Money Supply (Hansard, 15 July 1986)

§ Lord Williams of Elvel
My Lords, I beg leave to ask the Question standing in my name on the Order Paper.

§ The Secretary of State for Employment (Lord Young of Graffham)
My Lords, the object of monetary policy is to maintain the conditions needed to reduce inflation. Sterling M3 is only one of the indicators of monetary conditions. Taking all factors into account, including MO and the exchange rate, there is no reason to believe that monetary conditions are currently too loose.

§ Lord Williams of Elvel
My Lords, I am grateful to the Secretary of State for his reply. May I therefore take it that in setting the target for M3 in the budget his right honourable friend the Chancellor of the Exchequer was doing no more than talking in the air?

§ Lord Young of Graffham
No, my Lords. The annual target for M3 is in the range of 11 to 15 per cent. It is true that the annual rate to June was 18¼ per cent. and is above that target range. My right honourable friend the Chancellor of the Exchequer continually reminds us all that that is only one of a number of indicators. He has to consider all factors in the conduct of monetary policy.

§ Lord Bruce-Gardyne
My Lords, I apologise to my noble friend for denying to him and particularly your Lordships' House the opportunity to discuss this interesting information in response a month ago. May I ask him whether he is satisfied that, if one looks at all the various indicators, apart from MO (which, frankly, has a rather limited fan club), it does not begin to appear, when one considers not only the broad aggregates but also bank lending to the private sector and now the exchange rate and the movement in house prices and in other real asset prices, that there are accumulating indications of excessive laxity in credit conditions? Does this not possibly suggest an acceleration of inflation in 1987?

§ Lord Young of Graffham
My Lords, the proof of the pudding has to be in the eating thereof. If we look at the conduct of monetary policy over the last five or six years, we see that there has been steadily reducing inflation combined with a steady growth of 3 per cent. a year, which, at least in terms of the economy, is as good as that of any of our competitors in Europe. I think that we have to take all factors into account. The pound sterling and the economy have ridden a substantial drop in oil revenues; the economy is strong and we have to look and react to events when they occur.

Lord Bruce of Donington
My Lords, is the noble Lord aware that he has still not answered my noble friend's Question which asked the Government, what steps they intend to take to bring the 33.5 percent. annualised rate of growth of the broad monetary aggregate in the latest three months more nearly into conformity with the target ranges"? The noble Lord has not answered the Question. What steps do the Government propose to take to bring the rate of growth more into conformity? Is the noble Lord saying that it lies outside the power of this Government to take steps; and is he aware that for many years the M3 indicator was taken as the predominant influence on Government policy? Will the noble Lord give some indication or forecast as to what effect he thinks the extra billion to be injected into the economy for electoral purposes is likely to have on the future M3?

§ Lord Young of Graffham
My Lords, I am grateful to the noble Lord, Lord Bruce of Donington. I am sure that it was only by accident that he obviously misheard my reply. I said that my right honourable friend the Chancellor of the Exchequer takes into account a number of different indicators. His responsibility is in looking at monetary conditions as a whole. Sterling M3 is only one of a number of indicators, and it would be quite wrong to isolate one particular indicator.

§ Lord Tordoff
My Lords, may I suggest that the noble Lord has still not answered the Question, and that if the answer that he is trying to give to your Lordships' House is that the Government intend to take no steps whatever, perhaps he will be good enough to say so?

§ Lord Young of Graffham
My Lords, when the Question was first put down it referred to 39 per cent. annualised rate of growth of the broad monetary aggregate. When the Question comes to be answered it 795 is 33.5 per cent.—and this on a three-months' rate. I keep on making the point that it is no good taking a three-months' rate. We are talking of conditions over 12 months, and we shall have to look to see whether or not the present 18.25 per cent., which is the annual rate for June in sterling M3, would in fact come within the broad range, which is 11 to 15 per cent. I say again that the proof of the pudding is in the eating. We must look at the rate of investment, we must look at the rate of growth, and we must look at inflation in our society.

§ Lord Mackie of Benshie
My Lords, can the noble Lord tell us which are the other factors which enable the Chancellor to ignore the extraordinary variation in this rate?

§ Lord Young of Graffham
My Lords, there are many factors. There are, of course, all the other indicators to which the Treasury pays attention; but it would be wrong to single out one. What we have learnt over the years is that the responsibility of my right honourable friend the Chancellor of the Exchequer is to take an overall look at the whole of the economy. In the end what happens will speak for itself.

§ Viscount Trenchard
My Lords, would my noble friend agree that times have changed when all the opposition parties want to make sure that we understand the importance of monetarism; that in fact we have always taken into account other factors, including the state of our own economy generally and that of America; and that I hope that the Government will continue to look at all these factors?

§ Lord Young of Graffham
My Lords, I am very grateful to my noble friend for reminding me that times have changed; I am not sure that those sitting opposite have.

§ Lord Molloy
My Lords, may I ask the noble Lord the Minister whether the target ranges set out in the Budget speech had anything whatsoever to do with the statement that he (the noble Lord) made in this House that, because of that Budget speech, there could well be a big reduction in unemployment by Christmas? Is that still the position, notwithstanding the statements and despite the fact that the targets set out in the Budget speech have not been attained? Will that mean that there will not be much reduction in unemployment after all?

§ Lord Young of Graffham
My Lords, I am grateful to the noble Lord, Lord Molloy, for giving me the opportunity to remind the House once again that the only forecast I have made is that when the figures for Chistmas become apparent long-term unemployment will be seen to be down. I have at no time made any forecast about the level of unemployment itself. This is solely due to the Government recognising that a very real problem in our society is the plight of those who have been out of work for more than a year and taking steps towards helping that.

§ Lord Thorneycroft
My Lords, will the Government continue stoutly to resist all the attempts of the 796 Opposition to increase Government expenditure in endless amendments to every measure that comes before the House?

§ Lord Young of Graffham
My Lords, the Government have succeeded for the past seven years and I am quite sure that they will succeed for the next seven.

§ Lord Diamond
My Lords, to return to money aggregates, would the noble Lord the Minister help us as to what is the policy of the Government with regard to these aggregates? Do they recommend them as being helpful? Do they take the view that they are to be regarded as helpful on some occasions when the thermometer registers the temperature that they think it ought to register and not on other occasions when it does not. The House is in total confusion as to what is the Government's view of targets.

§ Lord Young of Graffham
My Lords, I am very sorry that the noble Lord, Lord Diamond, should be in a state of confusion. Let me endeavour to bring him out of it. The purpose of the Government is to look after the health of the patient. The temperature registered by the thermometer is another matter. The health of the patient is the only thing that really matters.

Lord Paget of Northampton
My Lords, in view of the supplementary question of the noble Lord, Lord Thorneycroft, may we take it that the "Chunnel" is now out?

§ Lord Young of Graffham
No, my Lords, we may take nothing of the sort.

§ Lord Williams of Elvel
My Lords, will the noble Lord the Secretary of State reaffirm that it is Government policy—and I quote from the medium-term financial strategy of 1980—that there is no question of departing from money supply policy which is essential to the success of any anti-inflationary strategy? Is this the policy of the Government or is it not? If this is the policy of the Government, will the noble Lord please answer my original Question?

§ Lord Young of Graffham
My Lords, surely the experience of the last few years continues to confirm the value of a clear commitment to medium-term financial strategy and the ultimate objective of continuing lower inflation. The record on money GDP growth, which has halved while output has continued to grow at an average of 3 per cent. per annum since 1981 and inflation has gone down from 18 per cent. to 2.5 per cent., demonstrates the success of that strategy; and we will continue, I hope, to demonstrate that success.