Andrew Griffith MP, Lowri Khan and Neil McMurdo.

Q221 The Chair: Good afternoon, and welcome to this hearing of the Economic Affairs Committee. Before I start, I should, for good housekeeping, declare my interest as an adviser to Banco Santander in Madrid. I welcome Andrew Griffith, the Economic Secretary to the Treasury. Good afternoon, Minister. Thank you for joining us. Would your two officials like to introduce themselves, before we crack on?

Lowri Khan: I am the director of financial stability in the Treasury.

Neil McMurdo: I am the deputy director for fiscal policy.

The Chair: Great. Thank you, all three, for sparing the time to come this afternoon. Let me start with a simple yes/no question to you, Minister. Are you an unadulterated fan and champion of operational independence of the Bank of England?

Andrew Griffith MP: That is an adjectivised yes/no question. I am a supporter of the current framework of independent monetary policy.

The Chair: And when you look back, not just over the last few years, but before that, how do you think it has gone?

Andrew Griffith MP: On balance—and everything in life is about a balance of outcomes—the monetary independence of the Bank of England has delivered stability. It is institutionally orthodox, if you look at other central banks, and that ultimately delivers a lower cost of money for firms that seek to do business here and gives some important confidence and stability to the markets. I think that there is a broad political consensus, since it was originally put on that footing, that continues to support that.

The Chair: If you look at weaknesses, where would you say they lie?

Andrew Griffith MP: You have taken a wide and interesting variety of speakers. You have, yourselves, rehearsed that debate. The committee will understand that not only have I not been doing this role very long but I was relatively recently elected to the House. The governor himself has recently commented that it has been an exceptional period, with difficult and moving circumstances, and that there is a case for looking again at some of the forecasting ability. That independent review is now in train. That is one example.

The Chair: Is that just one example? Would you like to give any others?

Andrew Griffith MP: No.

The Chair: Do you think that is it, in terms of where the framework needs to be tweaked or the operational performance can be improved?

Andrew Griffith MP: Let us be clear. My belief is that it has been overwhelmingly a positive intervention, and the policy of the Government is absolutely supportive of the continued independence of the Bank, as far as it relates to monetary policy.

The Chair: I am interested that you focus on the models. Models are, obviously, created by people and the output is then assessed by people. Are you saying that the performance or underperformance of the Bank is more due to the models and that mechanism than to judgment?

Andrew Griffith MP: I think that is what we should let the inquiry find, itself. To be truthful, I am not in a position to judge what happens under the bonnet. Indeed, there may not be any deficiency to be found; but it is right, as in any learning organisation—I would hope that organisations I have worked in previously, as well as the wider Treasury, would always do so—to have an inquiring mind and ask if there are things that, with hindsight, which is a huge caveat, one might seek to do differently or improve on.

The Chair: With hindsight, one of the members of the Chancellor’s council of advisers, Karen Ward at JP Morgan, said that the Bank made a “misjudgment”—her word—in believing that inflation was still being driven by external rather than domestic factors. Would you agree with her on that, with hindsight?

Andrew Griffith MP: I am not trying to be evasive: I think she should speak for herself. She clearly had a particular fact pattern in mind. One of the things we have seen at this moment is that inflation has multiple different causes. In large part that is because we have been through an exceptionally difficult period. We have more in common with other western economies that I would have regard to than we have differences.

The Chair: Just taking a step back, before we go into that—I will turn over to Lord Blackwell, in a moment, on inflation—are there any other aspects of how the Bank performs, operates, or interacts with the Treasury and Parliament that you feel should be looked at and improved?

Andrew Griffith MP: With respect, that is a hugely broad question. We can unpick elements of that. Any organisation should always seek to improve, and if I may draw on one of the experiences that I have had during my tenure—the interventions relating to Silicon Valley Bank UK, which were on the FPC side rather than the monetary side—I thought that officials were excellent, and that that worked well as a process and a collaborative exercise with the Treasury. It delivered a good outcome.

The Chair: What you are saying is that a broad bill of health gets a big tick overall—apart from the point on modelling. I am just trying to set the scene for what we are about to get into.

Andrew Griffith MP: It is definitely a positive scorecard.

Q222 Lord Blackwell: Minister, I am interested in the relationship between the Treasury and the Bank of England. Does the Treasury itself have a theory of the causes of inflation? What is it?

Andrew Griffith MP: You would have to ask the Treasury economist, in truth, whether there is a particular Treasury model. I am not the Treasury economist. Colleagues can comment on that. I think we have seen a number of different sources of inflation. My background is in business and I understand more of the microeconomics. We have seen particularly acute stresses on the supply chain, a very tight labour market, and, obviously, some behavioural differences from the period following Covid. We have seen periods where the Government have cushioned people to an unprecedented extent. The cumulative fiscal support for households is well understood—approaching £400 billion. We have also seen people behave in some slightly different ways that would probably not have been forecastable as the economy has returned mostly to normal, post Covid.

Lord Blackwell: There are a number of ways in which the Bank’s approach to inflation could be challenged. It placed great stress on the external factors that cause inflation—food prices, war, et cetera. At the same time, it maintained that it is a problem of excess demand that requires interest rates to be raised to create a recession and stop growth. That can be challenged. There is also a question of lags. It has perhaps been slow to raise interest rates, and there are questions whether it understands the lags, and whether there is a risk of overraising interest rates and causing the recession that it is trying to induce.

Does the Treasury take a view on the way the Bank is doing this? Does it have its own approach that it debates with the Bank, or does it take the view that these issues are not for the Treasury but for an independent Bank, so that the Treasury has no view?

Andrew Griffith MP: I think, generally, the latter. There is a clear view—oft-repeated by the Chancellor and Ministers—that the Bank is independent as it relates to monetary policy. The Treasury always keeps a close eye, as the most interested of observers, if you like, in its stewardship of the whole economy, on the actions of the Bank and any self-critique that the Bank applies. The governor has talked about a number of things that, with hindsight, it might have done differently; but hindsight is very different from foresight and we have seen a set of circumstances that nobody forecast. Nobody forecast that Russia would march into Ukraine on 24 February 2022, for example. I suspect that when the history books are written we will conclude that the Bank was doing the best job in the light of the then available data. It is easy, with hindsight, now that we have a very different set of data, to go back and say things might have been different.

The Chair: At the end of 2021, this committee was warning that the further bouts of QE could be exacerbating inflation, and we expressed concerns that inflation was not transitory. That was not with hindsight. We were warning of it at the time. Everyone—the Bank and the Treasury—said, “No, you’re wrong”.

Andrew Griffith MP: I hear you. What a wise committee. There will always be some of those functions. The committee did not, nevertheless, have foresight on a number of other factors that I think we would all acknowledge have impacted on supply chains, and some of the other pressures on the broader economy.

Lord Blackwell: Going back to this point about independence, the Treasury does have economists. I am sure they think a lot. If your economists in the Treasury felt that either the Bank was not raising interest rates enough, early enough, or that the Bank was going too far in causing a recession or was not taking account of the lags, are you saying that no view would be expressed back to the Bank? The Treasury would simply say, “Well, that’s none of our business”, or is there an interchange, to try to change the view of the Bank?

Andrew Griffith MP: In my experience, economists rarely all agree on everything at the same time. As to the transmission mechanism for any critique—and there is never a permanent optimal point on any envelope that one arrives at—one would hope that the critique would come as much from within the Monetary Policy Committee, which has independent economist members. It could come from the wider community of economists. I am sure that one of the purposes of having so many independent economists on the MPC is precisely to provide that sort of transmission mechanism. I push back about the idea that even a Treasury economist—wonderful economists though they are—would have a singular critique or challenge. I think we would all support what I understand was one of the original mechanisms when the current MPC was set up: it was to provide a voice for dissent, challenge, and critiques within the MPC itself. Would the Treasury have a particularly novel, singular view? My point is that that is probably relatively unlikely.

Lord Blackwell: The difference is that, unlike the MPC, you and other Ministers are elected representatives who will face the electorate. The Prime Minister has made a pledge on inflation. If the Treasury is not involved in meeting that, are you comfortable that an independent group of economists, as it were, holds your responsibilities in its hands, and to face the electorate on that basis?

Andrew Griffith MP: I do not think stewardship of the economy ever should be or is comfortable. It is for Ministers to try to do their best to deliver the most prosperous range of outcomes for this country. It is, however, the settlement made by Parliament itself, just as it allocates power and responsibility in a federated way in other domains such as the criminal justice and policing systems, that we have, as an article of this Government—of Parliament—an independent monetary policy. Is that always comfortable? Probably not—just as power of a federal nature in some of those other instances is not always comfortable—but it delivers many benefits in terms of the conduct of monetary policy, the certainty, the lower risk premium for the UK, and allows Ministers to pull on all the other levers that can be used to deliver the best economic outcomes.

Lord Blackwell: With that independence, how is the Prime Minister able to make a pledge on halving inflation?

Andrew Griffith MP: The Prime Minister is making it his priority. I think, without being overly pedantic, he said that his priority is to halve inflation. That is what the current forecasts keep us on track to do. I think that people will understand that not as a desire to pierce the independence of the Bank, but simply as setting out his political priority to support the Bank in all its endeavours—because it is important that people understand the importance that the Government place on the fight against inflation, which is a hidden tax on every household. I think that is appropriate. As you know, the Chancellor issues an annual remit letter to the Bank, so there are mechanisms by which the Government’s priorities of the day can be communicated to the governor and the MPC, while the independent monetary policy is still respected.

Q223 Lord Londesborough: Good afternoon, Minister. I want to follow up on the appropriateness of the Prime Minister’s pledge. There is a widespread view about the fact that the MPC was tasked by Parliament with a 2% inflation rate, that back in January it was forecasting 4%, and then the Prime Minister is personally pledging 5%. First, does that not at the very least blur the authority and operational independence of the central bank? Secondly, it brings in an inflationary expectation of at least 5%. It was 10% at the time. In terms of wage bargaining that would probably be regarded as a best-case scenario, so it is unhelpfully building in inflationary expectations, and perhaps sowing the seeds of confusion. What are your thoughts?

Andrew Griffith MP: I do not accept that for one moment. I am sure that the Prime Minister would regard one of his five priorities, to halve inflation, as a ceiling, not a floor. If it is overdelivered, that does not mean it is not an accomplishment.

Lord Londesborough: The danger is it will not be overdelivered. I am talking about the perspective of both employers and employees.

Andrew Griffith MP: Sure.

Lord Londesborough: If the Prime Minister is heard pledging 5%, potentially as the best case, you can understand from a wage bargaining perspective that people are going to push for greater than that, irrespective of the Bank’s forecasts.

Andrew Griffith MP: That is not what I would take from that. People will have all sorts of different factors in their wage negotiation. I would hesitate to tell them how to do that, but I do not think you can construe an ambition or a priority to reduce inflation as guiding to a particular numerical target. Indeed, we all know that targets will move around.

Q224 Baroness Liddell of Coatdyke: I am beginning to wonder if the Bank’s independence is secure.

Andrew Griffith MP: It is secure. I can assure you of that.

Baroness Liddell of Coatdyke: When you were asked initially by the Chair, you talked about independence in so far as monetary policy is concerned. It goes a wee bit wider than that. Are you still of the view that you have expressed that periodic government intervention in matters of financial regulation could be justified as a “safety valve”? How does that relate to independence?

Andrew Griffith MP: I think there is a distinction and, if I may, with respect, I shall try to draw that distinction. I was choosing my words very carefully, because when it comes to monetary policy the independence is absolute. The role of the remit letter is very clear. The detailed mechanics of financial regulation are a matter for Parliament. Both Houses have recently passed the Financial Services and Markets Act 2023. Parliament, while not touching independent monetary policy, will from time to time make different regulations, and the PRA and the FCA will provide the detailed guidance and handbooks on those.

Baroness Liddell of Coatdyke: So independence is constrained.

Andrew Griffith MP: Parliament has a role, and it has literally just exercised that role to decide what the financial regulatory framework should be.

Baroness Liddell of Coatdyke: So independence is constrained.

Lowri Khan: If I can add to that, I think, as the Minister has explained, there has always been a role for Parliament in setting the framework within which the regulators operate, and particularly in financial regulation there is a lot of it; but the operationalisation of that, in the Bank of England’s case, is in the hands of the independent PRC, which is able to exercise its own discretion in so far as it operates basically within that framework.

Baroness Liddell of Coatdyke: Thank you.

Q225 Lord Griffiths of Fforestfach: One word that we have heard quite a lot in taking evidence so far in this project that we are engaged in is “groupthink”. You said, earlier, that in terms of the MPC there is dissent, challenge and critique. You are absolutely right. Clearly, different individuals have different views and have expressed them, and they have voted differently. On the other hand, if you look, for example, at the period from the beginning of Covid in March 2020 to December 2021, I think it is true to say that the MPC voted unanimously that inflation was something transitory that would be over in a relatively short space of time. I wonder what you think about this.

Andrew Griffith MP: I do not have enough information to draw from that particular example to the generality. In terms of the generality, one should always be concerned about groupthink. We vest significant powers in the Bank—we have heard about that—and people should be concerned about groupthink from first principles. The evidence is that there are also many cases where members do not act as a group. There are split votes and there are internal and external members of the MPC. Cognitive diversity is very important—as important as other forms of diversity. Anyone looking at an important organisation should have regard to how to mitigate the risk of groupthink.

Lord Griffiths of Fforestfach: Can I just develop the point? If you think that there was an element of groupthink there—

Andrew Griffith MP: I said I did not have enough data to opine on that. I was talking generically about the potential; it is something about which one should always try to put some grit in the oyster.

Lord Griffiths of Fforestfach: Can I just present you with a piece of data? I recognise that Professor Hindsight is at work, but until March 2020 the broader money supply growth was on average around 2%. That had been going on for a long time. Then between March 2020 and December 2021 it shot up to, on average, well over 10%, and at some points 20%. Would you not say that if there had not been groupthink that would at least have triggered some people to ask the question, “Hey, what’s really happening, here?”

Andrew Griffith MP: Given the unprecedented nature of the events that the country was going through, including unprecedented ways in which this House conducted its business, it is hard to draw from that particular moment in time the inference that it was groupthink as opposed to a response to the scale of the global pandemic. It was unprecedented. With the utmost respect for you, sir, I think it is a little hard to extrapolate from that one incident. I am not disagreeing with your fundamental point that, when we vest in an institution such important power and responsibility, it is imperative to challenge ourselves and the organisation to avoid groupthink.

Lord Griffiths of Fforestfach: One thing we have noticed in taking evidence is the charge that in the past there has been greater intellectual diversity of view than there is at present in the MPC, even though the Bank was in line with the Fed and the European Central Bank in its view of inflation as transitory. Do you have a particular view on that?

Andrew Griffith MP: I do not. I am sorry.

Lord Griffiths of Fforestfach: Finally—I shall not say anything after this—if you feel that there is a case, as I think I have been convinced, that there is a lack of what you describe as cognitive diversity on the MPC, what do you think might be done about it by the Bank, or indeed the Treasury in its advice to the Bank, or the Chancellor in the letter to the Bank?

Andrew Griffith MP: The first thing is the important challenge and the good work done by committees such as this, to provide oxygen to that potential challenge. Then I think it is for the Treasury and the Bank, in the fullness of time, having had the chance to see your final review, to think about the appropriate response. It would be glib to answer it here and now or, indeed, to reject that. If that is the view of the committee, it is incumbent on all of us who have a role in appointments to think carefully about the best way forward.

Lord Griffiths of Fforestfach: Thank you very much. I do respect your integrity, in what you have said.

Lord King of Lothbury: Minister, would you agree that if you saw too much money chasing too few goods you might think that inflation could be about to rise?

Andrew Griffith MP: It would be hard to disagree with that logical inference.

Q226 Lord King of Lothbury: It is clear that when Covid hit, in the spring of 2020, while it was not entirely unprecedented in the sense that we have had pandemics, it certainly was a very big, unusual event. It was hard to know quite what it meant, but one of the things that it clearly did mean, because of the lockdowns, was fewer goods being produced than before, and a whole lot more money being created. The fact that something is unprecedented in that sense does not justify printing large amounts of money, does it? You have to ask, “What’s going on here? How should we react?”

Andrew Griffith MP: While not disagreeing with that logical inference, it is objectively a world different to be sitting here with three years’ worth of hindsight looking at what happened. I imagine at the time there was as much concern about demand as there was about supply. I do not think there would have been a fact pattern to follow. We will have separate and different inquiries about the decisions that were made during that unprecedented global Covid pandemic and maybe they will shed some light that I simply do not have, not having served in government in that period, on what was in people’s minds and the decisions people made. It feels easy to say with hindsight; it just may not have felt, in the moment, that the biggest issue to be managed was an excess of money rather than a gap in demand or, indeed, what we have subsequently seen—the challenges on the supply side from effectively pressing the big red stop button on the global economy, and a long time being taken to grind through gears to get back up to speed.

Lord King of Lothbury: Many of these points I made earlier were made at the time. It is not hindsight. You have talked about the need for cognitive diversity. It was apparent in the data to which Lord Griffiths referred that there was a unanimous view that inflation was transitory in the key period, when obviously it was not. Would you think it sensible that, when the Government come to make the next appointment to the MPC, they should look for a candidate who thinks that money matters, in some sense—not to say that there is a mechanical link, but that money does matter? The one thing that was so apparent about the MPC during the critical period—the only period when inflation really diverged from target—was that it believed that money did not matter. Would it not be sensible to look for someone who would bring a different way of thinking about financial development, to ensure that there was a discussion of these questions on the MPC itself? Would you be willing to take this forward, and look for someone who would take that viewpoint?

Andrew Griffith MP: Without overpersonalising it to the next, or an individual, appointment, I believe money does matter. The supply of money is a consideration in monetary policy. It is not a consideration for me as a Minister, because monetary policy should be and is the preserve of the independent Bank of England; but money does matter and, one would hope, around the table, without individualising any appointment, that that viewpoint would be aired and represented, either individually or generally, and that challenge would be put.

Lord King of Lothbury: That is very helpful. Thank you very much.

Q227 The Chair: I am going to ask a question and then come back to Lord King, who will ask about secondary objectives. We will come back to CBDC issues in a minute. Minister, just trying to join up some of the dots, I am interested in the role. You have confirmed that you are concerned, obviously, about the risk of groupthink. I want to understand the role of the Treasury in challenging Bank thinking, picking up Lord Blackwell’s point. Surely, it is a role of the Treasury to say in private, “How are you coming to these points?” Your economists may be saying, “What are the assumptions being made?”—or not. I am interested in that interaction.

Andrew Griffith MP: If I may, I think that view is too singular. My observation is that the field of economists, economic theory and theories of money is a wide one. I am resisting imposing an individual duty or overcharacterising the dialogue between Treasury economists, or other economists in the government service, and the wider field of academics and international economists working in different fields.

The Chair: I may not have expressed myself clearly. I just want to know whether you agree that the Treasury should be there as a challenge to Bank thinking internally, privately. Does this happen?

Andrew Griffith MP: If it is private I probably would not be in the room. I imagine there is a dialogue among economists. They attend the same conferences; they find themselves in the same room on occasions, and potentially this committee would call them individually and together as well.

The Chair: The reason I am asking this is that, if you look at the exchange of letters in late 2021, the governor was writing to give his assessment of why at the time he thought inflation was transitory. The Chancellor at the time was writing back to say he agreed with that assessment. This is why I am interested in whether there is a wider issue of groupthink here and there is real challenge on all the points we are making about diversity of thought. Is there this challenge?

Andrew Griffith MP: The only reason I am not agreeing, Lord Bridge, is simply that I think it is a more nuanced set of conversations. I think the challenge should come from a wider group of people, including this committee and the wider corpus of stakeholders who are all vested and, I know from some of the individuals, have opinions on these important matters. It is important that there are transmission mechanisms or dialogues whereby, to be clear, that constructive challenge is put. I do not think that you should solitarily try to unbake the cake and say, “This is the role of the Treasury versus the role of a wider group of stakeholders”. If that was an overdeveloped line of communication, you would probably, quite rightly, suggest that maybe that is not fully respective of the independence of the settlement that Parliament has put on this.

Lord Turnbull: Is not the problem to which the Chair is referring that the Treasury itself is part of the group, and when someone comes along and says inflation will be temporary and we will get back to 2% that is what it wants to hear? Should there be more thinking along the lines of, “That will be jolly nice, but if it isn’t the correct outcome we have some very big problems”, and it was too satisfied with the picture being presented?

Andrew Griffith MP: I was not there at the time, so I cannot go back and characterise events and conversations of which I was not a part. In all my experience in interacting with Treasury colleagues, there is a great deal of challenge. They are willing to challenge; they will lay out all sides of a particular argument and as far as possible—sometimes the datasets are not as well developed as one would like or hope—those conversations are informed by the best available data at the time. I am respectfully pushing back. I do not think it is as simple as that, but I was not there at the time and that is a caveat.

Lord Verjee: Minister, we talk a lot in this committee about the perils of groupthink but not about using excuses post poor judgment. It is very easy to say it is the pandemic or the war in Ukraine—extraneous circumstances—that can justify mistakes and poor judgment. How do we deal with those sorts of issues? How do you distinguish between poor judgment and excuses that are made post that poor judgment?

Andrew Griffith MP: I do not quite accept the adjectivisation of that, not to defend anybody because we should all have open and inquiring minds, but because those events to which you refer objectively are both high magnitude and very unprecedented and were not forecast or foreseeable by anybody. We are in danger of picking one unique moment in time. If we wanted to distinguish what you call poor judgment or mistakes, you would look at where the UK has taken a very deviant path that is out of step with other international central banks or treasuries. You have taken a great deal of thoughtful insight as part of this inquiry. Crudely, I have not seen that the UK has been particularly unusual in that, which suggests to me broadly that people were trying to do the best job in a difficult set of circumstances. It will unquestionably not be the case that everyone got everything right; that is just not a coherent intellectual status; mistakes will have been made. But I do not think you can elevate that into a pattern of failure just because of the events we have been through.

Lord Verjee: The Federal Reserve acted much faster; it brought down inflation much quicker. This is not just common practice. Are we leaders or followers? We have our unique set of circumstances.

Lord Blackwell: Minister, quite rightly you want to defend Bank independence, but I am struggling with the concept. Let us suppose that as result of the Bank’s actions, rightly or wrongly, you go into a general election in the middle of a recession. I am struggling with the idea that you would say to the electorate, “It’s nothing to do with us. This was all the Bank’s doing. We didn’t have a view on it”.

The Chair: That is one question.

Lord Griffiths of Fforestfach: Mine is almost the same. The Bank of England is coming under tremendous criticism at present for what it has done wrong. The Treasury, however, is hardly mentioned. The question is: do you think the Treasury has any responsibility for the inflation we are going through?

Andrew Griffith MP: I have said a number of times that I am satisfied and content with the settlement on independence that Parliament has laid down. I am a supporter of that. The Government’s position is strongly supportive of that because they believe that that is the best way to tackle the scourge of inflation. If that is your position, I put it respectfully that you have to adhere to that when there are bumps in the road. It is not independence if, at the first sign that not every metric is going in the right direction at the right time, you stand back from that position. That is why the Prime Minister, the Chancellor and I are all very firm that we need to support the Bank in doing its difficult job. The remit letter has remained remarkably constant through different periods and different moments of political leadership. If you were looking outside, those are all attributes of a genuinely independent institution. Is it always comfortable? Of course not, but what is the role of this elected Government in that situation? It is to be unequivocal about our support for the Bank, the governor and the remit, so that we can make very clear the priority we attach to tackling inflation.

Q228 Lord King of Lothbury: Could I change the nature of the question somewhat? It is 25 years almost to the day since the legislation underpinning Bank independence came into effect. At the beginning, it all seemed very simple. There was a clear inflation target; that was the primary objective. Subject to that, the Bank had to support the Government’s general economic policies. That was not seen as something that should change decisions on interest rates. Those decisions were uniquely related to the inflation target, but it was a more informal thing. If Bank economists could help the Treasury in some way, of course we would do it, and there would be discussions between the Bank team and the Treasury team at all levels.

Since then, what seems to have happened is that there is a number of secondary objectives, if I can use that phrase. “Subject to”, “having regard to” and all sorts of phrases have been used. It has expanded substantially in two dimensions. One is on monetary policy and climate change and other things have now been added to the remit letter, et cetera. The Bank now also has responsibility through the FPC and prudential regulation. There are two more committees, each of which has its own long list of phrases such as “having regard to”.

Does this not run the risk of distracting the Bank from focusing on its main objectives in all three areas by having to take into account all these secondary objectives? It is not clear that they add up to very much in terms of a policy that should be pursued, because the policy to achieve the inflation target is defined by the outlook for the economy irrespective of all these other “have regards”. What is the benefit of all these secondary objectives?

Andrew Griffith MP: I have not heard that from practitioners on the receiving end. You may have, but that is not a particular concern raised with me. In my view, there is no ambiguity about the primary objective; indeed, labelling it the primary objective is a helpful feature, so that should resolve some of that ambiguity. Temperamentally, I am attracted to the idea of doing a few things well, and that is always a consideration, but we have also talked previously about the significance of the Bank as an institution and the importance of its own policy interventions that are not directly linked to Parliament’s objectives. The objective of some of the secondary objectives is to try to inform and give the Bank some sort of weight to what the other important public policy objectives of the Government of the day are.

I have chosen my words carefully. This committee has a lot of expertise and wisdom on it. I am not entirely refuting your point. We will look closely at the ultimate report, having listened to lots of people with different roles who have sat on different sides of the equation on what is the right point to come out. I hope you would accept that there will always be a tension between doing the primary duty of monetary policy well and looking at some of the considerations of a Government of the day.

Lord King of Lothbury: That raises the question of the benefit of having all these other objectives, because your words suggest that in some circumstances the Bank might pursue a policy that was not directed solely to the primary objective in order to take into account the secondary objectives. Some of the evidence we have heard, not from the Bank—I will come back to that in a minute—but from others, suggested that they were somewhat concerned that people might get distracted. Look at the number of speeches made about climate change.

The Chair: I have to suspend the sitting for 10 minutes. We will resume at five to four with Lord King’s question.

Lord King of Lothbury: If I can remember it.

The committee suspended for a Division in the House.

The Chair: Welcome back to this hearing of the Economic Affairs Committee. Lord King was in mid-flow asking the Minister a question.

Lord King of Lothbury: I think I was very much towards the end of the flow, which I can no longer recall in total detail, but I am sure the Minister will. We were discussing the benefits of secondary objectives and the fact that some of the witnesses we have had have suggested that the Bank has become a bit distracted by other issues, perhaps during a period in which interest rates never moved, but now when monetary policy has become much more important again that distraction has had the impact of no longer allowing them to spend as much time, or focus as much as they might have done, on their primary objective. The question is: do you really think the secondary objectives are worth distracting the committees from their primary objective?

Andrew Griffith MP: I have not heard from any of the practitioners that they feel the secondary objectives are distracting from them. You have taken your own witnesses and people have different views, but that is not what I have heard. It is also not what I have observed. Obviously, there are different parts of the Bank: the MPC, the FPC and PRA. They seem to me to be able to make a clear differentiation between their primary objective and secondary objective, and reconcile those in the work they carry out; but, as we were saying earlier, that is not to reject entirely the challenge that you and others put in on that topic. Clearly, if you just kept adding more and more secondary objectives, there would be a point where the danger of that distraction or having ambiguity would be reached.

Lord King of Lothbury: One point the governor made in evidence to us was that, although he and the committees clearly understood the difference between the primary and secondary objectives and there was no question of them being confused, he was very concerned that the risk of judicial review of decisions made by either the FPC or PRA meant that they had to devote considerable time and effort to doing work to demonstrate if they were called on to justify their decision. That work and effort was not something that led them to be confused about what they wanted to do, but it was a clear distraction in terms of process, time and effort. The concern that they might be subject to judicial review meant that they were having to do things they did not think were very sensible. Can you help us on that front?

Lord Griffiths of Fforestfach: To add to that question, the example he gave was that they had now added climate change and their responsibility to take into account nature and biodiversity. I think he added “whatever that might mean”.

The Chair: Let us allow the Minister to respond.

Andrew Griffith MP: I read that evidence as well, so let us read it, note it and think about it. There is a tendency—we have seen this particularly at this end of the House as we have gone through the Financial Services and Markets Act 2023—to seek to use what would be generally financial regulation and to include additional undertakings and responsibilities in such areas as nature and biodiversity. I would always caution that there is a careful balance to be struck when one does that, because it can present the practitioner with a degree of confusion about the right way to act, but in that particular case it was right that Parliament decided that and the financial regulators will take their cue from that.

Lord King of Lothbury: On the sending of remit letters, which is not a decision of Parliament but of the Treasury, is there not a case for going through them and, as far as possible, pruning them to take us back to the simplicity of the initial remit letters that went to the Bank 25 or 26 years ago?

Andrew Griffith MP: Simplicity is not a polarity in itself, but it is clearly good. As I said earlier, temperamentally, let us do a few things well, but there are also important ways in which the elected Government can signal some other areas that they would like the Bank to have regard to. I do not think that that of itself is inappropriate. I just would not conduct the debate at the extremities. There is always a tension between those two points.

Lord King of Lothbury: In the way you have just put it, unless you take something out on a regular basis, you will always be lengthening the remit letters and the number of “have regards”. That does not seem very sensible.

Andrew Griffith MP: And I am certainly not advocating that.

Lord King of Lothbury: I look forward to there being no new ones added.

Q229 Baroness Liddell of Coatdyke: You are on record as having said that your “objective is to ensure that the UK is the most innovative, most international and most business-friendly economy anywhere in the world”. How can the Bank of England contribute to that?

Andrew Griffith MP: In lots of ways. First, good conduct of monetary policy in an independent way provides assurance to international investors; it allows UK companies as part of the credit spread of us as a sovereign and those who are based here and have access to our capital markets to be able to borrow for the longest term at the most competitive rates. For me, that is a key foundational building block for the desired outcome that we seek.

Secondly, the Bank, through both the FPC and the Prudential Regulation Authority, has a significant role to play in making the right judgments in a high-quality regulatory environment, which means the world comes here to do business because of those attributes of trust, predictability and high quality, but with an element of innovation, changing the regulations in an agile way as fact patterns change and as per the new secondary objective that Parliament has laid down for the regulators, including the Bank, to promote the growth of the UK economy and our international competitiveness. I think that is a good balancing tension when it gets into the role that it has to perform of providing some very prescriptive regulations on actors within the financial services sector. It is giving a good piece of guidance as to where to strike the right balance as between all those different attributes. My short answer is that it has a key role to play.

Baroness Liddell of Coatdyke: Martin Wolf in the Financial Times stressed that a new obligation on regulators to facilitate growth and competitiveness was a slippery slope. Do you agree with that?

Andrew Griffith MP: Absolutely not.

Baroness Liddell of Coatdyke: Why not?

Andrew Griffith MP: Because it is about striking the right balance. In any debate we can find those who are at either extremity. I fully respect Martin, but he is an extremist from this particular perspective. Ultimately, it is about finding the right balance. It is a secondary objective, so it does not supplant the objective of financial stability and prudential regulation, but it acknowledges that in a modern, dynamic economy you cannot have regulation to the point of suffocating all innovation, or potentially choking off an industry on which every UK citizen depends. The financial services industry, its employment and impact can be felt in every part of our national life in every town and city in the United Kingdom. Of course, one should seek to strike the right balance, and that is exactly what the new additional secondary objective, among others, does. It would seem to me almost more alien and extreme to say that that should not be one of its considerations in formulating good regulation.

Baroness Liddell of Coatdyke: It is interesting that in December 2022 Mr Wolf also said that light-touch regulatory precedents preceded the 2008 financial crisis, and banks should not mark their own homework. How do you view that? Do you think they should?

Andrew Griffith MP: People should not mark their own homework. I am very comfortable with people not marking their own homework, which is why we have a highly developed regulatory architecture in this country, with very significant amounts of resources put into it and an enormous corpus of regulations that, by and large, has stood the test of time. We do not operate a zero failure system, because we operate in a market economy and that involves balance. It is always a balance. I do not accept the characterisation that we have a light-touch system. I do not hear any practitioner saying that we have a light-touch system. I hear some critiques about the volume and very prescriptive nature of regulations, but I believe they are at the other extreme. Our collective job, because this is a role ultimately for Parliament, is to find the right balance, and that is what we seek to do.

Baroness Liddell of Coatdyke: I take you back to the issue of climate change. How do you think the role should develop within the Bank of England in relation to climate change?

Andrew Griffith MP: It is a big topic. Clearly, there is a point about the systemic risk of climate and all sorts of different global macro events. For any organisation looking at the broad risk register, whether in terms of financial regulation or for the overall economy, it is clearly a significant consideration for them. There are lots of other specific impacts from a public policy perspective where perhaps many would argue that the Bank is not as well equipped and does not have the degree of expertise within it. Understandably, we have lots of other forms and parts of government that can devote themselves more fully to that particular topic. It is not to decry that there is a role for the Bank for financial regulations in that space. The Government have a very far-reaching green finance strategy about how we mobilise capital and fund the transition to a clean energy world, but there will be limitations within any body that is particularly focused on financial regulation on its ability to opine on particular aspects of climate, nature or biodiversity.

Baroness Liddell of Coatdyke: Do you think that all these should be in the original remit letter to the governor?

Andrew Griffith MP: I do not have a particular view. That is one significant global risk factor, and clearly one should seek to take account of as many of those as possible.

Lord King of Lothbury: You have spoken very eloquently about the need for regulation not to choke off innovation, et cetera. There are many details in the sheer length of the regulation that certainly come under that heading, but it is not true of all kinds of regulation. After the financial crisis, the US and the UK, and in particular Sweden, imposed tougher capital and liquidity regulation, because this demonstrated that we had stronger banking systems and it was the continental Europeans who wanted weaker regulation because their banks were much weaker. Tougher regulation is not in itself damaging to competitiveness; it can support it. Is there not a danger that by adding this as an extra, rather vague secondary objective you give the impression that all regulation is somehow damaging to competitiveness, whereas the real issue is what kind of regulation we have?

Andrew Griffith MP: I agree that the real issue is what kind of regulation we have. The real issue is the outcome and striking the right balance. This is not about the extremities; it is not about a mischaracterisation. My role has been at pains to say that we are not seeking to deregulate or diverge for the sake of divergency, and that high-quality regulation is a key success factor for the UK. People come to do business here because they see all the different attributes of our regulators. I pay tribute to the work of regulators. This is about where you put the pendulum. I would always refuse to accept the characterisation of this as a deregulatory tear. That is not the case. It is about finding the right balance. This gives the regulators the opportunity to find the right balance, because they already have duties on things like consumer protection and overriding duties on financial stability and prudential responsibility. As someone who has advocated this, I think this is the right way forward and it just gives that balance to put the pendulum in the right place.

Baroness Kramer: I want to press a little more on roughly the same issue. Is it not true that what the innovators are looking for is efficient regulation where they can bring up their new ideas and get responses quickly? All the complaints we hear fall under the rubric of business complaints about regulation and efficiency; it takes too long to get people approved and there is so much paperwork. That is very different from the issue of risk. I just wonder whether the way that you have crafted the competitiveness objective conflates these two once again, because we are seeing a lot more risk being injected into the system. Let us see pension funds put their money into start-ups and illiquid infrastructure without any protection for pensioners. There is a whole set of things. I noticed that in one of your speeches you said we must support the risk takers. Surely, what you mean is that we need to support the innovators. Would it not be better if we distinguished these within the language that we put into the legislative framework?

Andrew Griffith MP: There is a lot there. Let me take that in parts. I completely agree. A large part of the way we can improve the regulatory structure is not necessarily the corpus; it is the efficiency with which we regulate. One of the big points of international competitiveness is often about the speed, pace and velocity with which decisions are reached, not necessarily the decisions themselves. I think that is right, and that is an important access for us all as we go forward under the new Act to work with regulators to try to get that right. It speaks a little bit sometimes to the volume of regulation.

My point about risk is not to have a wholesale drive of more risks into the system, but it is important for society that we accept there is risk in the system. Sometimes, that risk means there will be failure. One of the ways we help our financial institutions is to make sure that we litigate that up front as much as possible so that risk is accepted and is not something about which perhaps people have not received enough information up front to be able to make an informed decision about the risk they take. I think you can unthread those different parts and it is not a desire to put wholesale more risk into any particular part of the system.

Q230 Lord Rooker: Good afternoon, Minister. Going back to the remit letters, what do you think the role of the Governor of the Bank of England should be in the formulation of the Chancellor’s remit letters?

Andrew Griffith MP: The formulation of those letters is an iterative process. Primarily, they are designed to be of utility to the governor, the MPC and FPC as they undertake their duties. What you want is a successful remit letter that is clear, unambiguous and provides the guidance that the governor seeks. They are not opened without engagement, particularly at official level, between the two parties to make sure that they achieve that function.

Lord Rooker: What is the Treasury’s current process for formulating the remit letters? From what you have just said, does the discussion beforehand not involve the Chancellor and Governor of the Bank of England?

Andrew Griffith MP: It absolutely does. Forgive me if I did not squarely address that. I took as read that it involves the Chancellor and governor. I was trying to characterise perhaps the exchanges of drafts and the iterative nature before they are finally issued.

Neil McMurdo: It absolutely involves the governor and his team talking to the Treasury and the Chancellor.

Lord Rooker: We heard last week from Lord Macpherson and Sir John Parker that effectively before a remit letter is sent—this was my experience in government—there had to be approval by the recipient. That was more or less the situation here. The discussion was such that there were no surprises because markets can be affected. Would that be a fair way of describing it?

Neil McMurdo: Certainly, a strong conversation goes on. Probably, “approval” is putting it too strongly, in that the text of the remit is a decision for the Chancellor.

Lord Rooker: The point is that when the governor gets the letter it is not a surprise.

Neil McMurdo: Yes.

Lord Rooker: Using shorthand, if the governor and Treasury fix the letter beforehand so there is no surprise about it, where is the scrutiny and transparency? Should the Treasury Committee not have a role here? As Lord Blackwell said earlier, the Governor of the Bank of England is not elected and the Government cannot really go to the electorate and say, “This is the problem of the Governor of the Bank of England. It’s nothing to do with us. He’s independent”. Yet there would be no parliamentary accountability and scrutiny if the Treasury Committee is not involved in, say, the receipt of the letter. Should there be any scrutiny or accountability by the House of Commons at this stage, because there is not at the moment?

Andrew Griffith MP: Let me try to push back a little on that. First, as Neil made clear, it is not approval; it is a no-surprises process, for obvious reasons, but the governor does not have a veto in that process, so there is an opportunity for challenge within that exercise in arriving at the issuance of the letter. Secondly, the Chancellor who is writing that remit letter is regularly held to account through the Treasury Committee, as are other Ministers and officials. Therefore, the Treasury Committee, as indeed this committee, has the opportunity, as in every other domain, to hold Ministers to account. I feel it does that well. Those letters themselves are on the public record, so there is plenty of opportunity for people to scrutinise the contents of those letters.

Lord Rooker: That is after they are published and it is under way; it is half way down the road. Should there not be a stronger role for the Treasury Committee and the elected House of Commons? This committee does not deal with these issues; this House does not deal with these issues, as you have just indicated. Should not the elected House of Commons and Treasury Committee have a role bearing in mind, as we have agreed, that it is not a fixed letter, but the fact is that the letter is not a surprise to the Governor of the Bank of England? This is a pretty key part of our economy and the Treasury Committee is not involved at that point in the writing, transfer and delivery of the letter; that committee gets to it a long way down the road after the letter is published.

Andrew Griffith MP: I respect what sounds to me like advocacy. The Treasury Committee will conduct its own affairs. I think the point you are making is about whether it has a role before the letter is issued, that is whether the Treasury Committee effectively is exercising an executive function or whether it has a role after the letter is issued, in which case it is exercising in my view its proper scrutiny function, but I accept that people can have a different point of advocacy on that. It is not my view. I think the Treasury Committee—

The Chair: Let me put a point similar to Lord Rooker’s. Successive Chancellors have given the Bank more and more responsibilities under its objectives, climate change being one, as we have been discussing, yet has there been a commensurate increases in the levels of accountability in terms of Parliament and scrutiny?

Andrew Griffith MP: With respect, I think that is a question for your committee and the Treasury Committee as to whether it feels it has that role, but it can summon Ministers at any time.

The Chair: Obviously, we are interested in the operational framework where scrutiny and accountability is key. You are saying to me that you have no real view as to whether that level of accountability is working properly. As Lord Rooker says, these are enormous powers that the Bank can wield in terms of climate change, regulation, housing, et cetera. I am questioning whether you think from the Treasury’s perspective that that level of accountability and scrutiny is sufficient.

Andrew Griffith MP: As an individual, a parliamentarian and a Minister, I think the scrutiny exercised by the Treasury Committee is very strong and “bitey”. It feels like a proper accountability mechanism. Sometimes it is quite adventurous in its scope, but that is its prerogative. We are a democratically elected Parliament and I submit myself to any scrutiny it seeks to have.

Q231 Lord Verjee: I would like to talk about the balance between price stability and financial stability. Does the Bank’s price stability framework pay sufficient regard to financial stability? What changes, if any, would you suggest?

Andrew Griffith MP: I think it does get the right balance. That is a consideration that I observe happens in practice. Lowri heads up financial stability and I would invite her to add any additional comments.

Lowri Khan: You have two committees, the FPC and the MPC, both of which have their objectives. We have been through some of the remit letter processes. Those both for the MPC and FPC ask that they co‑ordinate with each other and take account of the actions of the other, so there is a mechanism for ensuring that they are co‑ordinated. I think the governor in his evidence to you referred to cross-membership also between the committees and the role that he, as someone who sits on or chairs all of them, plays in making sure that they fit together. That is basically the main routes through which they sit together.

Lord Verjee: It seems to me that there is a real tension and basically a conflict between price stability and financial stability. Look at where we are in the markets at the moment. There could be a big tension. Do we want to bring inflation right down, necessitating much higher interest rates, which will then lead to financial instability? Do you think there are enough frameworks and is there due regard to that? How do you suggest we deal with that basic conflict of interest, and a conflict perhaps between the Bank, the Ministers and government?

Andrew Griffith MP: I observe an awful lot of stress-testing and scenario work around that. That is being extended, which I think is a good innovation in the non-bank sector so it will have broader coverage, which is important. For that reason, since, as Lowri said, things do not happen in a vacuum, they are not siloed and there is good connecting tissue between the two, you are not wrong about some of those trade-offs, but I think they are made in an appropriate way and with due consideration.

Q232 Lord Verjee: Do you think the measurement of inflation should take greater account of asset prices?

Neil McMurdo: The main measure of consumer price inflation is consumer goods and services, so it would not include assets, historically.

Lord Verjee: Do you think we should? In terms of price stability and financial stability, asset prices are very important. Do we pay due regard to that? Let me ask the question another way. Let us say we go to 8% interest rates in the battle against inflation. That will cause huge financial instability. Do you think there are enough safeguards and procedures to handle those kinds of tensions?

Andrew Griffith MP: I am comfortable that there are enough safeguards to anticipate, as far as possible, those tensions, in that those risks would be knowingly telegraphed in advance, certainly to Ministers. That has been my experience. There are lots of prices for assets and daily prices for many financial instruments and similar things, so it is an area where relatively good datasets exist. I am sorry if I am not fully answering your question about indexes of asset price inflation. One of the things behind your question might be about the price of gilts or the price of other similar securities. Clearly, the price of those is well understood and a great degree of monitoring takes place certainly within the Treasury, the financial stability group and the Bank.

Q233 Lord Turnbull: When this new regime started in 1998, life seemed very simple. There was monetary policy and the interest rate was looked after by the Bank. Fiscal policy was looked after by the Treasury. What is more, the funding of the deficit came from the Bank. The Government, as a broker, basically came to you, as the Economic Secretary. Now, we have this monster new player, which is the Bank, buying and selling potentially huge quantities of the Government’s debt. What arrangements are there whereby it would say, “For monetary policy reasons we need to do X QT or QE”, and you can say, “Yes, but we would much rather you did it this way than that way”? What opportunities do you have to co-ordinate the two institutions?

Andrew Griffith MP: It is a good question. You are right that it is a novel area, particularly as it relates to QT. The policy decisions on the rate and pace and some of the particular different assets within QT sit firmly with the MPC. We see and respect that as monetary policy. The Treasury is responsible for the institution known as the Debt Management Office, which is responsible for issuance and funding of the Government’s debt. There are co-ordination arrangements. Once the MPC has decided, for example, the QT in a particular period and it has published for a year in advance its anticipated rate of sales, that can be taken account of in framing not so much the overall level of issuance but things like the tenure of issuance, the expected demand as well as on a more detailed operational basis. The DMO will speak to the Bank possibly daily, certainly very frequently and intensely, so that they stand out of each other’s way and their market operations do not conflict.

Lord Turnbull: It used to be said that the UK had a special advantage or merit internationally in that, whatever the size of its debt, its tenure was much longer than almost everyone else. This was seen as a very good thing. We do not have that any more. Half of it is on an overdraft at absolutely day-to-day money market rates. These rises in interest rates affect the Government immediately. Is that something you are worried about? Do you want to get back to the position where the term structure of government debt was much further into the longer term?

Andrew Griffith MP: Our relative advantage is still there. I am happy to write to the committee with the data; I did not bring it with me today. If you look at our relative position, we are still able to issue generally at the longer end, and overall in our portfolio we still have more long-dated than some other longer maturities in other comparable jurisdictions. I will write to the committee with the data on that.

It is certainly true for current issuance. The time horizons have tended to come on in. That is a function of where the market is. It is also a function of where some of the demand can be seen. As pension schemes have matured, as more of those are in payment rather than asset accumulation, that has also changed the shape of some of the demand. I am happy to come back on that. Clearly, there is an attractiveness of having, at the very least, a good, diverse range of maturities that we can issue at. Demand for our gilts remains very strong; I want to reassure the committee of that.

Lord Turnbull: You are satisfied that there is enough exchange of information between your officials, their officials, you and the Bank to reach common understanding.

Andrew Griffith MP: Yes. There is a very good exchange of information; it is very transparent and very frequent. I have no concerns about that.

Q234 Lord Londesborough: Can we focus for a few minutes on the specific subject of quantitative easing? I would like your thoughts on the views of some of the witnesses to this inquiry that QE, and particularly the growth of the Bank’s balance sheet to almost £1 trillion, has compromised the Bank of England’s independence by blurring the lines between monetary and fiscal policy.

Andrew Griffith MP: That is not my view. I am cautious, because I know it went on for a very long period of time and involved a very significant quantum, but QE is still an unusual feature of monetary policy. The fact that the Government put an indemnity in place is true, but that indemnity did not relitigate the governance arrangements over monetary policy. The indemnity was not saying, “In return for providing it, the Treasury will reach in and dictate monetary policy for you”. I do not believe, either de facto or de jure, that it has had that effect. I have heard that criticism but I do not accept that.

The Chair: I am going to suspend the sitting again for 10 minutes. I am sorry, Minister.

The committee suspended for a Division in the House.

The Chair: Welcome back to this hearing of the Economic Affairs Committee.

Lord Londesborough: We were in the middle of talking about QE.

Andrew Griffith MP: Independence, yes.

Lord Londesborough: You were saying that you did not accept the argument that QE had blurred the lines between monetary and fiscal policy; is that correct?

Andrew Griffith MP: The question, as it came to me, was about the independence of the Bank. I did not accept that because, although it is true that the Government—the Treasury—underwrite the balance sheet of the Bank of England, in return for that underwriting there was no change to the independent arrangements on monetary policy.

Lord Londesborough: Are there lessons to learn in relation to the role of QE in relation to the Bank’s fight against inflation—the Bank’s credibility?

Andrew Griffith MP: No, I am not going to go there. As I said before to Lord King, money matters. Clearly, this is an unprecedented intervention at great magnitude—over £880 billion. I hope all of us, within our allotted areas of responsibility—Treasury, Parliament and the Bank—learn whatever lessons can be learned in time.

Lord Londesborough: As to the side-effects of QE, particularly on the distributional side and the impact on debt sustainability, interestingly, the Bank of England’s own analysis suggests that, for every £1 of QE, only 8p fed into the real economy, and even that in a very unequal way. What are your thoughts?

Andrew Griffith MP: I have not seen that analysis, so I cannot comment on its specifics. It is right always to be concerned about the distributional effects of inflation and monetary policy. That should be a concern for us all.

Lord Londesborough: To quote Lord Macpherson last week, he told the committee that “QE has given windfall gains to a section of society who, quite frankly, do not need those windfall gains, potentially at the expense of poorer people who have suffered the effects of inflation” due to their exposure to food, energy and rental prices.

Andrew Griffith MP: I would share the concern. I would not use those particular words. One of the important issues in society that I care deeply about is intergenerational fairness. It is a function of inflation and potential side-effects of monetary policy in that it can amplify those who have assets and make it harder for those who have not to get a foot on the housing ladder, for example. As an elected politician representing constituents as a father, that is a source of concern.

Lord Londesborough: Can you elaborate on the reasons why the deed of indemnity between the Treasury and the Bank has not been published? Is there a reason for that level of secrecy?

Andrew Griffith MP: At some level it is market-sensitive, I imagine. I cannot comment. I am happy to write to the committee.

Lord Londesborough: Is there a specific reason? You think it is potentially market-sensitiveness.

Andrew Griffith MP: Not that I know of, so I would be speculating; my apologies. I will write to the committee with the Treasury’s view about why that has not been—and I assume should not be—published.

The Chair: We have been told by many, including Mr Osborne, that they can see no reason why it cannot be published. I do not know if anyone else would like to come in, but we find this very odd. This is quite an important document and it seems to be shrouded in secrecy. Those who have been at senior levels in government seem to say there is no reason for that.

Lord King of Lothbury: It was true not just of Mr Osborne but of Nick Macpherson, former Permanent Secretary. He saw no reason for it not to be published. The current governor, the former governor, no one involved in the exchange of letters, can remember why this was such a precious document that it had to be somehow concealed. I am not suggesting it is a remotely important document. What is odd is that the reason for not publishing it has created a speculation about what could possibly be in it that would lead people not to want to publish it. Can either of our two Treasury officials remember the origins of this, or more recent versions, as to why it might not have been published?

Andrew Griffith MP: I am sure there are plenty of people around the table who have been in and out of government, in and out of the Bank. People’s appetite to have things published often changes, depending on which side of the table they are sitting on.

The Chair: Could you write to us to summarise your view?

Andrew Griffith MP: I will write to you with the view on whether it should or should not be published.

The Chair: If it cannot be published, why? We would be very keen to know.

Andrew Griffith MP: That is what I will do, Lord Bridges.

The Chair: That will be very kind. Thank you very much.

Q235 Lord Layard: Coming back to the issue of accountability, we have had a discussion about the role of the Treasury Committee. You expressed yourself satisfied. Some witnesses have been less complimentary. The other system is the Independent Evaluation Office. This is located inside the Bank. The Bank decides when to ask it to do a review and what to do a review on. There is no external automaticity in that process.

We have been told that, in Canada, by statute, the Bank of Canada have to do a full review every five years of its whole internal method of operation. Do you think that internal evaluation system is adequate to the task or should there be something more external, such as a fixed time period with what has to be covered, making it more of a guarantee to the public that the Bank was really looking at itself?

Andrew Griffith MP: Lowri, do you have any observations?

Lowri Khan: I can say a little bit and Neil may want to come in as well. The role of oversight of the Bank clearly rests in the Court and it is the chair of Court, I believe, who has the ability to commission evaluations from the Independent Evaluation Office. That is the system we have. If we had a system where there was another independent evaluation office that was not tasked by Court, there would be a question of what the role of Court was. The question, therefore, is more about the way in which Court discharges its responsibilities rather than necessarily about the functions of the evaluation office.

Lord Layard: Which brings one to the question of the role of the Court. Are you satisfied that the Court is as effective as it could be? Should there be any change in its role? Or is that your answer, in a sense, to the accountability question?

Andrew Griffith MP: In the absence of a theory of harm or a deficiency in the Court, my limited time experience of the Court is that it is functioning well. I have met with members of the Court who have not expressed a dissatisfaction or some sort of constraint on their abilities. I have seen different views, and it is right that there are different views on that. In the absence of a theory of harm, I am content.

The Chair: Coming back to the IEO, given that it is not really independent in the sense that it is funded by the Bank, in the Bank, run by a bank official, as far as I understand it, should it not be made fully independent, so that, rather than grilling you about mistakes and lessons learned, it is sitting there independently and it could be set up just like the OBR and be analysing the Bank’s actions and operations? Would that not be a good way to increase accountability and scrutiny?

Andrew Griffith MP: It would be if there was a theory of harm that said that it currently felt impeded from doing so. Knowing some of the individuals, I am not convinced that would be any different. It might sound a little bit different regarding the structures or charters, but ultimately scrutiny comes from strong, independent-minded people asking challenging questions, following the data and looking at the outcomes. That does not necessarily correlate with a particular constitutional charter.

The Chair: No, but it could increase the sense that there is a fully independent analysis of what the Bank is doing in its operations. I make one observation and you may want to comment on this. As we were talking about the models, the IEO has conducted several investigations, two in the last decade, into the models. It is now doing a third one. I am not saying necessarily that by introducing this new independent analysis it would be a magic silver bullet, but it could increase the sense of independent analysis and increase confidence in the Bank in itself, could it not?

Andrew Griffith MP: I think we arrive at that conversation with a slightly different starting point as to whether there are any deficiencies in the status quo. I try to keep an open mind and seek to see what we can learn. I would not go so far as to think there is a problem that needs to be addressed.

Q236 Lord Griffiths of Fforestfach: One thing the committee has observed is that three of the four deputy governors were permanent officials in the Treasury; one of them was there for a few years. I had dealings with the Treasury, in particular when I worked in No. 10 for five and a half years. It is an outstanding ministry. The officials are extremely able but it has a culture of its own. It is the only government department, after all, that looks after the taxpayer, so I have huge respect for the Treasury.

Imagine you are the governor, you are in a meeting and you call the deputy governors in one day and want a discussion on something. You have four of them there who come from a very different background. Does that restrict the diversity of views you might have if, for example, you had somebody who had a lifelong career in business as a deputy governor so that you had a broader range? Is there a case for limiting the number of ex-Treasury officials who could be made deputy governors or, indeed, reducing the number of ex-deputy governors in total?

Andrew Griffith MP: I do not have a well-developed view on the number of deputy governors. I have dealt with most of them and they all wear different hats with different responsibilities. My presumption would be that there are a lot of different mandates the Bank has to discharge. I would not fundamentally start by thinking we need to reduce the number.

We talked quite a lot about cognitive diversity earlier. Looking at the deputy governors, in fairness, one is fishing in a fairly narrow gene pool. The likelihood is that people arriving in those positions will have had a lifetime of service in the Bank, possibly some time in the Treasury, and potentially not arriving in those positions being relatively new to the world of the Bank. We should look, as we would in other walks of life, not so much at the executive for that difference, valuable as it is, but in the other governance layers—for example, the external members of the MPC and the Court itself. Others have different views and I am very respectful of that, but, personally, it is less in the actual executive, where experience of these very difficult matters is valued, and more in the non-executive layer. Forgive me, I am drawing on an analogy from the business world. Would you like to add anything?

Lowri Khan: No. I would only note what I think Lord Macpherson said: that not all deputy governors were in the Treasury recently. Indeed, some spent quite a lot of time in business between being in the Treasury and the Bank of England.

Lord Griffiths of Fforestfach: Are you very happy with the present situation?

Andrew Griffith MP: Yes; I see no reason to change the current situation. It is a fair challenge. I am trying to be very balanced. It is right for this committee, for others and Ministers to challenge themselves. But in this case, having anticipated the question and considered the matter, I see no issue with the status quo.

Q237 Lord Blackwell: I have a question on the resolution regime. If there is time, I will come back to the issues on independence and accountability. On the resolution regime, Minister, we have created, as you well know, a regime that is meant to protect taxpayers as far as possible and ensure orderly wind-down of institutions, with priorities around the calls on equity holders, bondholders, unprotected depositors and so on. In a crisis, if a well-known and publicly familiar institution is having a hard time, there are also political issues around this. As a Minister, is the operation of the resolution regime something you would want to leave to the independent Bank of England entirely or is it an area where you feel Ministers would want to and need to intervene?

Andrew Griffith MP: Ministers absolutely have a role to play. It is a possibility in any resolution regime that public funds are at risk. That is our duty anyway. That is a requirement under the 2009 Act. In the case of SVB UK, each of the PRA, to the lesser extent the FCA, the Bank and Ministers, the Treasury, all had their allotted role to play as part of that resolution regime. I am not sure where you are coming from but I would not want it to be entirely the province of the Bank or officials; there is always going to be a public policy element. Even if there was none, it is important for the confidence of public policy and accountability to Parliament that Ministers are involved in that decision.

Lord Blackwell: The rescue of SVB called into question some of the existing rules on the priorities around equity, bondholders and so on. Are you comfortable that that did not jeopardise the whole resolution regime credibility?

Andrew Griffith MP: Yes, I am comfortable. I accept that is a relatively limited use case. As ever, I do not want to overly extrapolate from one relatively small incident where, fortunately, good outcomes were achieved for the taxpayer, depositors and the United Kingdom. That is one particular case. From my limited experience of that one case, it worked well and everyone had their allotted role to play.

Lord Blackwell: Thank you.

The Chair: I would like to bring in Lord King.

Lord King of Lothbury: After the financial crisis, a lot of weight was put on the importance of devising a proper resolution regime. This was something developed by countries across borders, working with each other. It is hard to think of any resolution since then where Governments have allowed the process to follow in the way that the design of the regime assumed would happen.

For perfectly understandable reasons, in each and every resolution case—you saw it this time with SVB in the UK, SVB in the US and Credit Suisse in Switzerland, certainly—Governments have intervened. This has raised questions about how the resolution process is actually going to work in practice. Politicians do not say in advance what they are going to do. It means there is a lot more uncertainty about the resolution process and how far we can rely on it. It has created some concern that we should not be relying too much on resolution and we need to do far more to think about ex ante approaches to reduce the incidence of problems arising in the first place.

Andrew Griffith MP: I certainly accept the point that each individual crisis or event will be different in its own particular way. No regime should be designed for one particular fixed outcome. It is right that everybody involved—it is much broader than the United Kingdom—should look, every time there is one of these incidents, at what lessons can be learned and how one can improve one’s performance thereafter.

Lord King of Lothbury: Given what you have said, it would imply that people should not rely on reading the details of a resolution process, because, in each case, it is very likely that Governments will want to intervene and change what would otherwise have been expected to happen.

Andrew Griffith MP: I did not go so far as to say that but the fact pattern will simply be different. The fact pattern that one is presented with will, in all likelihood, be different in each case. You cannot litigate perfectly with foresight for events. It is important that there are good resolution regimes and they continue to be tested against the wider set of circumstances. Lowri, this is your day job.

Lowri Khan: Yes, I can say a little more, particularly in the case of SVB UK. Under our framework, the Bank of England, as the resolution authority and in accordance with statute, is in charge of determining whether a firm goes into the special resolution regime. There is a process of consultation with the Treasury, but the decision is the Bank of England’s and that is very clear.

Lord King of Lothbury: Are you saying in the case of SVB UK that the Bank’s decision was not influenced by government intervention?

Lowri Khan: You would have to ask the Bank that. The Bank consulted the Treasury, as it must under statute, along with the PRA and the FCA on its decision. But it is a decision of the Bank of England.

Q238 The Chair: Before I go back to Lord Blackwell, I have a question about CBDCs. A decision has yet to be taken; I understand that. Could you shed some light on your thinking as to how, if there were to be a digital pound, that would have an impact on the operational framework of an independent Bank of England? It raises, with the creation of a Britcoin, issues not just regarding monetary tools but privacy and cyber programmability—a whole range of issues. These are matters that surely do have an impact on how the independence of the Bank of England operates. If you agree with that, what is your thinking about how we need to reflect that within the current framework?

Andrew Griffith MP: The thinking about CBDC is that we proceed cautiously, which is precisely what we are doing with the joint consultation with the Bank of England. You have raised some concerns. There are other concerns, and it is right to engage and have the very widest and, to a degree, the most thorough public policy debate, which we have started with the process of consultation. You will know that we have undertaken to give Parliament, as is right, a very significant role if this moves forward. Monetary policy and monetary independence, and all the implications for that, which can be profound, will be a key part of it.

The Chair: Including, therefore, a number of the issues that have been touched upon this afternoon. This is the question we need to be thinking about: how the Bank of England operates in terms of its independence and so forth.

Andrew Griffith MP: Correct, which is why it is a joint consultation with the Bank of England. It is a central bank digital currency; it is not a sovereign digital currency. We will work through those together and involve the widest group of stakeholders, including, no doubt, this committee and others.

The Chair: On that final question of accountability, Lord Blackwell.

Q239 Lord Blackwell: Thank you. I would like to go back to a couple of points. First, regarding the relationship between the Treasury and the Bank of England, both monetary policy and fiscal policy work through their impact on aggregate demand. They can either work together or they can work in conflict. They do have different distributional effects. Tight monetary policy obviously has an impact on mortgage rates and housing. Equally, loose monetary policy can have an impact on creating asset bubbles, whereas fiscal policy has a different effect.

Prior to Bank of England independence, these kinds of trade-offs to optimise overall policy, fiscal and monetary, to achieve the right impact were part of the normal processes of government. If those are not happening now, is there a risk that we are missing out on getting the right balance of instruments? Would it not be sensible to have some way of having those discussions?

Andrew Griffith MP: Discussions happen. Everyone has their allotted role, their primacy, the levers that they are responsible for. It seems to me not a bad thing in life that people have clarity about what their allotted role in that position is. I do not want to accept or not challenge this, and I respect you are not exactly saying that, but it is not an oil and water-siloed set of conversations. There is interplay between individuals, there are conversations and there are dialogues. I am very confident that both sides of that are informing each other. For example, the Chancellor, before a fiscal event, will inform the governor. There is a dialogue between selected officials in the Treasury and the Bank of England about particular moves that they may make on monetary policy. Those fall very far short of not respecting each other’s independence of action within those domains, but do not take from that that there is not a close dialogue and that each person’s action is not informed by an understanding of the other’s.

Lord Blackwell: That is helpful. As you have explained, in respect of Bank of England independence, the Treasury is not holding the Bank of England to account; the Bank of England is not answerable to the Treasury. Given the huge powers the Bank has and the impact it can have on the economy and people’s lives, accountability to Parliament becomes crucial. As a parliamentarian, is it sufficient every six months or so to have the Governor of the Bank of England appear in front of a group of MPs? Our committee does not necessarily have the staff expertise behind it and the economists to review in detail what the Bank is doing. Are we missing some mechanism to challenge the Bank of England and properly hold it to account?

Andrew Griffith MP: No, I think that is the right mechanism. Can one always think about the frequency, the time spent, the papers, the materials? It would be wrong to characterise accountability mechanisms, scrutiny and engagement with stakeholders as narrowly as the appearances before the Treasury Committee. That is a very formal mechanism. I believe any former Minister and former Governor of the Bank of England would say that they feel properly scrutinised, spending a number of hours being asked all sorts of questions; even the process of preparation is part of that scrutiny mechanism and feeling one is accountable for decisions. I am quite sure that is not the only mechanism. There will be other interaction with stakeholders, Members of Parliament, opinion formers and the press, all of which forms an accountability mechanism.

The Chair: Looking back with hindsight, admittedly, at the period of Covid and the successive bouts of QE that took place at that point, were the Treasury and the Government doing enough to explain at the Dispatch Box what was going on?

Andrew Griffith MP: I can only speak not having been part of the Government at that time. That seemed to me a time when it was hard to exercise the full scrutiny mechanisms that one would if we were not in a global pandemic. This place, for example, was itself shut down. There were scrutiny mechanisms put in place. I was on the Science and Health Committee and we did scrutinise some of the Government’s decisions in near real time, through the excellent work of Greg Clark and others—but it was impaired. I do not think any fair-minded person would say that there was not some impairment of Parliament’s normal scrutiny mechanisms.

The Chair: Obviously those were exceptional circumstances, but should we be looking more to how the Government explain the work of the Bank, and not just via the TC? As Lord Blackwell is implying, just asking the governor to come to the TC, excellent though those sessions are, may be inadequate.

Andrew Griffith MP: We should always strive to hold ourselves to account and to public scrutiny. It is very important for all parts of the public realm that the maximum amount of scrutiny is exercised. With respect, I do not want to fixate on a particular committee or one particular mechanism for that.

Q240 The Chair: Understood. Does anyone else have any final questions? Ministers, thank you very much. Before you go, one final question, because I know it is a matter of great public interest at the moment and has also been a matter of debate, as you will have known, during the Financial Services and Markets Bill. That is the issue of politically exposed persons and banking. There has been a lot of debate about this over the last few days. I do not want you to get into individuals, but I know the Chancellor has asked you to look into this. Can you give some sense of what you see the problem as being here?

Andrew Griffith MP: Let me try to unpack it briefly. You were kind enough to accept it is a broad domain. Regarding lawful freedom of expression, it is not right that anyone would be de-banked on those grounds; that is not acceptable. To be a holder of a banking licence or a payment service is a privilege; it confers rights and obligations. One of those obligations, in a lawful, democratic society, should be the freedom of expression. As a sole ground for the withdrawal of banking facilities, that is not acceptable. If executives within organisations hold themselves out to be fit and proper, then they would not seek to suppress the lawful expression of democratic views on which all our institutions rely. We have been talking about scrutiny. Implicit within scrutiny is the ability to exercise the right of freedom of expression. How that is taken forward is one of the things I will be working on with officials, and we have consulted on this.

The Chair: Is this emerging from the PEPs regime or is it something separate?

Andrew Griffith MP: It is not that they may not be interrelated but I want to try to distinguish three different strands. My remarks are in respect of the lawful freedom of expression.

As this committee will almost uniquely know, the second is the reforms that we seek to the politically exposed persons regime. We inherited that regime as part of a rule in an international rulebook. One of the abilities that we and the FCA will have as part of the Financial Services and Markets Act 2023 is the ability to revisit those rules. The Chancellor and I have asked the FCA to do just that: to review the application of those rules for the unintended consequences that can always happen when a duty of care is put on an individual institution. Sometimes that can go too far. It should not be applied in a blanket way. As with all good regulation, it should be applied in a proportionate way and in a way that reflects the risk.

The second thing we have asked is that the FCA looks at creating a domestic politically exposed persons regime to reflect the lower category of risk associated with those whose affairs are wholly domestic.

The third point, just to round out the topic, is the general way in which financial institutions apply the very difficult area of economic crime, anti-money laundering and fraud prevention. That is a challenge. We all recognise that it is a shared challenge, but we seek that that, again, is applied in a proportionate and a thoughtful way. This may be anecdotal, but the idea of a widow who has banked with a particular institution for a quarter of a century being asked to demonstrate repeatedly the source of wealth to comply with a well-intentioned piece of financial regulation is not an outcome that we seek.

I look forward to working with the sector to try to make sure that those important regimes—and we are undiminished in our desire to prevent economic crime, money laundering and fraud—are applied in a proportionate way so that they do not have those unintended consequences for those on whom they are not intended to bite.

The Chair: Excellent. Thank you very much for answering that supplementary question. More to the point, thank you for bearing with us for the best part of two-and-a-bit hours and answering all our questions so fully. Thank you and your colleagues for coming.