Examination of Witness (Questions 60 -
WEDNESDAY 25 SEPTEMBER 2002
60. That is rather astonishing. (Sir
Andrew Large) I have had two days to look at it. I am sorry,
there has been an awful lot to try and get under my belt
61. You have been an observeris how I
think you described itof monetary policy and everything
else for, is it, the 20 or 30 years you have been in the business,
and the ECB has been around for quite a long time. Have you not
noticed how they run monetary policy? (Sir Andrew Large)
You use the word "observer". What I was implying by
that is not that I am an expert in the minutia of the way in which
rates are set in different parts of the world, but that as a banker,
if you are talking to business customers about things that they
are thinking of doing, or if you are looking at the way in which
the bank itself is operating, you need to have some feeling for
the way that interest rates are moving and the factors behind
them. It is the underlying factors rather than the minutia and
details of the manner in which they are set.
62. Let me tell you then that the European Central
Bank's inflation target is asymmetrical: it has a cap of 2 per
cent, do not go above it. That is quite a different way of defining
the target than the one we use. What are the respective merits,
in your view, between having an asymmetrical inflation cap and
our symmetrical target that says steer at that central number?
Do you have any view as to which is a smarter way of handling
inflation? (Sir Andrew Large) As I said to you before,
I certainly like the symmetrical approach that we have; I think
that it provides you with a firm target that enables you to take
policy decisions in one direction or another, whatever the circumstances
dictate. I think if you do not have that then you have to look
at it somewhat differently.
63. Therefore, if during your five-year term
sterling were to join the eurozone, I take it you would have worries
about the monetary system we would be moving into? You would not
prefer the way inflation is targeted. (Sir Andrew Large)
Just as I said to you before, I would like to reserve my judgment
on the present situation. I am afraid I cannot answer to the affirmative
now. I do not know. I would need to look at it at the time.
64. I think what you are telling us, Sir Andrew,
is that you have a lot of homework to do yet. (Sir Andrew
Large) That is correct.
65. Just finishing on that, I do get the impression
that you are somewhat inhibited by the need to be diplomatic to
other countries. Do you feel, as a Governor and because of your
contacts in other countries, that you need to exercise restraint
in your comment on how they operate? (Sir Andrew Large)
I think one wants to be very clear on one's facts before making
comments about how other people operate. That is why I am somewhat
66. If we were to meet again at some time in
the future might you feel able to comment in a less inhibited
way? (Sir Andrew Large) I might well.
67. Returning to domestic matters, to what extent
do you feel that the MPC is able to influence the rate of economic
activity through interest rate changes over the short and longer
term? (Sir Andrew Large) If there are changes in interest
rates clearly this can impact consumer behaviour, it can impact
investment decisions, it can impact in a number of areas. Obviously,
one would expect that that would have an impact over time on economic
68. Would you expect that the Bank could influence
long-term economic performance by varying its interest rate policies? (Sir
Andrew Large) I think for the long term, as I see it, the
most important feature is that there is confidence in the stability
of the monetary system. I think that is, perhaps, the biggest
single contribution that can be made if you take the long term.
69. What about inflation? Do you feel that varying
interest rates is the most powerful tool for the control of inflation? (Sir
Andrew Large) The fact that we have an inflation target and
that the tool that has been applied to meet it is interest rate
movement, I think, implies by definition that there is an impactover
time. The way it works its way through, of course, is complex
and it does not always manifest itself immediately.
70. Do you feel that, over time as you say,
it is an adequate instrument or do you feel sometimes that it
is a little impotent; that inflation can get out of control regardless? (Sir
Andrew Large) That is obviously something that the Committee
has to look at very, very carefully. The tool that it has at its
disposal is interest rate movement and I think the experience
over the last five years since it has been in existence has shown
that that tool has been a useful one.
71. During the last five years we have had a
reasonably stable economic environment most of the time, with
some exceptions. Let us say there was a sudden increase in oil
prices. How effective do you think interest rate policy could
be in managing the impact of that on inflation? (Sir Andrew
Large) I think there are all kinds of external factors that
could cause instability in the economic environment, but that
is the tool we have available. So we would have to use it to our
72. So you would not anticipate that if there
was a sudden increase in oil prices that the Bank would respond
promptly? (Sir Andrew Large) The Bank would have to
look at that in relation to all the other factors that there were
that could have an impact on inflation. Oil prices may be one
but there are all kinds of other ones as well.
73. In your answer to question 10,
you said that monetary policy cannot redress imbalances on its
own because there are a great number of other factors, many of
them structural, including labour mobility, educational standards,
tax distortions and the exchange rate. Do you think that it is
part of the Bank of England's remit to comment if they see that
imbalances in the economy are arising out of, let's say, educational
standards or tax distortions? Do you think that this is one of
the things you will experience in your role as Deputy Governor?
(Sir Andrew Large) I think that within
the MPC itself of course imbalances and these various factors
are discussed and you can see the evidence of that in the minutes.
74. Would you hope that the Bank would actually
make recommendations as to how such distortions might be corrected?
(Sir Andrew Large) I think it depends
what the distortions were as to whether they were in the Bank's
area of competence or not.
75. Well, let's say tax distortions.
(Sir Andrew Large) I think that tax distortions
are going to be for the Treasury. What the Bank has to consider
is whether there happens to be a tax distortion which is relevant
at that time for monetary stability.
76. So in the Bank's comments you might envisage
making a comment that there was a tax distortion? I do not want
to put words into your mouth, but you might comment that there
is a tax distortion which is having an impact on monetary policy,
but you would not necessarily suggest how to correct that because
you would leave that to the Treasury? Would that be a fair statement?
(Sir Andrew Large) Or I suppose it is
possible, and I have not thought this through enough, but I suppose
it is possible that the same situation would occur in terms of
financial stability and that will lead to the responsibility I
have within the Bank as such rather than within the MPC. Clearly
one has to be quite judicious in making recommendations about
things if you are not clear that the recommendations either will
be or are capable of being followed because, otherwise, all you
are doing is stoking up concern and actually negatively impacting
on the very confidence you are trying to engender.
77. Yes, I do see the problem. So if the Bank
detects what they see is, let's say, a tax distortion, there are
various things you could do. You could do nothing, you could privately
have a chat with the Treasury officials or the Chancellor and
indicate concern, you could publicly indicate that it is a problem,
but not suggest changes, or you could actually suggest changes.
Do you have a view?
(Sir Andrew Large) I think one would
have to look at the circumstances of any particular case. I do
agree with you that there are those four and there may be other
options as well.
78. Yes, and you might do any of those?
(Sir Andrew Large) Depending on what
the situation was.
79. Sir Andrew, how well do you think you understand
the productivity numbers? (Sir Andrew Large) Which
productivity numbers in particular have you got in mind, Mr Ruffley?
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