ANNUAL REPORT BY THE BANK (Hansard, 20 April 1998)

§ The Economic Secretary to the Treasury (Mrs. Helen Liddell)
1 beg to move, That this House doth agree with the Lords in the said amendment.

§ Mr. Deputy Speaker (Sir Alan Haselhurst)
With this, it will be convenient to discuss Lords amendments Nos. 2 and 3.

§ Mrs. Liddell
These three amendments, which have come to us from another place, will ensure that the Bank's annual report contains details of its objectives and strategy and provide for the committee of non-executives to report specifically on them. The amendments reflect and enhance existing practice, and provide useful additional clarification of the role of the court and its sub-committee. I have pleasure in commending them to the House.

§ Mr. Michael Fallon (Sevenoaks)
I am grateful to the Minister for explaining the background to the amendments. She said that they came to us from another place; it may help the House if I add that they came to us from Labour Back Benchers in another place. As the hon. Lady said, they usefully clarify the position.
Lords amendment No. 1 ensures that the Bank properly reviews its performance. May I ask who will lay down the objectives and strategy for the first year, which the Bank will not have been able to do before the enactment of the Bill—or do we take it that the Chancellor's correspondence setting up the new arrangements itself comprises the objectives and strategy?
Lords amendment No. 2 is self-evidently an improvement—such an improvement that I wonder why it did not occur to anyone in this place.
Lords amendment No. 3 is worth pausing over. It makes sense only if the Bank of England's report is published reasonably early in the financial year. Could the Minister help us by giving her interpretation of the phrase "as soon as practicable"? As I understand it, the Bank's report will include the accounts of the Bank of England. Many public bodies have to produce annual reports to the House that include their accounts and they sometimes struggle to get them in by end of July, when the House rises.
I hope that the Economic Secretary accepts that that is a little late in the day for us to see the statement of objectives and strategy for the forthcoming year. It may 504 be that they can be published in some other form. Under clause 12, the Treasury's specification for monetary policy strategy and objectives can be published at any time during the 12 months. If the hon. Lady can clarify the timetable and say when she expects the annual report to be put before Parliament, I am sure that we can wish the amendments well on their way.

§ Mr. Nick Gibb (Bognor Regis and Littlehampton)
Lords amendment No. 1 seeks to ensure that the Bank of England sets out its objectives and strategies and then prepares a report on its success in meeting them. I am delighted that the Government have accepted the amendment proposed on Report in the Lords. As my hon. Friend the Member for Sevenoaks (Mr. Fallon) said, I am surprised that it was not proposed by the Conservatives in Committee or included in the Bill as originally drafted. It is difficult to see how
the Bank's performance in relation to the objectives and strategy for the time being determined by the court can be kept under review under clause 3(2) if there is no requirement to publish the objectives and strategy.
There is a big problem with the Bill's basis, because it takes from politicians key economic decision making in a vital area of economic policy and puts it into the hands of unelected officials. In such a case, it is the more important that every step in the decision-making process is catalogued and published so that people can see what is going on. It is more important that that happens when policy is determined by those who are unelected, because, if the policy goes wrong, there is no sanction against those officials—they cannot be turfed out of office by the electorate. As an alternative, the public must be able to see every step in the policy-making process. The setting out and publishing of strategies and objectives is a key element in achieving that.
It is important to remember that the translation of an inflation target into monetary policy is not a scientific, simple, formulaic matter. The conduct of monetary policy is as much an issue of public policy debate as the setting of the inflation target itself—indeed, I would argue that it is more political. There is a consensus on a low inflation target, but there is much less of a consensus on the means of translating that target into monetary policy. The amendment should ensure that the Bank of England publishes not only its objectives and strategies for running itself on a day-to-day basis, but a statement of how it believes monetary policy should be conducted.
5 pm
Clause 16 specifically states that the directors of the Bank
shall keep the procedures followed by the Monetary Policy Committee under review. That is therefore specifically to be included in the functions to be carried out by the directors as set out in clauses 2 and 3, and is to be part of the annual report required under clause 4. It is logical that the amendment should also apply to the review of the Monetary Policy Committee and therefore to the conduct of monetary policy. I should be grateful if the Economic Secretary could say whether that is the purpose of the strategy and objectives that are to be required to be published. Will they contain details of the Bank's general strategy on how 505 to conduct monetary policy—how it intends to translate an inflation target set by the Chancellor and the Treasury into day-to-day monetary policy?
Samuel Brittan, in giving evidence to the Treasury Committee, said:
Monetary economics is not a hard science. In his evidence, Lord Eatwell said:
there is a tendency in monetary policy matters to regard certain propositions as 'obvious' and anyone who questions such propositions to be at best a nit-picking academic and at worst a crank. Yet the notion that the theory of monetary policy is 'obvious' and 'pragmatic' is belied by the fact that the theory and practice of monetary policy has undergone quite radical revisions over the past 20 years. If views held 10 years or 15 years ago were so obviously right then, why are they so obviously wrong now? The Bank of England should use the disclosures required by the amendment to spell out its latest thinking on what constitutes best science or best practice in the general conduct of monetary policy. The public, academics and general policy debate can then examine the Bank's propositions to determine how far they are proved correct with the passage of time.
One of the other great paradoxes and difficulties in the Bill could be eased if we were to include in the required statement of strategy some explanation relating to the inherent conflict between the Bank's conduct of monetary policy and the Government's conduct of fiscal policy. The problem with separating those functions is that, by passing control of inflation to an outside independent body, the Government could conduct a loose fiscal regime and leave the Bank of England to deal with the inflationary consequences. Indeed, some have argued that such has been the Government's record over the past 11 months. The amendment should enable the Bank to set out how it would or did respond to the Government's fiscal policies.
That would have two distinct advantages. First, it would enable the public to see the consequences of the Government's fiscal policy in terms of interest rates, mortgage rates and so on. Secondly, it would enable public policy debate to take place on the issue of whether the Bank was adopting the correct strategy in dealing with fiscal policy changes implemented by the Government. The Bank's performance will be judged at the very least principally—and probably almost entirely—by the success of its conduct of monetary policy and therefore the success or failure of the members of the Monetary Policy Committee. I hope that the amendment will enable the Bank to set out, in as much detail as possible, its strategy and objectives on the conduct of monetary policy.
Important matters relating to the conduct of exchange rate policy also need to be spelled out in any statement of objectives and strategy. The key role in the conduct of an exchange rate policy rests with the Treasury and, as with fiscal policy, it is important that the Bank sets out how it has dealt with what it perceives to be the Government's exchange rate policy. In addition, the Bank itself has some role in the implementation of exchange rate policy.
Such an approach is important for two reasons. First, it would enable the public to assess how the Bank has dealt with and responded to the Government's exchange rate policy and, with the passage of time, to decide whether that was the correct approach. Secondly and equally important, it would enable people to see what effect the Government's exchange rate policy had on the conduct of monetary policy by the Bank—in other words, the effect on mortgage and interest costs.
506 The Bank should also set out what it perceives to be the consequences for the exchange rate of its own conduct of monetary policy. That would help to expose the absurd situation that might occur if the Government pursued a policy of reducing the value of sterling by selling it into the market and, simultaneously, the Bank raised interest rates to reduce the money supply artificially increased by the Government.
Throughout the Committee stage, Conservative Members tried to obtain from the Government an explanation of how such conflicts would be resolved. Which policy will take priority: fiscal or monetary; exchange rate or inflation target? The Government refused—or, rather, were unable—to give an answer. The amendment might do what the Government could not, and help to make the issues transparent.
A further conflict that the amendment will help to make apparent to the public relates to the Treasury's debt management policies. Whether or not the Government finance debt through a fully funded method will have an enormous impact on the money supply figures. In his evidence to the Select Committee, Professor Tim Congdon explained in great detail that debt being fully funded or not will have a specific and direct effect on the money supply. The Bank should set out in its strategy and objectives how it will respond to the method of debt funding pursued by the Government. Again, that will enable analyses to be undertaken of whether that approach is correct and, with hindsight, it will enable the public to see the effect of Government debt management policy on the level of interest rates.
The amendment, accepted by the Government, should be used to create much greater transparency not only in the management of the Bank but in the far more important question of the performance by the Bank of its key function of managing monetary policy in general. The minutes of the Monetary Policy Committee go some way towards achieving that, but more general objectives and strategies set out in full, assessed in the light of experience, debated and discussed will do much to bring an element of democracy into what is, in essence, an undemocratic Bill.

§ Mrs. Liddell
I am glad that the hon. Member for Sevenoaks (Mr. Fallon) sees the common sense of the approach taken, because it fits in with our debates on Second Reading and in Committee. I welcome the hon. Gentleman to today's debate, as he was not with us in Committee. I hope that he will pass on to the hon. Member for Daventry (Mr. Boswell), who was with us, our good wishes to his family, about whom the Committee heard a great deal—which may have been a sign that it took the Conservatives some time to get into their stride in relation to the Bill.
I take up the specific point that the hon. Member for Sevenoaks made about who will set the Bank's strategy and objectives. As clause 2(2) says, the court as a whole will set out what that strategy is; we had a lengthy discussion in Committee on how that would be achieved. Indeed, the Chancellor mentioned the subject in his statement on 20 May 1997.
The hon. Member for Sevenoaks suggested that it might be possible to hold a debate on the Bank's annual report and strategy. On 20 May last, the Chancellor of the Exchequer specifically said that it would be desirable for 507 the Bank's annual report to be debated in the House. The Treasury Committee, in its report on accountability of the Bank of England, also recommends that there should be a debate.
The hon. Member for Sevenoaks asked about this year's timetable for the annual report. The Bank's financial year ends on 28 February, and usually an annual report is available by the end of May or the start of June. We are aware of no reason to deviate from that timetable or for the Bank to deviate from it. The Government look forward to a debate in the House soon after, but I am sure that the hon. Gentleman, as an experienced parliamentarian, would not expect me to involve myself in the issue of when the House will have an opportunity to debate these matters; such issues are a matter for the usual channels.
As the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) is a great fan of recycling, I am glad that he had an opportunity to recycle his speeches from Committee and from Second Reading. It is always interesting to listen to him, although one does not necessarily agree with all that he says. It will be for the court to determine the contents of the annual report. Extensive correspondence between the Chancellor and the Governor of the Bank of England has been published, as have memorandums of understanding between the Government and the Bank. There has been extensive debate in this place and elsewhere, and I am sure that the court will take into account many of the points raised.
The Government welcome Lords amendments Nos. 1, 2 and 3, which provide useful clarification. They very much fit the Government's strategy, which is in favour of greater transparency, and greater clarity of operation, of the Bank. It is useful to have greater clarity of legislation as well, so I commend the amendments to the House.