Examination of witness (Questions 40-59)
TUESDAY 1 MAY 2001
MS KATE BARKER
40. Sure. You would have been inclined to go
for the 25 basis points which suggests you would have had reservations
about a 50 basis points cut, presumably believing that it would
carry some risk that should be avoided. What would have swayed
you against 50 and in favour of 25 exactly?
(Ms Barker) In terms of the discussion and the debate
at the committee at that time, as I understand it, and I have
to say it is difficult to describe this in detail, I think there
were two points. One was, of course, which has already been referred
to, the information value of making a 50 basis points cut as opposed
to a 25 basis points cut, the question as to whether that might
be likely to signal a very significant change of view of the economy
and have some negative effects on confidence. There is often a
great deal of discussion about that. The other point was a question
that is obviously very important in the conjuncture at the moment
which is exactly what is going to happen in the US economy and
what effect is that going to have in the UK and, in particular,
that clearly is a negative influence from outside, is that going
to affect the domestic economy which has, of course, been growing
very strongly, or are there signs that the domestic economy is
still growing so strongly that it will not be much affected? It
is my view on that side of the conjuncture that I think would
have led me towards 25 basis points.
41. So you would have been a cautious dove?
(Ms Barker) You may wish to categorise it like that.
42. Finally, can I ask you to expand a bit on
the answer you gave to question eight in our questionnaire. We
are talking about using the target of RPIX.
(Ms Barker) Yes.
43. You said "it is important to start
off with the realisation that the perfect policy solution almost
certainly does not exist" and that is understandable. Then
you go on to say, "The question clearly is what is best for
the UK over the next few years, given the goals which other central
banks have adopted". I did not quite understand the point
you were making there, can you just expand on that?
(Ms Barker) What I was thinking about was given the
monetary history of the UK, and perhaps uniquely we have been
through a long period where we have very often changed our inflation
targets and the way in which we manage our policy, we are at a
certain state of maturity in the monetary management cycle. It
seems to me if we look at central banks, some central banks are
set up with more independence or their remits give perhaps apparently
slightly greater weight to growth and employment. It is right
for the UK in particular to have a rather clear inflation target,
to give a priority to the inflation target, and that is the best
thing to establish low inflation and credibility in low inflation
in the UK, which I think is particularly important. I mean in
that sense if you are looking at the UK on a spectrum of central
banks, of independence and the way in which they operate their
goals, given our background economically and, indeed, our constitutional
background, it seems to me that kind of framework is right for
us.
44. Does it follow from that that you think
the way we have chosen to do it here in the UK is better than,
for example, the way it is done by the European Central Bank?
(Ms Barker) Obviously I did not express myself as
clearly as I might have done. What I intended to indicate was
that it was right for the UK, over the next few years given where
we have been coming from in terms of our background. If you look
at the European situation they have, of course, come from a different
situation, very often there is a much stronger tradition of independent
central banks which has had much greater political and public
acceptability. Therefore, I do not think you can necessarily conclude
that what is right for us today is right for the ECB or necessarily
for the UK at some future date.
Mr Davey
45. You are about to join the hothouse committee
with some big intellects there but you are all playing as a team
with your own particular role. What is your comparative advantage
in that team? What will you bring to the teamwork of the MPC?
(Ms Barker) To some extent I have already talked about
that in describing some of the business experience I have had
which I feel is particularly relevant. It is my view that experience
of working in a company, of experiencing it first hand, the pressures
in the way in which a company goes about taking decisions, particularly
doing it at the kind of level I did in Ford of Europe, which after
all is a particularly big company, is a useful experience. I had
the opportunity to build on that experience in my work for the
CBI because since I have that strong kind of business background
I have been perhaps better able than other people at the CBI to
engage with businesses in discussing particular decisions with
them and I have, on occasion, had the opportunity to do so and
interest in pursuing that. That is one particular expertise. I
would hope also that my expertise in talking to business audiences,
in setting out economic ideas to them, will be helpful in the
role that I have described of the importance of communicating
the messages of the MPC and what it is doing. I have also more
recently, although I am sure the Committee will be glad to know
I resigned from this position yesterday, been a non-executive
director of a building society, which again has brought me back
into direct contact with the financial markets and consideration
of questions as to how to manage financial risk, again building
on experiences I had earlier. I think that is very useful and
also it has given me a reasonable working knowledge of what is
going on in the mortgage market, which is an important part of
the transmission mechanism. I do come with quite a lot of relevant
experience of working as a practical economist. There are also
other pieces of experience I have had more recently, for example
considering how changes in the tax system or different approaches
to taxation may affect corporate behaviour, which will also be
relevant.
46. Thank you for that. You have obviously focused
in on some very practical issues from your experience. Is there
anything from your academic background or your own intellectual
interest that you think you can draw upon in your work in the
MPC?
(Ms Barker) To some extent the kinds of things I am
interested in tend to build on my background working as a practical
economist and working as a practical person. One point that is
always of interest to me, I think, is investment behaviour, the
way in which companies approach investment decisions, how they
think about financial markets, inflation rates, all that kind
of thing going forward. That is something I am interested in,
and it is something I am interested in developing the understanding
of further. It is something that is important in a lot of debates
in the UK at the moment, the debate about what is going to happen
to productivity in the future for example.
47. You touched on this in an earlier answer
about what research projects you might decide to lead or to be
part of when you join the MPC. Clearly it is early days yet, you
need to talk to people at the Bank about what is going on. DeAnne
Julius, who you are directly replacing, led a number of research
projects in the service sector, measuring inflation, for example.
Do you have any particular issues that you would like to join
in on those types of research projects that are already there
or, as you have just said, new research projects on investment
behaviour?
(Ms Barker) I indicated that and also I talked earlier
about an interest I have in looking at the way in which inflation
works at a more regional level, the way in which it is transmitted
between regions. I am also very interested in the development
of a piece of work which I know is going on about the measurement
of the new economy and productivity. I have quite a wide range
of interest. You are right to say that it is too early to say
definitely which way I would go first. Certainly somebody asked
earlier about day to day activity, clearly I would see leading
research projects as a very important thing to do. I think I referred
to that in my written answers.
Mr Fallon
48. The IMF suggested last week that the United
Kingdom economy will grow around 2.6 per cent this year, slower
than the three per cent last year. Do you agree with that assessment?
(Ms Barker) No, on the whole this year, although as
the Committee knows forecasting is a very tricky business, I would
expect the figure to be somewhat lower than that. One of the reasons
I would expect it to be lower and of particular uncertainty, and
something that is going to be very difficult for any forecaster
at the moment and, indeed, will make some short term difficulties
for discussions on the Monetary Policy Committee, is what impact
foot and mouth is going to have on growth. I think there are obviously
a variety of factors going on which may be slowing the economy
at the moment. I have already talked about the US economy, that
is one thing that is slowing the economy down. It is not easy
to assess but one can get a feel for it. The impact of foot and
mouth, however, is particularly difficult because it almost certainly
in terms of its macro economic effects—clearly it will have
a lot of micro economic effects—it will depend almost entirely
on the behaviour of foreign tourists coming into the UK. That
is not something which macro models have so far been very good
at capturing, but an estimate of that suggests to me that it will
have a significant effect, perhaps taking 0.2 or 0.3 off economic
growth. At the moment I would have a forecast probably rather
lower than 2.6 per cent.
49. So if the UK is going to slow faster than
the IMF predicts, monetary policy will have to be looser, will
it not?
(Ms Barker) I do not think that would necessarily
follow because, after all, if the economy was to be growing at
this 2.6 per cent that would be above what many people would think
of as being long term trend for the economy. Of course the real
question for monetary policy—it is the question at any time,
it is not just a question today—is exactly where are we
relative to trend, do we need to be a little bit below trend or
a little bit above trend in order to get inflation back to the
target? If you think about what I have just said about foot and
mouth, that will slow the economy this year, but in some sense
that is quite a technical matter. It is much less clear that it
will still be slowing the economy next year and so very unclear
what effect it will be having on inflation two years down the
line. It is in that sense that I express some worry about some
of the numbers that come out this year being difficult to interpret
because foot and mouth may have quite strong short term effects
which actually will not make very much difference to inflation
prospects in 18 or 24 months.
50. You do not see much of a role in monetary
policy in helping us avoid the economy slowing faster than the
IMF predict?
(Ms Barker) Underlying that question is whether I
think it is desirable to prevent the economy slowing faster than
the IMF would predict. I remarked that the key point in assessing
monetary policy was we are not after all aiming at keeping a particular
rate of growth, we are aiming at keeping inflation on target.
I am sure Sir Michael Spicer might remark on the fact that I had
come up with the wrong target if I was to say it was important
to monetary policy to have a role preventing growth slowing. What
I am saying is quite a lot of the slow down in growth will be
due to foot and mouth but that is something that since it does
not have very clear long term effects on inflation is very difficult
for monetary policy to respond to at all, and it is a situation
which clearly needs to be tackled through the operation of fiscal
policy.
51. In answer to question 12 in your evidence
to us you said that if inflation was under shooting significantly
it would not be desirable to bring inflation back to target quickly.
Would you hold that view if inflation were above target?
(Ms Barker) This comes back to the point about the
two objectives. The reason on the whole that people are concerned
about moving the inflation rate back to target very quickly, or
trying to move it back to target very quickly, is that it leads
to volatility in output and employment which can be unhelpful
further down the line, i.e. to get inflation back to target quickly
might risk putting too much demand into the economy that might
then prove very difficult to control. In that sense when you are
trying to move back towards the target I think it is just as right
when you are above it as below it. The reason I expressed it that
way round is as a matter of fact that it is more often expressed
the other way round, that it is wrong to cut inflation too sharply
because it has undesirable effects in putting output down for
a short time. I think if you are going to be symmetrical, you
have to equally say there are risks and dangers in having a bumpy
path with output growth which includes strong periods of growth.
52. Are the dangers to the MPC's credibility
the same?
(Ms Barker) If you are operating a symmetrical target
then, yes, I believe they should be the same.
Sir Michael Spicer
53. You have touched just now in answer to Mr
Fallon on the mix between monetary and fiscal policy. Can you
give us some feel for which you think is more important, fiscal
policy or monetary policy, in terms of the real economy and in
terms of inflation and in terms of what you are going to be considering?
(Ms Barker) In terms of achieving the inflation target,
I believe that the position we have in the UK, through the operation
of the monetary policy, is absolutely right. Given that I think
achieving the inflation target is important to long term growth
in employment, in that sense I think monetary policy is more important
perhaps. That does not mean that I think there is no role for
fiscal policy beyond meeting long term rules. Fiscal policy may
be very important, for example, in looking at imbalances in the
economy. In evidence to this Committee before I am sure we have
talked about difficulties in manufacturing and whether or not
it is a good time, therefore, to increase taxation on manufacturing
and argued that with manufacturers in difficulties this is not
a good time. Looking at imbalances can sometimes be a matter for
fiscal policy. I have to say, again, I think only relatively unusually.
54. You are not arguing that fiscal policy does
not have its own substantive effect on inflation?
(Ms Barker) No, I am arguing as an approach to managing
inflation, monetary policy is the right way to go. I am certainly
not arguing, for example, if there was to be announced tomorrow
enormous contraction in fiscal policy, that would not be something
that the monetary policy would have to take account of. I have
to say I think it is very difficult to say which is more important,
they both clearly have an effect.
55. If that is the case, does it make sense
in your view to separate monetary instruments from fiscal instruments
and the responsibility for those?
(Ms Barker) The reasons for separating them are good
and, yes, I do believe it makes a difference. In answer to one
of the earlier questions I talked about the benefits of credibility
that have been gained by having the two separated, and I think
it is absolutely right that an independent committee that is seen
to be free of political pressures can improve credibility, and
the experience of the last four years has demonstrated that to
be so in the UK. I do not believe, which may be the implication
of your question, that it necessarily makes policy co-ordination
more difficult.
56. But if, as you have suggested, there is
impact on inflation of fiscal policy, do you think that it is
the job of a member of the MPC to make that very explicit in public?
For instance, if there was a loose fiscal policy which was forcing
up interest rates, would it be the job of the MPC member to make
that plain to the outside world?
(Ms Barker) It is certainly the job of the MPC, and
as I understand that is indeed what happens, to make plain to
the Treasury what the impact of particular changes in fiscal policy
would be on the MPC's decisions, as it were, to make plain their
reaction function. It is generally clear in the minutes, rightly,
what view the MPC has taken of an announcement the Government
has made, in terms of its effect on inflation and the effect on
their decisions. Again, that is absolutely right, those things
should be made clear. I think I said in answer to an earlier question
that on decisions on fiscal policy which are taken by Parliament
and by elected Ministers, I am not sure that I would necessarily
wish to criticise them. But I think it should always be made clear
what the implications of them for monetary policy are.
57. I think the thrust of my question was to
see what you felt about individuals taking a stance within the
MPC. Do you think it is right that if there is a loose fiscal
policy, or looser than it should be in terms of inflation, an
individual member of the MPC should make speeches to that effect
and should be proselytising against the loose fiscal policy, for
example?
(Ms Barker) I think if an MPC member felt very strongly
that a particular course of fiscal policy had had a particular
effect on interest rates it is open to them to say so and to indicate
that, yes.
58. And you think if it is open to them then
it should be something that they should seriously consider doing?
(Ms Barker) It is something that they should seriously
consider doing but they also have to think about—You use
the word "criticise", I think it is absolutely right
that they should make it clear how fiscal policy has been taken
into account and how it has affected the decisions they have taken,
but I think an MPC member should be very cautious about criticising
the democratic fiscal policy which emerges.
Mr Beard
59. In your response to question 13 you said:
"It is pretty difficult to imagine how to manage monetary
policy without the use of a concept such as the natural rate of
unemployment . . .". And you go on to say: "I would
judge it likely that unemployment could not fall significantly
further in the short-term without putting upward pressure on wages,
and therefore that the UK is very close to the NAIRU at present."
Unemployment has fallen hugely in recent times and there has been
no pressure on inflation from that. Why should that not continue?
(Ms Barker) I also said that I thought establishing
where the NAIRU was, was always a difficult matter. However, unemployment
has now fallen so far that it is beginning to reach levels, and
certainly has reached levels probably in parts of the country,
which it would be reasonable to describe as full unemployment.
In some regions there are really very few people left to be brought
into the labour force. The reason why I think we now may be reaching
a time when it will be difficult to reduce unemployment very much
further is based on an observation of that simple fact and an
observation also of what is happening to skills shortages. Something
I am conscious of, not only through survey data but also through
direct contact with business, that in some regions there are skill
shortages. Indeed, in some cases it is actually wrong to describe
it as skill shortages, there are just labour market shortages.
In those circumstances you start to become worried that if unemployment
were to fall significantly further that would start to bring upward
pressure on wages.
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