Select Committee on Treasury Minutes of Evidence

Examination of witness (Questions 80-99)



  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.


  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.


  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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