Examination of witness (Questions 80-99)
TUESDAY 1 MAY 2001
MS KATE BARKER
80. Can I change the subject arising from the
debate about the new economy. There is very lively debate inside
the MPC about whether improved ICT importance has improved our
competitiveness and productivity such that we are not giving enough
weight to those and we are under-estimating how much they are
reducing inflation. What is your view of that whole debate?
(Ms Barker) I have not had the benefit the people
on the committee have had of seeing in detail some of the new
work that is being done. My view of the whole debate on the new
economy is that in some senses we are actually moving to a period
where it is being talked about more sensibly. A year or so ago
people were making some very large and extravagant claims which
did seem to me to be quite wrong. A sensible reading of the evidence
in the US is that the benefits of the new economy, even outside
the ICT producing sectors, are starting to be slightly clearer
and are appearing in an improvement in the trend rate of growth
of productivity. The evidence in the UK that this is going on,
on the face of it, is that this is very much less clear. There
are questions about whether or not some of the activity in the
economy is being properly measured which might lead one to be
a little bit more optimistic about it. I have to say that I am
not necessarily completely convinced of that. But it is likely
that down the road we will start to see far more new economy effects
in the UK and that we may be a little bit behind the US. I have
some concern that some of the, as it were, forays into the new
economy have not always proved successful for companies. So some
of the claims about productivity growth just may take longer to
come through. I do think we may see them over the next two or
three years. I certainly think that the endeavour to ensure that
accurate measurement is there to capture them when it comes through
is very important, and it would be one of the things that I would
want to concern myself with.
Mr Davey
81. I just want to touch on the fiscal and monetary
policy mix, but before I do can I just go back to what Sir Michael
was asking in respect of the synergy of the inflation target and
you said the dangers of deflation. While that is a consensus view,
can I hypothetically put to you a case that could in theory happen
where prices were falling by one per cent a year but real GDP
was growing at trend. What would be wrong with that?
(Ms Barker) On the face of it there is nothing wrong
with it if it turns out to be a sustainable feature. Equally,
one might say there was not anything wrong with prices growing
at five per cent and it turned out to be sustainable, but one
tends to think the difficulty with that kind of situation is that
you are then in territory where people are finding it very difficult
to adjust their prices and wages adequately and the price mechanism
may find it more difficult in working and you may run into deflationary
territory. In the same way, when you have a much higher inflation
rate you start to worry that the price mechanism is not working
so well upwards and there is a danger of the thing moving on up.
82. I want to focus on that because it does
tie into the new economy, of course, because one of the issues
of the new economy is you are seeing components, particularly
in industry, where you are seeing huge price reductions and they
are feeding through to the consumer sector as well. Okay, we have
got hedonic issues, which I do not really want to go into, the
Committee will be pleased to hear, but I just want to push you
on that. If you are in the new economy maybe one of the key aspects
of the new economy will turn out to be, with these productivity
improvements, that actually we could see lower average inflation
than the current inflation target would suggest we ought to be
aiming for.
(Ms Barker) It is different to say that there is falling
inflation in some sectors than to talk about falling inflation
across the economy. The reason there is falling inflation in particular
sectors is that they have extremely strong productivity growth,
so you are not then talking about the kinds of problems of wage
adjustment that I referred to earlier. It is not a whole economy
feature and, because it is built on productivity growth, people
are able to go on earning, on the whole, pretty good money. I
think that would answer the first part of your question. The second
part of your question was saying we might have a lower overall
inflation.
83. So maybe the inflation target is too high
if we are in the new economy.
(Ms Barker) I am not sure I would necessarily agree
with you that I felt the new economy itself pointed to a higher
inflation target. Rather I would have thought that what the new
economy pointed to was the possible achievement of a higher rate
of growth, if it is going to improve our productivity.
84. Thank you for indulging me. Can I ask you
the question that I was down to ask which is about fiscal and
monetary policy mix. You have made comments in the past, both
in CBI evidence to the Lords' Committee on Monetary Policy and,
indeed, I think in your answers to our questionnaire, suggesting
that maybe a tighter fiscal policy would have been a better role
for fiscal because it would have enabled monetary policy to be
slightly looser and have knock-on effects to the exchange rate
in particular. Are you still of that view? Do you think that the
current mix of fiscal and monetary policy is still a problem?
(Ms Barker) No. Even when we were expressing those
views I think we expressed them more strongly in the early couple
of years of the MPC—I am speaking now on the CBI's behalf—than
we did latterly. We did not express them terribly strongly. We
thought perhaps there might have been some benefit in tighter
fiscal policy but, as I say, even then we were not quite convinced
because one of the chief reasons that we were interested in it
was we thought it might allow lower interest rates and it might
allow lower exchange rates. However, I suggested then on behalf
of the CBI, and would suggest it again today, that was an extremely
uncertain linkage. The idea that there might be some fiscal and
monetary policy mix which would have got us out of this box we
have been in over the past few years with an overvalued exchange
rate was probably pretty much a chimera.
85. How should we get out of this box that you
describe?
(Ms Barker) The box we seem to have got in is one
in which we all believe, or a number of economists believe, that
sterling has been too strong and we have had that familiar problem
between the internal and external sectors. The truth is I do not
think there is any very obvious way out of this box. It will be
solved in the long run in one of two ways. Either sterling will
at some point decline, and obviously we have to cope with any
inflationary consequences of that decline, and there will be a
period before the external sector recovers. Or sterling will continue
to be strong and the economy will adjust to that but, as I suggested
earlier, my view would be that would be at some cost in terms
of the long-term growth rate because of the pressure on the traded
sector. I very much wish there was a very good policy way of getting
out of this box. I think the fairly lengthy discussions that have
gone on over the past three or four years indicate that there
is not. I should perhaps remark, although that sounds rather negative,
that there would have been worse ways of dealing with it. Fiscal
policy has on the whole been kept generally pretty tight over
the last few years, it has been very prudent. While I do not think
there is necessarily a solution to it, it has certainly been scope
for policy makers to have made it worse and they have not done
so.
86. I notice that you did not introduce one
other option that some people have spoken about, namely that sterling
joins the euro area. Have you any thoughts on that? Would you
see that as a potential policy option for a future government?
(Ms Barker) Clearly it is a policy option. In terms
of where we are today, for sterling to join the euro clearly would
not get us out of the box because presumably we would have to
join at an exchange rate similar to the one we have, which we
feel is over valued. Of the two ways I suggested the problem would
be resolved it would be to know we have got the second one which
would mean that we would have to adjust the economy to a higher
level of sterling.
87. You would like to see the sterling exchange
rate vis a" vis the euro decline before Britain considered
joining the euro?
(Ms Barker) I have not yet said I would want to see
sterling necessarily join the euro at all, I would like to point
out. If you were to ask me the question would you join sterling
to the euro today at this exchange rate, I would say no.
88. That was not the question.
(Ms Barker) No, it was not. Let us be clear about
this. There are two caveats. If you are talking about joining
the euro further down the road, I think the truthful answer that
I would give, and most people would give, is I want to look at
the exchange rate decision again in the light of what has happened
since and what has happened to the traded sector. I think the
question what would be the right rate to join two or three years
down the road is always going to be a difficult one to answer.
Chairman
89. Do you think it is legitimate for members
of the MPC to hold views about the euro and to talk about them?
(Ms Barker) Given that the question of the euro may
become one of the major questions of the next few years, I think
it would be very odd if members of the MPC did not hold them.
I doubt you could make me not hold a view.
90. I wondered what you thought.
(Ms Barker) Yes. Of course I think it is right for
them to hold them, therefore I am sure they will talk about them.
Mr Davey
91. Do you think the objectives of the Monetary
Policy Committee might have to be changed in the lead up to the
UK going into the single currency should a referendum make that
option possible?
(Ms Barker) Having said, first of all, that of course
at present it is a hypothetical question, yes clearly—Sorry,
you asked me in the lead up to the referendum or—
92. Let us assume the country has decided, the
Government, the Parliament and the people have decided, that the
UK should join the single currency, do you think the MPC's statutory
objectives might need to change?
(Ms Barker) Once we have gone perhaps a stage beyond
that and started to talk about the exchange rate that you would
wish to enter at, yes, clearly the objectives would have to change.
That would after all be a temporary feature, it would be part
of the transitional regime.
Judy Mallaber
93. In his report to the Bank of England Directors,
Don Kohn commented that he thought the Inflation Report was maybe
not as helpful as it might be in understanding, predicting and
judging policy actions. How easy have you found it to understand
the Inflation Report forecasts?
(Ms Barker) I fear in my answer to this question I
am going to give you ammunition to throw back at me when I come
to you again. I have found it slightly difficult because beyond
a certain few key assumptions you are not quite sure what some
of the factors that are going on in the forecast process are.
I find the Inflation Report extremely helpful in giving you a
view as to obviously where the MPC judge the economy to be today
and it very often contains very interesting summaries of pieces
of work done at the Bank. In that sense, as a practical economist
I find it an extremely useful piece of source material. In terms
of understanding the shape of the Bank's forecast, however, it
is not quite as helpful. You understand the shape of the inflation
forecast, it is drawn out for you.
94. Does it matter the central band of the inflation
forecast may not represent the views of every single member of
the MPC? Does that matter?
(Ms Barker) Perfectly straightforwardly, I think that
is a question I am going to want to come back to when I have experienced
being one of those members and seen how it works in practice.
95. Would it be possible you might consider
your own forecast should be published as a separate chart rather
than just having that band of one?
(Ms Barker) It is certainly something I would consider
but it is not something on which I have a firm view today.
96. If you have said it is maybe not completely
as clear and helpful as it might be, what would you do to improve
the Inflation Report and make it easier, not just for members
of the MPC but others to understand and use?
(Ms Barker) I do think that one of the things I would
be interested in discussing with my colleagues is whether or not
some of the underlying forecasts and shape of the forecasts should
and could be made a bit clearer. I would want to understand a
little bit better why that has not been the case in the past and
whether it would help, as it were, the transparency of policy
and the reaction function. After all, that is what you are after
at the end, you are after something which is transparent, clear
and credible. The question is whether adding a little bit more
detail about the Bank's forecast would improve that or not.
97. What sorts of areas would you want to expand
in the report?
(Ms Barker) The kinds of areas we might want to expand
on are exactly how the Bank sees the balance of the economy going
forward, particularly what have they assumed about a whole variety
of items on how investment is developing, how the savings ratio
is developing in the future, in a slightly more specific way than
you can get a feel of now. Very often if you look at the Bank's
GDP forecast, you find it does not quite tie in with what you
think is going to happen but you cannot then unpick exactly what
it is they see slightly differently.
98. Does that imply that they do not have the
right information before them or that they are just not presenting
it fully?
(Ms Barker) No, it implies that they do not present
it. I am quite sure that in taking the decision they do have a
fully worked up forecast, yes.
Chairman
99. So we would need to watch the new Inflation
Report once you are on the MPC?
(Ms Barker) Yes.
Chairman: Any further questions? Thank
you very much.
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