§ 3.20 p.m.
§ Lord Bruce-GardyneMy Lords, I beg leave to ask the Question standing in my name on the Order Paper.
§ The Question was as follows:
§ To ask Her Majesty's Government what steps they intend to take to seek to bring about the 18 per cent. annual rate of growth in broad money more nearly into conformity with the target range announced at the time of the Budget.
§ The Secretary of State for Employment (Lord Young of Graffham)My Lords, interpretation and forecasting of growth in broad money is very difficult, as other countries besides the United Kingdom are finding. The Chancellor of the Exchequer explained the problems fully in his speech to the Lombard Association last April, and the Governor of the Bank of England discussed them further in his Loughborough lecture last night. However more 436 reliable indicators, such as narrow money and the exchange rate, have recently been indicating some easing of monetary conditions and the Chancellor judged an increase in interest rates of 1 per cent. to be appropriate.
§ Lord Bruce-GardyneMy Lords, I am most grateful to my noble friend for that reply. I am sure that we all noticed the governor's conversion on the road to Loughborough last night. May I ask my noble friend about the governor's earlier comment at Mansion House when he said that he reckoned that both liquidity and credit had been growing uncomfortably fast? Do the Government share that sense of discomfort? Are they sure that a 1 per cent. rise in base rates—although intervention must be becoming very expensive in the exchange markets—is sufficient to calm our stomachs?
§ Lord Young of GraffhamMy Lords, the Governor of the Bank of England discussed at some length last night at Loughborough the complexities of broad money growth and the difficulty in interpreting it. That is why, as the Chancellor explained in his Mansion House speech last week, it was the evidence of more reliable indicators such as narrow money and the exchange rate that was the trigger for the recent rise in interest rates and not broad money or credit. As the Chancellor also made clear, the governor fully concurred in the judgment that a rise in interest rates of 1 per cent. was what was required to keep the financial strategy on track.
§ Lord GrimondMy Lords, are we to understand from the governor's remarks yesterday that the Government have abandoned monetary targets?
§ Lord Young of GraffhamMy Lords, the governor was right to draw attention to the increasing difficulty in interpreting changes in broad money stock, as my right honourable friend the Chancellor has done on several occasions. Our commitment to a firm fiscal and monetary policy remains unchanged. That is the policy which has brought us to the combination of low inflation and sustained growth.
§ Lord BeswickMy Lords, in view of the increasing complexity of the financial system to which the Governor of the Bank of England drew our attention this week, in view of the ever-increasing volume of credit—or purchasing power—which the private banking system is producing, as the noble Lord's Question indicates, and in view of the fact that all this gadgetry in the City is going to increase the volatility of this business, is not the demand that was made in this House in November last year for a new inquiry—a new Royal Commission of the Macmillan type—of greater validity now than it was a year ago?
§ Lord Young of GraffhamMy Lords, having regard to the period of time that most Royal Commissions take and the increasing complexity and speed of markets, I doubt whether a Royal Commission would be appropriate in the circumstances. No, I believe that my right honourable friend the Chancellor is on the right course, and if noble Lords opposite cannot recognise low inflation and sustained growth when 437 they see them, possibly that explains why in 1974 to 1979 we had an average rate of inflation of over 15 per cent. and an average growth of only three-quarters of 1 per cent. a year.
§ Lord Williams of ElvelMy Lords, can the noble Lord tell us in the light of what the governor said and in the light of what he himself said in response to the noble Lord, Lord Bruce-Gardyne, whether the Government have faith any more in the medium-term financial strategy? If so, what does that strategy now consist of? If not, can he explain precisely what the Government's monetary policy is?
§ Lord Young of GraffhamMy Lords, I am glad to be given the opportunity of explaining to noble Lords opposite what monetary policy should be. It should be to create monetary conditions that bring a steady downward pressure on the rate of growth of money, GDP and thence inflation. Short-term interest rates are the essential ingredient of such monetary policy, and they will be held at the level required to maintain monetary conditions which will continue downward pressure on inflation.
§ Lord DiamondMy Lords, as the noble Lord has come before us so extremely well briefed, no doubt he can give us the figures of the cost to the exchange of preventing the rise in interest rates until very shortly after the Tory Conference was over?
§ Lord Young of GraffhamMy Lords, if the noble Lord wishes to ask such a Question, may I suggest that he puts one down on the Order Paper? That is another matter entirely.
§ Lord RoberthallMy Lords, are we to take it now that since the Government cannot identify money they have lost all control over the monetary system?
§ Lord Young of GraffhamNo, my Lords. I do not believe that any of my answers has given rise to the suggestion in any way that the Government are doing anything other than continuing their commitment to a firm fiscal and monetary policy. We must look at and interpret correctly changes in broad money stock. The Government are looking at that and at the difficulties of interpreting such changes, and they are looking towards narrow money. That is why my right honourable friend the Chancellor of the Exchequer judged it fit to raise interest by 1 per cent. last week.
§ Lord Williams of ElvelMy Lords, I am sorry to press the Secretary of State, but can he answer my first question? Do the Government still believe in the medium-term financial strategy or not?
§ Lord Young of GraffhamYes, My Lords.
Lord Bruce GardyneMy Lords, may I ask my noble friend, following the question from the noble Lord, Lord Grimond, whether we shall be careful to bear in mind that when we abandoned targets for broad money in the early 1970s the consequences were not altogether savoury?
§ Lord Young of GraffhamMy Lords, I should like to assure my noble friend that time has moved on and that we do not live in the conditions that existed in the late 1970s.