Examination of Witness (Questions 120
WEDNESDAY 25 SEPTEMBER 2002
120. How likely is it that the United Kingdom
is going to suffer from price deflation over the next couple of
years? (Sir Andrew Large) Well, I suppose if one had
asked that question ten years ago, one would have said, "Well,
there is no evidence of price deflation anywhere in the world,
so is it very likely?" We do see price deflation now taking
place in Japan, for example. Happily, the circumstances in this
country are very different from those in Japan. I certainly do
not want to give the impression of saying that I think that it
is likely or trying to put any degree of probability on it, but
I certainly think it is something that one needs to bear in mind,
do everything possible and look at possible factors that could
be leading in that direction.
121. If it occurred, what would be the implications
for financial stability? (Sir Andrew Large) It is a
very, very interesting point. If you look at the Japanese situation
where you have deflation, it renders the conduct of monetary policy
far more difficult. I suspect, though this is something that different
economists may have different views on, but I suspect that is
one of the reasons, that one has a positive target for inflation
and, going back to our earlier questions, one of the reasons that
there is in having value in this symmetrical approach to that
target. I think there is some validity in that, but I think that
if one finds oneself, heaven forbid, in a situation where deflation
was actually taking place, I really do not think I can give you
an answer to what one could do. One would have to be reconsidering
and looking at all the possible tools at one's disposal in order
to try and handle the situation.
122. You mention Japan, but is not one of the
problems with Japan that they are running out of tools to use
on this? (Sir Andrew Large) Yes, the major problem
in Japan or the major problems in Japan are the structural ones
that we were talking about before and we are in the fortunate
position that of course, as with any economy, we have problems
and areas of difficulty, but we have a very, very much stronger
position in our basic structure of the financial system than is
presently the case in Japan.
123. But is it not the case that here and even
more so in America the interest rates are getting so low now that
if you did have a problem which required lowering it, you would
not have very much scope? (Sir Andrew Large) Well,
this of course is the point I was alluding to. I am sorry I did
not actually specify it, but that was exactly what I was meaning,
that once you have a situation where interest rates get close
to zero, then of course the likely tools at your disposal are
rendered far from ideal.
124. Would the Bank, under your responsibility,
then look at a scenario where that did happen, even if it is remote,
to see what should be the reaction of the central authorities?
Is that not one of the responsibilities that you take on and is
that not central to the responsibilities of the tripartite committee
too? (Sir Andrew Large) I would be surprised if thought
had not been given on a purely theoretical basis. I am sure thought
would have been given and I am sure in all central banks people
have given thought to this and certainly it is something one would
expect to find.
125. Your predecessor, Mr Clementi, said that
the current rate of house price inflation is "unsustainable".
Do you agree with that? (Sir Andrew Large) I think
that when you have a rate of house price inflation of 20 per cent
or so and if you look at that continuing over a period of years,
it is difficult to avoid agreeing with that, but I think that
what we need to look at is actually what happens to that rate
and it appears that there seem to be signs that that rate is already
slowing, so that probably bears out the point that he made. I
think he made this comment, when? Was it back in June or so? I
think since then it would appear that there is a slowing in that
rate already manifesting itself.
126. What are the consequences of it happening? (Sir
Andrew Large) It depends how it happens, I think. This is
one of these areas where, as with many areas where assets are
involved, you have to look at levels and you have to look at rates
at which things happen and the knock-on consequences of them.
Clearly what is more desirable is that if rates are unsustainable
(and I referred to that 20 per cent figure at an earlier date)
that will tend to create problems over a period of time, and it
would be more desirable that it should even off and maybe come
down to a lower level rather than going in the opposite direction
all of a sudden which can be far more disruptive. This is really
the behavioural psychology that leads to rapid potential movements
in asset prices, is complex and undoubtedly something that we
have to try to understand.
127. Your predecessor responsible for financial
stability in May actually said the following: "The level
of house price inflation, the growth in prices, is unsustainable
and the longer it goes on for, the sharper is likely to be the
eventual adjustment." What do you think the eventual adjustment
will be in the next twelve months? (Sir Andrew Large)
Well, may I just ask you precisely what you are asking? Are you
saying what level will house prices be at in twelve months?
128. Yes. (Sir Andrew Large) I cannot
give you an answer as to what house price levels will be in twelve
months. I think what he was saying was the point I was making
before, that if you have very rapid upward movements that go on
for too long, there will be a painful adjustment process.
129. I am asking you what assumptions you are
making because this is going to form, I would have thought, quite
an important part of your work in performing the role you are
performing. (Sir Andrew Large) Yes.
130. You must have looked at forecasts for house
price inflation over the next twelve months and there will be
a spread of forecasts in different bodies. What do you think the
increase is going to be in the next twelve months? (Sir
Andrew Large) I cannot tell you. I am sorry to disappoint
you and you have asked me several questions that I cannot give
you numbers on and here is another one. Why can I not give you
a number? Because there are so many factors that could influence
the course of events: the manner in which consumer confidence
changes; the factors that cause it to change; the speed at which
it changes; and the way in which people then conduct their affairs.
There are many, many factors behind it.
131. What is the working assumption you make,
as an economist and as a prospective policy-maker, about house
price inflation in the last twelve months? How do you think it
has been nationally? (Sir Andrew Large) In the last
132. Yes. (Sir Andrew Large) I have
seen various statistics.
133. What do you think it is basically? (Sir
Andrew Large) Well, it appears to have been somewhere, and
not just in the south east but various other areas of the country
where there have been very rapid movements, and Edinburgh happens
to have been one, I believe, and a number of other places, where
it has been up in the 20s and 30s and there have been others where
it has been below ten. Nationally, I believe the figures are for
everybody to see. It has been somewhere, as I understand it, at
the sort of 15 to 20 level.
134. Do you think it can run at that level? (Sir
Andrew Large) Well, this is the question that David was asked
135. May actually. (Sir Andrew Large)
I beg your pardon.
136. I just wonder whether your estimate is
going to be higher or lower than that figure. Higher or lower? (Sir
Andrew Large) I would think it is likely to be lower.
137. By how much? (Sir Andrew Large)
I cannot tell you.
138. We are getting to the end here, Sir Andrew,
and I would like to ask you a question. How good a deal is the
consumer getting in financial services at the moment? (Sir
Andrew Large) Well, you have to look at that from various
points of view, Chairman, I think. You have to look at it in terms
of choice, you have to look at it in terms of the products on
offer, you have to look at it in terms of the prices the consumer
pays, you have to look at it in terms of whether the consumer
has adequate information to make informed choices. There is a
whole range of issues.
139. Do you think the market works very well
now? (Sir Andrew Large) There are areas where the market
has not worked as well as it should.