Examination of Witnesses (Questions 100-119)|
TUESDAY 27 NOVEMBER 2001
100. Does any member of your committee think
there is any likelihood in the near future of inflation going
below 1.5 per cent and you being forced to lick the stamp on a
letter to the Chancellor?
(Sir Edward George) We had a discussion earlier about
that and that is, really, reflected in Table 6A and Table 6D.
101. I do not really want to go back to that.
(Sir Edward George) As I say, it is possible some
people may think that is more likely than others, but the centre
of gravity of the committee is that it is pretty unlikely.
102. If any of the possible candidates here
think it is slightly more likely, would they speak up?
(Mr King) Please do not get too obsessed by this "below
1.5 per cent inflation". The most remarkable thing about
the past five years is that inflation has been within an extraordinarily
narrow range and the most likely thing that would lead to inflation
falling below 1.5 per cent over the next year is not, in any sense,
a failure of policy, it is just a sharp movement in oil prices
or seasonal food prices, which can be reversed. What matters most
is not whether or not inflation falls below 1.5 per cent but the
reason for it. If it is one of those temporary factors then we
will explain it.
103. You actually say, and there are only a
couple of paragraphs in the entire report about it, that oil prices
are falling very steeply. Are you considering what impact on the
economy that is going to have? What are the expectations about
(Sir Edward George) I do not think we can second-guess
the oil market, so basically what we do is to take the starting
point, which is an average of the oil price over a period, and
we take the forward price for oil as reflected in the markets.
104. Do you disregard, therefore, the commentators
out there who are talking about a $15 barrel or even a $10 barrel
in the not-too-distant future?
(Sir Edward George) People are actually trading in
oil at higher prices than that or had at the time of the Inflation
Report, and we frankly think that the people who put their money
where their mouth is are probably more reliable than commentators,
but, of course, there are risks always around these things.
105. What would the impact on the UK economy
be of a $10 a barrel price?
(Sir Edward George) It is actually rather helpful.
Eighteen months ago, or whenever it was, it was down to $10 a
barrel. It would provide room for policy stimulus not just in
this country but elsewhere too. So that in the short-run it is
not an unhelpful development. Of course, the problem is the volatility
of the oil price, and if it fell to that level then we would get
less production in the future and you would see it rise more sharply
in the future. I am, personally, very supportive of the objective
of the OPEC countries who are trying to stabilise the oil price
within that kind of $20 plus range. I think managing any kind
of market price is extremely difficult, but I think it would actually
be very desirable if that were the outcome.
Chairman: We are going to move on to
recent economic developments.
106. Sir Edward, you have already mentioned
the imbalances in the United Kingdom economy which have several
different manifestations, such as the manufacturing sector looking
rather depressed compared with the bubbling in the retail sector;
there is the corporate sector reducing investment while the private
sector has increasing debt, and we have got the old division of
North and South with the North East and, say, the South East of
England. A lot of that is expressed in the fact we are getting
poor exports against a bubbling growth in consumer expenditure
and a rising balance of payments. How concerned is the MPC about
these imbalances and, in particular, how long can the United Kingdom
economy go on stoking up domestic demand with a rising balance
of payments deficit?
(Sir Edward George) Well, as I said, we are concerned
abut these imbalances. It is extremely uncomfortable, but the
question is what can we do about them. Since the origins of the
imbalances are mostly external in origin we cannot directly ourselves
affect the rate of growth in the United States or the euro zone.
Some people think we could affect the exchange rate but that is
more difficult than people assume. I have pointed out very often
before that the United States has reduced its interest rates hugely
relative to those of the euro zone but the dollar is stronger
than it was before they started, and the same is true to a lesser
degree of what has happened in terms of sterling interest rates
against euro interest rates. So we cannot directly influence the
exchange rate either. Given that we cannot do anything about those
things, we have a straightforward choice. Are we going to pursue
our mandate, which is stable inflation, by encouraging, in compensation
for those negative influences, the growth in domestic demanduncomfortable
though that isor are we simply going to not do that, in
which case the economy would be very much weaker and unemployment
higher than if we did do it. That does not seem sensible but in
any case it would be inconsistent with trying to achieve 2.5 per
cent inflation, which is a symmetrical objective. So it is not
ideal but it is the best available course to us.
107. These are quite substantial qualifications
on the general projections in the inflation report, yet this question
of the mounting balance of payments deepening in exports and the
increasing problems there for you hardly get a mention in the
(Sir Edward George) They are certainly referred to.
I think that concern is part of the concern that underlies the
sense that we could see a kind of rapid, sudden exchange rate
adjustment. That is the point really reflecting this growing imbalance
on the trade side. All I can say is that it has actually persisted
for some time and it has not happened. It has persisted in the
United States where the trade deficit is substantially larger
as a percentage of GDP than it is here, and so anticipating when
that kind of form of correction is triggered is extremely difficult.
In the meantime, as I say, I think we are better off living with
it than simply trying to not respond by sustaining domestic demand
and accepting lower output and also, therefore, lower inflation.
108. Would these black clouds not lift rather
more if the circumstances were right for us joining the European
Monetary Union and avoiding some of the external problems?
(Sir Edward George) I am not sure which is the chicken
or the egg. Part of our problem is the weak euro and the strong
sterling exchange rate against the euro. So the consideration
is the rate at which we were to go in. This has cropped up a number
of times. If the suggestion were that we should give up on our
inflation objective and try to drive the exchange rate down in
order to make that feasible, then I think that would have disadvantages,
too. Somebody would have to change our instructions if we were
to do that. That is quite apart from the five tests which are
very much the Chancellor's province.
Mr Beard: Are there any members with
varying views from those that the Governor has expressed?
109. Just very quickly, Governor, on the very
poor balance payment performance relying on strong domestic demand.
Could you take the Committee very quickly through what assumptions
you are making in the next two years about what is going to happen
to this balance of payments deficit and how persistent you see
it being? Do you see it deteriorating? Secondly, what assumptions
are you making about demand domestically holding up as it appears
to be holding up? What are those two sets of assumptions?
(Sir Edward George) I cannot remember the precise
number (maybe, Mervyn, you can) but we have got a balance of payments
current account deficit of something like 2 per cent of GDP right
now and we expect that to deteriorate fairly gradually over the
next two years. As I say, it is not enormous, it is half the size
of the equivalent position in the United States. The indication
of when it becomes of concern will actually be in the exchange
market, and so long as it is financable without great difficulty
that is fine; it is the problem of if the capacity to finance
it erodes that it becomes a concern. The second imbalance?
110. Strong domestic demand in the context of
poor balance of payments.
(Sir Edward George) We do anticipate that investment,
basically, will be pretty weak through the forecast, picking up
in the second year; that consumer demand will gradually moderate
(I have to say we have been looking for that for some time, too,
and it has held up rather better than we anticipated) and that
government spending will grow in line with the Chancellor's objectives.
111. Does not that rather smooth response cover
huge disparities in regional growth, particularly in industry?
Do you not think that for the manufacturing sector, especially
in textiles which is significant in my own area, with the 30 per
cent reduction in production and output, the policy of waiting
to see what happens in the rest of the world, in the Euro zone
and in America does nothing for the people in those jobs?
(Sir Edward George) I absolutely understand that and,
of course, we are constantly visiting the regions and in touch
with those people, and we have all that fed to us month-by-month
through the regional agents. So we are perfectly well aware of
that situation. What I think you have to try and hold on towhich
is what I try and hold on tois that overall macro-economic
stability that we have seen for nigh on the best part of eight
or nine years has been a tremendous thing for the British economy
as a whole. It has been a particularly good thing for the labour
market, as employment has increased pretty well continuously until
very recently over that period; and unemployment has come down
on both measures until, again, very recently. What you have to
hold on to is that that is true not just for the United Kingdom
as a whole but it is true for every region in the United Kingdom,
notwithstanding the imbalances that have emerged. The question
is, if you try to do something in order to protect particular
sectors of industry then you would put that at risk. What could
we do to try to offset these influences? I repeat, they originate
abroad. What could we do to try to offset them? The only thing
we could do would be to really try to pump up, to compensate for,
that demand on those sectors which are internationally exposed.
I am not actually sure how we can possibly attempt to do it, but
if we did attempt to do it what is very clear is that we will
generate instability for the whole of the macro-economy. I think
all past experience would say that that would not do much for
the adversely affected sectors except, conceivably, in the short-run
if we could succeed.
112. Is there not a long-term problem if one
sector goes into what looks like a permanent decline?
(Sir Edward George) You deal with that, of course,
all the time. The expansion in the Far East is having that kind
of effect in a structural sense. Then there is the emergence of
Eastern Europe. There is a lot of business activity being relocated,
not just from this country but from elsewhere in Europe, to Eastern
Europe and into Asia. So, to some extent, that is how the economy
works. The important thing is that, if that is going to happen,
you actually get a change in the activity in this country which
replaces the activity that is in decline. I think that the exchange
rate has taken us beyond that. The exchange rate can be constructive
if it is putting pressure on industry to improve its performance.
However, we have gone beyond that and I do not know what I can
do about it.
113. I wonder if Ms Barker, with her particular
macro-economic background, has anything to add to that?
(Ms Barker) I think the distinction I would draw,
in terms of what one would be concerned about, would be the distinction
between the sectors and the regions. The Governor has just said,
and it is absolutely right, that in the long sweep of history
sectors rise and fall and the difficulties of the textile sectorwhich
we all understand are very greatare very much driven by
a set of global factors even beyond the exchange rate, which may
mean that production for that sector in this country is becoming
less economic. Where it is then a problem is if in a particular
region you do not find you have other opportunities coming along
and you have the position where you have regional imbalances.
These are difficult because they lead to people being out of jobs
for a long time and a draining of skills, and that is the kind
of thing that we would, at least, have concerns about because
it may affect the whole economy. However, in terms of what the
Monetary Policy Committee can do, we simply cannot do anything
to affect and help particular situations. I agree that regional
imbalances are things we need to look at, and as people we are
concerned about it, but as policy-makersto the extent that
there is a role for policy thereit is a role for fiscal
policy and the way in which the Government manages the country.
Sadly, we are not all powerful.
114. Do you think that regional imbalances are,
in the main, due to sectoral differences?
(Ms Barker) They can be due to sectoral differences.
Certainly, at the moment, the regional imbalances that we see
are very much driven by the imbalances that have been extensively
referred to, between the tradable and non-tradable sectors, and
that, at the moment, does lie at the root of most of the regional
imbalances in the UK.
115. There is a huge difference between the
South East and the North East (which I think perhaps is the biggest
difference) and you are painting a pretty gloomy picture that
we cannot bridge that gap.
(Ms Barker) No, I certainly would not paint a gloomy
picture that over the long-term you cannot bridge the gap, but
I am saying that we cannotin terms of actual monetary policydo
anything to help address that gap. The best thing we can do for
the country in the long-term, as the Governor has already said,
is to encourage macro-economic stability. To the extent it is
clearly an issue for policy it needs to be dealt with by considerations
from fiscal policy and from regional policy, such as actions by
the RDA. It is not something the Monetary Policy Committee itself
116. Do you feel you know enough about what
is going on in the regions?
(Kate Barker) I certainly think the RDAs themselves
know a great deal about what is going on in their regions, but
you are asking whether we, as a committee, know enough about what
is going on in the region, and the answer to that is that given
both the amount of time we individually spend going out into the
regions and talking to businesses and the amount of time we spend
listening to the very good reports we get back from regional agents,
yes, we absolutely do, and it is a vital part of the macro picture
we have to build up to enable us to take our judgments.
117. I wonder how you think it comforts somebody
on a Liverpool council estate or somebody in machine tools, textiles,
optical products, electrical engineeringall sectorswho
are experiencing great difficulties to be told that "macro-economic
stability will deal with your problems?" Can you tell us
how macro-economic stability will deal with their problems?
(Ms Barker) I do not think it is in the least comforting
for anybody who is in a sector in difficulties who has a particular
skill set they have invested in to realise those difficulties
are very great. I do not intend to bring them any direct comfort.
The point about macro-economic stability is that over the long-term
it affords the best prospect of growth in the economy as a whole,
and that means the best prospects for growth in other sectors,
and that should mean the best prospect of job opportunities in
those sectors. Now, clearly, if you have a particular skill set,
that is going to make it very difficult for you and there may
be a period of adjustment. I certainly do not wish to implyand
I do not think I have impliedin any of my answers that
as people we do not find those situations difficult and distressing.
I am simply saying that as policy-makers it does not lie in our
power to address it.
118. I am sorry I picked on you but you were
the last speaker. The Governor worries me more because the Governor
actually said at one stage "I do not know what to do".
The macro-economic theory that is propounded sounds like the "redistribution
of wealth with a trickle down" theory. If we have growth
eventually it will reach Liverpool, Newcastle, Bradford and Halifax.
That is very comforting but the people in those cities will tell
you it has not reached them for 100 years. How soon is it going
to come? You shake your head.
(Mr King) I was in Newcastle last week and I did not
get the message that people say they have not had growth for 100
years. The gap in unemployment rates between the North East and
the South East has narrowed over the past two years. There are
problems in the industrial sector but it does not help to exaggerate
them. The fact is that the gap in unemployment has narrowed. That
is a fact.
119. Am I exaggerating when I read from your
minutes that: "The Bank's regional agents had reported that
business confidence was weak, with further declines in manufacturing
orders and slowing activity in business services"? Am I imagining
that the regional differences we are speaking about are not growing,
and secondly, manufacturing is continuing to decline?
(Mr King) Let us take them separately. It is true
that manufacturing output has fallen over the past year. There
is no doubt about that. A major contributory factor to that, over
and above the slowdown in the world economy, is the exchange rate,
as the Governor said. I think we have been honest on our side
of the table in saying that we do not think that there is any
magical or simple answer to the problem of the exchange rate.