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Financial Markets and Monetary Policy

Interest rates are a very blunt instrument and I am sure many people are worried. I hope that if inflation picks up trajectory and goes down, we will start to see interest rates top off and that some with fixed mortgages—many have quite long fixed mortgages—will feel much more relaxed. To pay tribute to the Chancellor, he has, with the lenders and in a very competent way, produced a very good package of forbearance for those who may have problems with mortgages. The Government have, in many respects, set a very stable environment for the economy, but there are worries. My principal worry about the Bank, independent as it is, is that it may overdo interest rate rises.

My second point concerns quantitative easing and quantitative tightening. Clearly, we did more QE than was probably needed, but we are where we are and it needs to be reversed. If you are going to try to eat an elephant, you have to do it one bite at a time. It will take us 20 to 25 years to reduce the stock of bonds that the Bank of England holds, and what I do not understand is why the Government are not having a more active

discussion with the Bank about when it will sell the bonds. We have a situation where the Bank has put up interest rates, that leads to a fall in bonds and at the same time the Bank sells bonds, creating a loss that it passes on to the Treasury. Whereas if it waits three or four months, inflation is likely to fall and some pressure may come off bonds, and that may mean that it is able to sell bonds for a slightly higher amount.

Now, whether there is a sort of hair-shirted virility symbol in doing that, I think selling bonds into a market where you will lose more than you would otherwise do is not really very good husbandry. Ultimately, although the Bank holds the debt, as the Government are the underwriter of the debt, it is a little bit like saying to your estate agent, “Go and sell the house, I don’t care what the price is.” The Government should have a view so that when we discuss things with the Bank, we ought to try to do our best to minimise the losses on quantitative easing as we reverse the process. Some projections say that over the next 20 years the loss could be £100 billion. Well, if we are very careful in how we get rid of the bonds and it is a £90 billion loss, then that is a win.

Mrs Thatcher always had a problem that when she was trying to control broad money there were no instruments apart from higher interest rates, but if we have this stock of bonds over the next 20 years, it might well be that it could form a part of policy that we either speed up or slow down to reduce broad money. It might be something that can be used in policy terms. My view is that the Debt Management Office—which has an interest because it has to sell Government debt, and the Bank of England selling it at the same time does not help—the Governor of the Bank of England and the Chancellor really ought to sit down a couple of times a year and agree a joint letter that sets out the parameters for how they will unscramble quantitative easing with a quantitative tightening programme, which I think the markets would understand. I do not think anybody would think we were infringing on the independence of the Bank of England if we were actually trying to ensure that the taxpayer gets best value.

On almost anything, any budget or taxation, the Treasury is very careful in approving things. This could be a big budget item each year for the next several years, so I do not know why we are taking a relatively benign attitude of saying to the Bank, “Just sell it and we’ll pay the bills.” I should say that I was a Lord Commissioner for a while and I signed some of the documents that indemnified the Bank. [Interruption.] There is probably another Lord Commissioner laughing, but we ought to pay quite careful attention to how we unscramble this. Those who read the column by my right hon. Friend the Member for Wokingham (John Redwood) will know that he has raised this matter a number of times. It is worth raising, because we are at the early point of unscrambling quantitative easing, and slightly more interaction between the Government and the Bank of England is necessary.

My final point is about money supply. During the pandemic, we were printing money at 20%. Then the money supply dropped a little, to about 15%, and now it has dropped very substantially. M2 is nearly into negative territory, and according to the last Bank of England estimate, M3X and M4X are growing by between

1% and 2%. Too much money in the economy is a bad thing because it creates inflation, but too little money in the economy is a bad thing because it can cause a credit crunch. In his book on the Wall Street crash, John Kenneth Galbraith pointed out that the principal reason for the major worldwide depression was the fact that money in the United States economy declined by a third. That is what pushed the economy over the edge, because the banking system essentially collapsed.

We have gone from an over-exuberant money supply situation to one in which money supply is barely growing. This is not unique to Britain; it is a feature in the eurozone and in the United States, and we know that the eurozone will have further problems. Those countries still have differentials in productivity and trade imbalances, and there is money swishing through their system as well. There was even some discussion about the Bundesbank having to be bailed out because of bonds it has bought—and, unlike the Bank of England, it cannot print money because it does not have a currency.

There is a worldwide problem. Money supply is falling in the United States, in Europe and in the United Kingdom. If we assume the normal 18 months to two years, that takes us into 2025. My principal point is that if we raise interest rates, which has an impact after a long lag that will hit at the end of 2024 and the beginning of 2025, and if we have a reduction in monetary growth and credit which has an impact at the end of 2024 and the beginning of 2025, there will be two interactions that could cause growth to hit a brick wall.

The economy has changed substantially over the years. We now have internet banking, money flows very freely, and we have digital currencies. I think we ought to be looking much more carefully at what is going on in the British economy, and, indeed, at how money supply affects real output. However, I think we also need a monetary policy; I do not think we should withdraw completely and allow the Bank of England to determine these matters, and that may require us to look at levers to ensure that credit and monetary growth go up.

What I really want to do this evening is to put it on the record for those at the Treasury that if they read Twitter, they will find that many monetarist economists are beginning to think that the decline in money will cause severe economic dislocation. The rule of thumb is that there should be a smooth transition of money, not sharp falls or sharp rises, and I fear that we are not getting a smooth transition of money. As I have said, that is a feature of all the various zones, and it is something that the Government need to pay attention to and not ignore.

The Government do not mention money supply very much. The Bank of England has started to talk about it again, but I suspect that we have to learn what Mrs Thatcher would have told us some years ago: that money is very important, and it is a very important part of economic policy. We cannot totally vacate it and leave it to central bankers. One reason I always opposed the euro was that I did not think the problems of the world could be solved by unelected central bankers, and I think some of that goes for our own unelected central bankers.

The next time the Minister sees the Chancellor, I hope he will ask him to read the report of this debate and reflect on the fact that there is a problem with money supply. We may be going into a new era, although I do not know whether the supply will continue to be

negative or whether it will pick up, and the Chancellor needs to have discussions with other actors in this area. If we are not careful, the combination of the lag on interest rates and the current credit squeeze could give an incoming Conservative Government a real nightmare in due course, in terms of the way in which they manage the economy. So let us give these matters a little thought.

I look forward to the Minister’s reply. Probably, in accordance with the normal Treasury line at the moment, he will reply by not saying very much, but I am sure he has listened.

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