members, it would therefore be a very real shame if, by banging about so publicly, those inside-outsiders were to undermine the very thing that makes the MPC a success. The MPC's role is too valuable to have it frittered away by pointless public wrangling.
I started by welcoming the noble Lord, Lord Woolmer, to this House. Perhaps I may be permitted to say that this is in all probability the last time that I shall have the privilege of speaking here. This afternoon some maiden speakers have said how kind people have been to them as they start here. I, too, should like to say thank you to all my friends and colleagues on all sides.
Baroness Hogg: My Lords, it is a mark of interest in this report that it should have attracted no fewer than four distinguished maiden speeches. If it has also attracted the last speech from my noble friend Lord Poole, I for one shall be extremely sorry.
In particular, I take the opportunity to welcome my former colleague, the noble Lord, Lord Lipsey, to the House. I realise that if I were to refer to him as my noble friend, I should cause him some embarrassment. But because he is my friend, I should like to say how much I welcome him and how much, I know, he will add to this House's debates.
The timing of this debate has been made most apposite by the revelation that certain systemic tensions exist between members of the Monetary Policy Committee. Therefore, while I commend this excellent committee and, in particular, its chairman, the noble Lord, Lord Peston, on its work, I focus my reflections on its recommendations regarding the role of the independent members of the MPC.
Clearly, it has been desirable that independence should have been accompanied by an infusion of excellent independent economic talent into the Bank of England. However, I suspect that the form which the MPC takes may have to evolve; that we have, as with this House, a transitional MPC.
The issue that has burst its way into the public print--if one can so disrespectfully describe the Financial Times--is whether the independent members have sufficient rights to command resources within the Bank, and thus to arm themselves with research. Clearly, some independent members feel that they do not.
The answer that seems to please almost everyone is that the Bank should hire some more economists to support the independent members. The Governor of the Bank has been much criticised for not acting to satisfy them much earlier, rather than leave it to the Court of the Bank--which in truth has been left without much of a role to play in the new world--to see fair play. Hum! I believe that some of the criticism
It is all too easy to throw money at the problem, but I believe that the Court should pause for thought. Of course, it is important that the outside members should feel able to challenge the insiders. But from their voting patterns I can see little evidence that they did not. Of course, the longer they stay on the job and away from other jobs from which they may be debarred, the more they can be expected to run down their outside expertise and to need recharging, like batteries. However, the more the independent members are embedded into the comfort of the Bank with their own research staffs, the more they come to look like "insiders" rather than "outsiders". In an entertaining letter to the Financial Times this week, Peter Oppenheimer warns them against allowing themselves to become a kind of monetary equivalent of the House of Lords. Therefore, I warmly support the recommendation of the Select Committee that appointments should be for no more than five years and non-renewable. I also support the committee's view that the process of appointment should be opened up.
The fundamental problem is that the independent members have a mongrel role; they are cross-bred out of two different ideas of, on the one hand, the non-executive director and, on the other hand, the outside appointment to an executive team. If they are non-executives, it is not clear to me that they require executive back-up. Rather, it might be better to follow corporate governance practice in the private sector--and here I agree with my noble friend Lady O'Cathain--and ensure that they have sufficient weight, not because they lead executive baronies but because they are in a majority on the MPC.
Full-time appointments should be avoided, as they could be--here I beg to differ with my noble friend--if the Bank and Treasury were less anxious about conflicts of interest. I agree strongly with the noble Lord, Lord Goldsmith, that we are possibly too precious about this.
If, on the other hand, the independent members are in effect full-time executives, the distinction between outsiders and insiders disappears. I note in passing, and with absolutely no disrespect to those concerned, that the outside membership of the MPC would not pass the PIRC test of independence for non-executive directors. However, if they are intended to be insiders, it is then far from clear to me why we need so large an MPC.
Does any organisation work well when nine different executive teams are charged with the same responsibility? I wonder whether the public would not at some future date come to ask whether it was necessary to maintain a whole series of academic baronies in the Bank in order to arrive at a decision whether to move interest rates by, it is hoped, only a quarter or a half percentage point at a time.
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