Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 60-79)



  60. You have actually entirely stolen my next question.
  (Mr King) I do apologise!

  61. If you look at that table, Table 6.A, which is where I am going, 2003, quarter four, two years ahead, and you look at the risk that inflation would be below 2.5 per cent and add up all those bits and compare them to the risks that inflation will be above 2.5, you have a 49 per cent chance that it will be 2.5 or less and a 51 per cent chance that it will be 2.5 or more. Between friends, that means evenly balanced, but that is not quite the impression that was given in the inflation report and to some extent by your statement when there was a discussion that there had been an upside risk to inflation. Would you agree with your latest statement that it is actually more evenly balanced?
  (Mr King) At the press conference, I was asked the same question that you put to the Governor and, in response, I went straight to Table 6.A and said that when we say that the risk to inflation is slightly on the upside, that statement only makes sense by reference to the central projection. Since the central projection is slightly below the target, when you have a small risk on the upside of that, you end up with, as you said, an even balance to inflation and I think that Table 6.A explains precisely why the level of interest rates were set at 4 per cent.

  62. Before we leave that table, the Chairman has already asked about the discussions that we had with our advisers the other day when they expressed surprise that there seemed to be a perception in the Bank that the inflation risk was towards the upside when they considered them more to the downside. They were also staggered by the GDP growth forecast for 2003 quarter four, which seems to suggest that there is a one in 100 chance for a recession occurring. Governor, would you agree with Table 6.A and the projections about GDP growth in which it is suggested that the chances of growth declined in spite of the economy contracting over the next two years are one in 100 or whatever?
  (Sir Edward George) I honestly would not put any weight at all on precise numbers. We are really trying to count angels on a pinhead or whatever you do.

  63. It is a very small number.
  (Sir Edward George) These are absolutely tiny kind of differences. I do not honestly, in these terms, think that I understand the difference between a low chance of recession, which is certainly our view, and quantifying that in this precise way.

  64. Governor, these are the forecasts that you and your economists within the Bank are making which must form, to a large extent, the decisions about interest rates that you are taking, and the forecast that you are making internally is that a recession growth and the economy declining over the next two years is a one in 100 possibility.
  (Sir Edward George) It is a very small chance.

  65. And that is your view, that it is a very small chance?
  (Sir Edward George) Absolutely.
  (Mr King) Can we just get this technically absolutely right. What this number refers to is the probability that, in the fourth quarter of 2003, the growth rate over the previous 12 months would be negative. It does not refer to the probability that, at some point in the next two years, growth, even on a 12 month basis, will be negative, but I think there are two very important caveats within these numbers. The first is that the word "recession" is used by different people to mean quite different things and much of the comment in the press has been either about a recession being two consecutive negative quarters of growth or indeed, at the world level, that the annual growth rate of world GDP is less than 2.5 per cent, which is a very odd definition of a recession. I do not like the word because it has no precise quantitative meaning. In this context, the numbers are referring to the probability that growth over any 12 month period will be negative.

  66. I accept that, Mr King.
  (Mr King) In the tails of the distribution here, I do not think that we have any good feel. Once the number is small, it is very hard to be precise.

  67. Using the Bank's own figures, what is the Bank estimating is the probability of two quarters of negative GDP?
  (Mr King) We do not have any means of doing that because we do not project —

  68. You yourself have said that the risk of recession is about one in 10.
  (Mr King) At the press conference, I was referring to, if you had to put a number on it, using the methods in the charts which I warned at the time were imprecise because of the tails of the distribution not being well-estimated, the chance that the 12 month growth rate would be negative was about one in 10 and I would much rather go back to what I said first at the press conference which is that I think we do believe that it is less than we felt was the case at the time in autumn 1998. In November 1998 when, if you remember, there was great concern about what might happen to the world economy, business optimism had fallen very sharply and, at that point, we said that we felt the chances of recession in the 12 month growth rate sense was about one in four and now we believe it to be less than that. As the Governor said, I think that to try and put numbers on it is extraordinarily difficult because you can see from the charts further up on page 56 that it is very unlikely that you can estimate well the tails of the distribution because we have very few observations.

  69. I accept that. Governor, do you think it is nonetheless surprising, given the statements you have made today and these probabilities, however loosely interpreted, that you brought interest rates down to the lowest levels for 40-50 years and you brought them down pretty quickly and responsively and yet the view of the Bank and yourself and the Deputy Governor appears to be that the risks of a recession in the UK are actually pretty low. Is that your view?
  (Sir Edward George) You are talking about recession which we very much hope we will avoid. What we are talking about is unnecessary slowdown. We are not in the business of, "it would be fine if we just avoid recession". What we are doing —

  70. But you regard there as being a very small probability that we will have a recession?
  (Sir Edward George) We do but what we are doing is targeting inflation over the whole of the two year period and we do not want to see growth any lower than it needs to be in order to deliver that objective.

  71. May I ask a final question on recession. I think we all accept that it would be immensely surprising if all of you on the MPC agreed—that would worry government that you were exercising too tough control over your colleagues. May I just, in discussing the forecast for inflation and growth and in particular Table 6.A ask Mr Wadhwani what his comments are about those questions and whether he considers that the GDP growth projections and inflation projections and the low risk that they appear to put on (a) recession and (b) a slowdown in inflation to be credible and how Dr Wadhwani's view would differ.
  (Dr Wadhwani) As has been said several times today, it is reasonable for people to disagree about what are necessarily uncertain issues. Speaking personally, I do have as my central projection a lower outlook for both the GDP growth and for inflation. In terms of inflation, my central projection is for inflation to be about 0.50 per cent lower than the projection published here and I also think that the risks are on the downside rather than on the upside —

  72. For inflation?
  (Dr Wadhwani) Yes, to inflation and to GDP growth. In terms of why I think the risks are to the downside relative to here, I guess that I am much more concerned about the global economy. We have the three largest economies almost certainly in recession as we speak. I am quite a bit more nervous about the consensus projection of the V-shape recovery occurring some time soon especially in the US where I think we have for some time had a race against time where essentially you hope that you can keep the consumer resilient while the corporate sector works off its excesses. The difficulty is that the excesses are still there in the corporate sector, you have an investment overhang. The inventory correction has not ended but there are clear signs now that consumer confidence is slipping and lay-offs are accelerated, so I think that the risks have risen.

  73. Is it credible with the risk, even looking at it is loosely, that has been given by the economists at the Bank in that Table 6.A about growth and recession, that the Bank appears to be putting such a tiny probability on there being a recession?
  (Dr Wadhwani) That projection reflects the collective wisdom of the Committee as a whole and I have enormous respect for my colleagues. I think it is reasonable that people disagree over these issues.

  74. How much higher would you put the possibility of a recession in the UK over the next two years?
  (Dr Wadhwani) I am not sure that I would want to quantify it precisely but it would be quite a bit higher than the numbers here but it would still be a less than 50 per cent chance.
  (Sir Edward George) Chairman, can I just point out, as I am puzzled by the reference to the kind of outside forecasts, that, if you compare Table 16 with Table 6.A, you will find there is very little difference and the 1 per cent number that is being talked about is 3 per cent in the other forecasters' expectation on the range of forecasts, so I repeat the point that I make earlier that we are really talking about really tiny differences.

Mr Plaskitt

  75. I just want to continue briefly with Dr Wadhwani. You have now been voting for interest rate reductions at 13 consecutive meetings of the MPC. On eight occasions you wanted a 25 basis point reduction and, on five occasions, a 50 basis point reduction. On only three of the 13 occasions has the Committee done what you argued it should do. Are you sure that you do not feel too lonely?
  (Dr Wadhwani) I think the important point to make is that we have all been going in the same direction. Month to month, our judgments have differed somewhat perhaps because our views about the eventual destination have obviously differed somewhat. Economic forecasting is such a imprecise science and, when one votes, one votes on the basis of one's own convictions about what is likely, one recognises that these things are very uncertain and I have enormous respect for my colleagues and, as the Governor said right at the beginning, it is healthy that we disagree about these issues because you have to make such difficult judgments and it would be completely astonishing if we agreed all the time.

  76. Have you ever considered on any one of those occasions that the appropriate reduction in base rate might need to be more than 50, perhaps 75?
  (Dr Wadhwani) Yes.

  77. When was that?
  (Dr Wadhwani) At the last meeting, I actively considered the possibility of 75 because I thought that the medium term fundamentals justified that. However, I did not go for that primarily because even the 50 cut that we actually enacted was somewhat of a surprise and, in this situation, psychology is just as important as economics and I think it was very important not to scare the horses and go for 75 because I think that could have led to some concern out there.

  78. Can we take it from what you said that you personally feel that interest rates at the moment are too high?
  (Dr Wadhwani) I think one has to be careful because I never pre-announce my views for the next meeting for the good reason that I sit down, listen to the briefings that we get and only decide which way I am going to vote on the day of the meeting having evaluated all the evidence over the month because you essentially have to take all the evidence over the month and add that to whatever your pre-existing position is and sometimes the evidence overwhelms whatever your pre-existing position was. Hence, I think it would be premature for me to essentially make a judgment at this point because I have not fully evaluated the news that we have had since the last meeting.

Kali Mountford

  79. Ms Barker, having picked the brains of Dr Wadhwani at some length, I would like to get to know your thinking a little better. Earlier, Sir Edward talked about the centre of gravity of the Committee. As a relatively new member of the Committee, how do you think you affect the centre of gravity now?
  (Ms Barker) If you look at my debating record on the Committee, you will observe that I have always voted in the majority. You asked Sushil if he felt lonely on the Committee—and the discussion is always rather complicated and you obviously have to take a clear decision at the end and that is quite right—and certainly I hope he does not feel lonely because many of us share the concerns which he rightly raises and are very pleased to discuss them. I think that like Sushil and indeed other members of the Committee, I would not want to be classified as a hawk or a dove because you always want to approach every meeting by looking at the evidence and I think that to suggest that you are a hawk or a dove suggests that you have some odd view about the inflation target itself, either that you are trying to over-achieve it in one direction if you are a hawk or that, if you are a dove, that you do not care about it very much and I do not think that is true for anybody on the Committee. So, I do not think it is right to say that I affect the centre of gravity on the Committee; what I hope I do on the Committee is bring the benefits of particular experiences I have had particularly working with the business community, comments about how I think the present conjecture will be affecting business and interpretation of business surveys and that kind of thing.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 20 March 2002