Monetary Policy (Hansard, 12 June 1997)

§ 4. Mrs. Anne Campbell
To ask the Chancellor of the Exchequer what steps he is taking to ensure that the Government's monetary policy objectives are met. [1588]

§ 5. Mr. Sutcliffe
To ask the Chancellor of the Exchequer what steps he is taking to ensure that the Government's monetary policy objectives are met. [1589]

§ Mr. Gordon Brown
Last month I announced reforms which gave the Bank of England operational responsibility for setting interest rates. Today I have written to the Governor setting out the Bank's remit and how it will be held accountable for meeting its target.
To meet the Government's objectives of high levels of growth and employment, we need consistently low inflation. That is why I am today announcing a precise and rigorous framework to achieve the Government's inflation target of 2.5 per cent.
Our new long-term framework will ensure that, if inflation is 1 per cent. higher or lower than that target, an open letter will be sent by the Governor to the Chancellor so that the public are fully informed as to why the divergence has occurred and what steps will be taken in response. I have arranged to put the letter in the Library of the House.

§ Mrs. Campbell
The whole country will welcome the openness and firmness of my right hon. Friend's pursuit of the Government's objectives. Does he agree that such measures are essential if we are to create a climate of stability and confidence and break out of the cycle of boom-bust economics that was the Conservative Government's policy?

§ Mr. Brown
If we are to achieve our aims of high levels of growth and employment in the British economy and avoid the boom-bust economics that bedevilled people's lives during the period of Conservative Government, we need to set a target for consistently low inflation. The Conservative Government's inflation target was not met in any month in 1985 or 1986; average inflation under the Conservatives was 6.2 per cent. and in the 1990s it was 4 per cent. By setting our target of 2.5 per cent. and introducing the modern procedure whereby the Governor will write to the Chancellor if it is exceeded by more than 1 per cent., we are creating the most open and rigorous framework for monetary policy.

§ Mr. Sutcliffe
In 1979, manufacturing represented 30 per cent. of gross domestic product, but that is now down to less than 20 per cent. and thousands of jobs have been lost. This country is a net exporter of investment. What do the Government intend to do to improve the situation?

§ Mr. Brown
I agree with my hon. Friend. The reason why we have had, on average, high inflation and low growth over many years is lack of investment and lack of capacity in the economy. There is no long-run trade-off between inflation and growth. We need measures that will create a platform of stability on which industry and employees can build. It is precisely for those reasons that we have set in place a long-term framework for monetary 1266 policy. If the Conservative party does not believe that I am right to make these reforms in the Bank of England, will it pledge to reverse them in its manifesto at the next election?

§ Mr. Malcolm Bruce
Does the Chancellor acknowledge that what he has just told the House and explained to the Governor of the Bank of England is a clear departure from the Labour party's manifesto commitment? Under the heading "No risks with inflation", it said: We will match the current target for low and stable inflation of 2.5 per cent. or less. By having a fixed 2.5 per cent. with, in effect, a margin of 1 per cent. either way, the Chancellor is setting a range of 1.5 per cent. to 3.5 per cent. Is that not the beginning of a serious relaxation of the commitment to bear down on inflation?

§ Mr. Brown
I have tightened the framework and made the procedure more rigorous and open. Under the Conservative Government, the range was 1 per cent. to 4.5 per cent. Under this Government, if inflation goes above 3.5 per cent., the Governor of the Bank of England will write a letter to the Chancellor explaining his views and whether the circumstances are unique. If they are repeated over a period of time, he will write again three months later.
Taken together, the reforms in the Bank of England, the setting up of the Monetary Policy Committee, the appointments that I have made to that committee, which have been widely welcomed, and this new open procedure will be welcomed in Britain and abroad. They are the best guarantee that we shall have the consistently low inflation that has eluded this country. That is the platform on which to build in order to achieve what everyone wants—high and stable levels of growth and employment.

§ Mr. Kenneth Clarke
The hon. Member for Gordon (Mr. Bruce) is right. The Chancellor has just tried to slip in an important announcement on a day when the figures show that the Conservative Government hit the inflation target of 2.5 per cent. on the button as a result of our policies. How can the right hon. Gentleman deny that he is loosening the inflation target by moving from 2.5 per cent. or less to 2.5 per cent.? He has now introduced a new obligation on the Bank of England: he will hold it accountable if inflation is more than 1 per cent. below 2.5 per cent.
Those measures loosen the criteria for controlling inflation that the bank previously used. What is the reason for that? Is it a reaction to our criticism that the Chancellor's hasty decision to go to operational independence would lead to overkill? Does it not show that he is making policy on the hoof, and giving no stability or confidence to anyone?

§ Mr. Brown
It is interesting to note the right hon. and learned Gentleman's nostalgia for the old Ken and Eddie show. Instead of an ad hoc, personalised and often chaotic system, we have introduced rules based on principles and a rigorous approach. One week the shadow Chancellor argues that our approach is too rigorous, and the next he says that it is too soft. The difference between the Conservative party and the Labour party is that the 1267 Conservative party met its inflation target in only 11 months out of 55. It did not meet its target at all in 1985 and 1986. Everyone knows that the only reason why the target was met last month was because of the fall in the exchange rate. We have established a framework that is open and will last. I believe that that is our best long-term chance of having consistently low inflation, and is the means by which to achieve high levels of growth and employment.