Narrow Money Supply (Hansard, 12 July 1989)

§ Lord Brabazon of Tara
My Lords, MO's growth rate has fallen appreciably since last summer. The Government will continue to take whatever steps are necessary to ensure that it reaches, and remains within, the target range.

§ Lord Bruce-Gardyne
My Lords, I am grateful to my noble friend for that reply. In his Budget Statement, my right honourable friend the Chancellor of the Exchequer said that he expected MO—or "Little Mo" as it is known in the trade—to fall within the target range of 1 to 5 per cent. very shortly. Is it not the case that in the last quarter for which figures were available—the quarter to May —it was still up at 6.2 per cent? Although some of us may have reservations about the relevance of MO, it is my right honourable friend's current favourite. May we be assured that it will not be jettisoned like some previous favourites as being unreliable, simply because it proves to be somewhat wayward?

§ Lord Brabazon of Tara
My Lords, I think that I can give my noble friend the assurance that he seeks. "Little Mo" has proved a reliable indicator of monetary conditions. The sixth-month annualised growth rate for last month was 2.9 per cent. Obviously, I cannot give my noble friend a date when it might come within target, but I hope that it will be shortly.

§ Lord Barnett
My Lords, will the Minister tell us whether he or any other member of the Government believes that MO, or any other wider measure, is an adequate measure of money supply? If they believe that, do they believe that that is the only thing necessary to control inflation, regardless of other indicators?

§ Lord Brabazon of Tara
My Lords, as I said, "Little Mo" has proved a reliable indicator of monetary conditions. Obviously, we continue to take broad money, particularly M4 into account in assessment of monetary conditions, but there are a number of other factors which need to be taken into account in measuring the performance of the economy.

§ Lord Ezra
My Lords, does the noble Lord agree that, when the Government came to power, they set great store by controlling the money supply as a means of regulating the economy, but that progressively over the years they have discarded the use of the various money aggregates? Are we now to assume that the control of the money supply no longer plays a part in the Government's policy towards the economy?

§ Lord Brabazon of Tara
No, my Lords. Indicators have their uses, but, as I said, other things are also important. Firm monetary policy is the only way to get on top of inflation. It has worked in the past and it will work again.

Lord Bruce of Donington
My Lords, in the light of the information given to the House by his noble friend Lord Bruce-Gardyne that, at 6.2 per cent., MO is outside the target range already set at one to five in the medium-term financial strategy, will the Minister give any indication as to whether the figures that have been given for 1990–91, 1991 and 1992 are to be revised in view of the apparent unreliability of the present money indicator? Will the noble Lord give the House an undertaking that, as and when the existing definition of monetary aggregate proves to be of little use to them for propaganda purposes and they select a new definition which suits them more conveniently, they will consider using the term "MOO" or, if not, "MOO7"?

§ Lord Brabazon of Tara
My Lords, I should hasten to add that the Government do not use those indicators for propaganda purposes. I cannot give any information as to any possible revision of targets for future years. The noble Lord will have to wait and see what the Chancellor of the Exchequer says in due course.

§ Lord Stoddart of Swindon
My Lords, while the technical arguments that we have heard about money supply are very interesting, is it not a fact that Government policy of controlling money supply in the economy has gone completely awry in that, despite high interest rates, credit expansion has gone on apace? Will the Minister ask his right honourable friend the Chancellor of the Exchequer to get rid of that moribund policy and bring forward a new policy to deal with credit expansion, by insisting that the banks and other credit institutions put special deposits with the Bank of England?

§ Lord Brabazon of Tara
My Lords, I disagree with the noble Lord that the Government's policy is in disarray. We are experiencing an unprecedented growth rate at the moment which I should have thought would be welcome to most people. With the benefit of hindsight, the loosening of monetary policy post the Stock Exchange crash in 1987 proved to have gone too far; but it was a judgment made at the time when the risk of recession was considered to be great.

§ Lord Stoddart of Swindon
My Lords, is the Minister aware that the growth is in credit and imports from abroad?

§ Lord Brabazon of Tara
My Lords, at the moment all the indicators, whether for imports or anything else, are showing strong upward signs.

§ Baroness Seear
My Lords, will the Minister reconsider his statement that the only way of dealing with inflation is through monetary policy? Does he not feel that fiscal policy also has a role to play?

§ Lord Brabazon of Tara
My Lords, as I said, firm monetary policy is the only way to get on top of inflation. Credit controls would not work again.

§ Baroness Seear
My Lords, I did not mention credit controls. I do not believe in credit controls. I asked about fiscal policy.

§ Lord Brabazon of Tara
My Lords, perhaps I should have a discussion with the noble Baroness to find out what her proposals are.

§ Lord Peston
My Lords, if, as the Minister says, firm monetary policy is the only way to get on top of inflation, why are the Government making such a song and dance about wage settlements at the moment?

§ Lord Brabazon of Tara
My Lords, obviously excessive wage demands are in themselves inflationary.

§ Lord Bruce-Gardyne
My Lords, in view of some of the comments from the Opposition Benches, perhaps I may ask this question. Will my noble friend confirm that it is now clearly the view of Her Majesty's Government that a certain disregard of monetary indicators in the period 1984 to 1987 may have been a significant contributor to our current problems with inflation?

§ Lord Brabazon of Tara
My Lords, as I said, there was a relaxation of monetary policy post the Stock Exchange fall in 1987. With the benefit of hindsight, it is clear that the stock market crash was merely a financial phenomenon of little relevance to the real economy. However, at the time and given the balance of risks, the policy was fully justified.