Examination of witnesses (Questions 380-399)
TUESDAY 27 FEBRUARY 2001
THE RT
HON SIR
EDWARD GEORGE,
MR MERVYN
KING, MR
CHARLES BEAN,
DR DEANNE
JULIUS, PROFESSOR
STEPHEN NICKELL
AND MR
IAN PLENDERLEITH
380. You are monitoring?
(Sir Edward George)—the performance of these
economies. As I say to you, we are monitoring the performance
of the United States economy, we are monitoring the performance
of the Japanese economy. It is the link that you are trying to
make between this and the question of whether or not the five
tests are met which I just think is a false premise.
381. So the monitoring you are doing and the
five economic tests do not have any necessary connection?
(Sir Edward George) No, but the information we are
collecting, the perceptions we are gathering, could be relevant
to that sort of assessment if the Treasury asked us to contribute
to their assessments.
382. Would you be prepared to publish the monitoring
work that you are currently doing?
(Sir Edward George) Well, no, I am not prepared to
publish it because this is just routine—
383. If it is routine why not publish it?
(Sir Edward George)—monitoring of behaviour.
Because, frankly, we publish endless things.
384. Why not this?
(Sir Edward George) The briefings that I receive before
meetings and that sort of thing, you want that published? I just
do not think it has any role in explaining what it is we are trying
to do. This is part of our ongoing work. You want everything that
is produced in the Bank to be published?
385. No; the important things. We do not have
a right to know that, the monitoring work you are doing, that
is what you are saying?
(Sir Edward George) No. I am just saying I do not
think it would be useful to you. I am very happy to talk to you
about our perception of the United States, that kind of thing.
That is produced by staff, it is presented at our pre-MPC meetings.
There is a limit, frankly, to how much it is sensible to put into
the public domain. It would not inform the public view. There
is nothing secret about it, I can tell you.
Mr Ruffley: In which case it begs the
question why you will not publish it. You have given an answer
and I will let the Chairman move on.
Sir Michael Spicer
386. I would just like to pursue that question.
Governor, you have said that you are doing routine and ongoing
monitoring work, but no special assessment of convergence. I have
to ask the question which my colleagues have moved on to, which
is, why not? It is not just a question of your keeping in touch
on this. It is a major feature, is it not, in any forecast of
inflation as to what our exchange rate relationship is with the
continent of Europe and how fixed that is going to be? Surely
this is a major feature of MPC's responsibilities?
(Sir Edward George) Of course. We have a lot of discussion
about what is happening to the exchange rate and what the impact
of that is and what the implication of that is for our expectation
of inflation. What is happening in the different economies of
the world is a very major input in what is likely to happen to
external demand to world prices and all of that. That is what
I mean by it being ongoing, routine work.
387. But the probability that you attach to
our entry to the euro is something more than just routine. It
is a major feature in any forecast of inflation, is it not?
(Sir Edward George) Oh, you are suggesting that if
we thought that it was likely that we would be going into the
euro we would have views about the exchange rate which we would
need to take into account in our forecast?
388. Yes, or not.
(Sir Edward George) I have to say we do not do that
at all.
389. So from the point of view of inflation
forecasts you ignore the question of whether we are going into
the euro or not?
(Sir Edward George) If the market gets the impression
that we may be going into the euro over a certain time span, and
they do. When the Prime Minister said that it would be within
two years of the next Parliament, there was some kind of frisson
and some suggestion that the market was going in for what they
call convergence plays. If that really became embedded in the
market attitudes, because it was in the market, that would feed
through into our process, but we do not sit down and speculate
on what you are going to decide.
390. Can I ask Dr Julius whether that is in
your view reasonable, that therefore you are not going to take
too much of an interest in what is going on on this front because
at the moment it is not relevant? That is the answer I have been
given.
(Dr Julius) Given that we look ahead two years in
our forecasts, which is not a terribly long time, I would agree.
I think the probability that we would be in the euro within the
next two years is pretty small.
Mr Cousins
391. Well, Governor, we have had a Labour Government
now for almost four years and I have to drag you back to questions
about inflation which are very boring. There is the measure of
your triumph. Dr Julius earlier in our discussions this morning
said that in her view some significance should be given to the
idea that the policy changes, the behavioural changes, that could
be linked to changes in interest rate policy were occurring quicker
and faster than hitherto. I wondered if I could get a sense of
what other members of the Committee thought of that view.
(Mr Plenderleith) I think it is very difficult to
reach a view. The view I take is that the impact is progressive
over a period of time. In some situations where, as DeAnne indicated,
confidence effects are particularly important—and that may
be true in the United States at the moment—one can see a
more rapid impact. There may also be some quickening of the impact
when the greater credibility of the monetary framework that we
have been pursuing for several years now. I would not exaggerate
the latter effect. I think it is more likely that one sees a quicker
impact than there are confidence effects but that is not always
the case. One certainly should not forget that there can be an
ongoing or persistent effect, from shifts in the policy stance,
that can reach forward over a year or two.
(Mr King) I am not sure if there has been a change
in the length of the transmission lag in the sense that changes
in interest rate have a quicker effect on consumption or investment,
but one thing that has changed is that the magnitude of the interest
rate changes we need to make to bring inflation back to the target
for a given deviation may well be smaller, and in that sense the
length of time it takes to bring inflation back to the target,
given a shock, may be less. The reason is that people really do
believe that this 2.5 per cent target will be met over a period
of time. When there is an inflation shock, unlike, say, the 1970s
when quite quickly wages and then prices took off in response
to an inflation shock, now it may well be the case that the second
round responses of wages and prices are damped because people
believe that inflation will be brought back to the target. The
amount by which interest rates have to go up or go down to deal
with an initial inflation shock may well be less than was the
case in the past. It is probably too soon to be confident of that,
but that is certainly a plausible proposition.
392. Mr Bean?
(Mr Bean) I would second that. On top of that, you
can also allow for the fact that there have been changes in the
structure of financial markets in recent years, so that it may
be easier for consumers to borrow, particularly against their
housing equity, than it has been in the past. That is another
reason for expecting a given change in interest rates to have
a stronger effect than it used to. These sorts of structural changes,
and the way they impact on the strength and duration of the transmission
mechanism, are things that evolve over time and it is quite difficult
to say unambiguously, yes, the effect is twice as powerful as
it was ten years ago or something like that. But there are reasons
for expecting the nature of the transmission mechanism to have
changed over the last ten or 20 years.
(Professor Nickell) I just echo that. I think there
are quite good reasons for believing the effects of interest rate
changes are a bit bigger but I do not see them operating any quicker
than they used to.
393. Governor, in the discussions we have had
about the inflation forecast and about the views of members of
your Committee about this, it seems fairly clear that if we look
at the minutes of the last meeting there was a difference of view
about what might happen to the US economy that is expressed in
paragraphs 4 and 5, and a difference of view that is expressed
in paragraph 28 about the balance of risks and about inflation
expressed in the fan charts, and a quite distinct difference analysis
of judgments which is expressed in paragraphs 33 and 34 of the
Committee's report. It is also quite clear without actually going
round and asking every individual member their views, that those
differences are symmetrical, mainly that the same people are taking
these different views on these different issues. Are you concerned
that the Monetary Policy committee is to some degree, maybe only
at the moment, maybe not for a long period of time but certainly
at the moment, dividing into two camps?
(Sir Edward George) No, not in general. Differences
of view are an absolute fundamental strength to the Committee.
I think it is terribly important that we should encourage people
to do what they are there to do, which is take independent views
and the cross-read that you get and the interaction that you get
is an absolute huge strength in the Committee. There has been
for quite a long time, a difference of judgment which has persisted
about the new economy, if you like. How do you explain the fact
that quantities, whether you are talking about goods or labour
markets, have been stronger without producing the kind of inflationary
pressures that you would have expected on past experience. We
have discussed that very extensively and very frequently. There
are different possible explanations but there are some people
who are more confident overall that this is something which is
going to persist for the foreseeable future. There are other people
who take the view that it might persist for a time but they are
less confident about that. My own view is that I do not pretend
to know but I think you have to keep an open mind to that possibility.
Indeed, over time we have built into the forecast some allowance
for that factor to continue over the next couple of years. You
get a measure of the divergence in Table 6B in the Inflation Report,
and indeed that was part of the evolutionary process. We introduced
Table 6B because there were differences of that kind. This time
we have added a difference of view about the central expectation,
what is going to happen to the United States, and the extent of
the impact that that could have on the United Kingdom. That is
a difference of view which will probably narrow as we move forward
because, as DeAnne said earlier, we should actually have a better
read on what is likely to happen in the United States by monitoring
what is actually happening. If you look at the differences there
is one which has been fairly persistent, and I think the jury
is still out on that. There have been others and I give the United
States thing in this Inflation Report as an example where they
come and go a bit. I am extremely happy with that situation. The
difficulty is trying to explain that publicly, as Mervyn said
earlier, and explaining how that affects the policy judgments
of the individuals but also how that affects the policy judgment
of the Committee as a whole. That is quite a complicated process.
394. Of course it is true that, as you say,
these differences have their origin so far as this Committee can
track it in the issue of an evaluation of the so-called new economy
in the United States, but it is also clear that the differences
are growing both broader in the sense that they are extending
to issues beyond just that and deeper because they are now resulting
in two quite different judgments of the proper course of action
over the next immediate period, and these are very clearly set
out in paragraphs 33 and 34 of the Monetary Policy Committee report.
(Sir Edward George) If you look back at the minutes
over as long as I can remember (perhaps not right at the beginning),
you will find that at the end of the minutes of the meeting there
are two, sometimes three, paragraphs which express a different
emphasis by different members of the Committee. Sometimes that
is true when we vote unanimously, as it was this last time. At
other times it is where there is a split vote. I do not think
that has changed fundamentally or that the gulf has got wider.
Others may have a different perception but that is not my impression.
There is this persistent thing about the new economy, not just
in the United States but the parallel thing in this country too,
and that has persisted for a while and will go on longer because
the data are still ambiguous. We still do not understand what
is driving it and so we are still monitoring it and keeping an
open mind to the possibilities, as I have said.
395. It is perfectly true that there is a clear
symmetry about the inflation forecasts and it is also true that
all the members of the Committee voted together to bring interest
rates down on the last occasion, but paragraphs 33 and 34 make
it clear that that unanimity of voting and the identification
with the symmetrical forecasts that go with it concealed real
differences of view and judgment which are set out for all to
see in paragraphs 33 and 34.
(Sir Edward George) As there almost invariably are
and have been for some very considerable time.
(Dr Julius) I wonder if I could come in on this point.
What we try to do in the minutes is to set out clearly the different
economic judgments that different members of the Committee thought
were important at that particular time, but it is not the case
that we try to pigeonhole, each of us, in one paragraph or the
other. There are bits of me both in 33 and in 34, for example.
Yes, there are some distinct arguments that we felt in this particular
case it was important to expose to those who care to read the
minutes, that although we voted unanimously some people did it
basically in a paragraph 33 way, as was the sensible, precautionary
thing to do, and for some others they did it having considered
whether it should be 25 or 50. We felt this was material for those
who interpret our reaction function and our judgment to know,
but at the same time it does not, and I think it should not, or
at least it was not my intent to have it, be interpreted as a
deepening or broadening split in the Committee at all.
396. Mr Plenderleith, in the discussion of the
fan charts in the inflation report there is a discussion of the
balance of risks that goes with the inflation forecast. It says
that the largest risk is that of a sharper slowdown in world activity
than embodied in the central projection. Do you identify yourself
with that?
(Mr Plenderleith) This is in the main text you are
talking about now, not 6B? Yes, I do. I broadly subscribe to the
central projection that we have included in this inflation report.
That includes with it, because it is a probability distribution,
a quite substantial down side risk and I share that view.
397. So you do agree that the largest risk is
of a sharper slowdown than embodied in the central projection?
(Mr Plenderleith) Yes.
398. Therefore, which goes with that, you identify
yourself with the Committee's best collective judgment of the
probabilities, which is set out in 6A?
(Mr Plenderleith) That is right.
399. Governor, are you not a bit concerned,
and we have had this discussion earlier about what significance
should be given to the central projection because it is a probability
distribution, that public discussion of these issues is going
to lose sight of the fact that there are these real differences
of view expressed within this inflation forecast process?
(Sir Edward George) I am not concerned at all, I have
to tell you. I think that it is one of the very valuable parts
of the procedure that we adopt, that people should understand
that you have nine people who in an area which is not precise
have differences of view. They are on the whole pretty marginal
differences of view. Very often they are about this month or next.
It seems to me to be the normal situation. People who really understand
the process would be pretty astonished if everybody had the same
view. It is letting people see the reality. That has not always
been true in central banks generally. It still is not true in
some central banks. There is a kind of announcement which explains
a decision. I think it is an absolute strength of our process
that we can display a bit around that decision—and we always
come to a decision; we do not have difficulty with that—and
we can explain the uncertainties and the fact that individuals
will have different views about the emphasis they put on this
or that factor.
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