Examination of Witnesses (Questions 120-139)|
TUESDAY 27 NOVEMBER 2001
120. I am not looking for Harry Potter, I am
looking at the Bank of England's Governor and the Deputy Governor.
I am not asking for anything magic, Mr King, I am just very quietly
saying tell us what you intend to do, because Mr Beard asked,
Kali Mountford asked and we got the answer "There is nothing
much you can do except ensure macro-economic stability".
(Mr King) Look at what we have done. We have brought
down interest rates seven times this year. That has maintained
an overall balance in the economy. Unemployment has fallen steadily
over the last eight to nine years, as the Governor said. Some
sectors will decline, other sectors will expand. Overall, employment
has continued to rise. Is that not the main contribution that
the Bank of England can make?
121. I would like a balanced economy. Manufacturing
seems to me to be a very key part of that balance and it is continuing
to decline. Your answer was that it will decline but that it will
be replaced by something else. So you do not see anything the
Bank should be doing or the country should be doing to at least
arrest that decline, if not turn it round.
(Mr King) We, too, would like a more balanced growth
path. We have said that publicly. We have one instrument, the
interest rate, and we have used that to ensure that the economy
as a whole has remained balanced and that total employment has
continued to rise. That is the use to which we have put our one
instrument. We would also wish we had a second instrument that
would enable us to change the exchange rate, but we do not. I
think it is unlikely that the exchange rate will continue at its
present level, but there is nothing we can do to change that,
and nor is there any certainty about that. I think that is an
122. There is nothing you think you can do to
actually help the North West. If you have been to Newcastle I
would advise you to go a bit further up the coast and just walk
about and see how the people are living. It is far different from
the picture you are painting, I can assure you. If you come to
Bradford and inner city Leeds, it is quite a shocking experience,
Mr King. That is why complacency is not appreciated.
(Mr King) There is no complacency here, Mr Mudie,
let me tell you that. Inner city London also has the same sort
of problems and these problems are not ones that you can redress
by changing the interest rate.
123. What measures do you suggest, Mr King?
A lad in Brixton is hanging on your answer because his future
(Mr King) With great respect, the aim of the Monetary
Policy Committee, which has been given one interest rate to maintain
124. I am not speaking about the Monetary Policy
(Mr King) But you are. We are here as the Monetary
125. Can I just make it clear, Mr King? I came
away from Ms Barker because I am speaking to you as Deputy Governor.
So it is not the Monetary Policy Committee, it is the Deputy Governor
of the Bank of England. What measures do you suggest we take to
make the North West as prosperous as the South East?
(Mr King) The role of the Monetary Policy Committee
is to maintain a balance in the economy so that you, as politicians,
can take measures that you are elected to take to do with regional
policy. We are not here to implement regional policy. We have
been given a remit by elected politicians.
126. Why do you have regional representatives?
Why do you call for a report
(Mr King) We do not have regional representatives
on the Monetary Policy Committee.
Chairman: The Governor wishes to come
(Sir Edward George) I am very glad Mr Mudie can distinguish
between me and Harry Potter.
127. You are slightly older.
(Sir Edward George) I really do think that you have
to address these kinds of questions to the political circles.
We are given a mandate by Government to achieve 2.5 per cent RPIX
inflation. That is very precise. That is a political decision
and they have delegated the technical implementation of that decision
to the people you see before you today. That is our job. The reason
that they have done that is because they believe that macro-economic
stability reflected in stable inflation is the best help that
they can give to the country as a whole. The result is that we
have unemployment which is lower than it has been for 25 years
in this country, not just for the country as a whole but in every
region of the United Kingdom, up until the recent upturn. We are
beginning to see a softening in the labour market because of the
international environment and the impact that is having on us.
Frankly, it is very easy for you to say "What are you going
to do about these very severe, sectoral problems, regional problems
and problems of deprivation and poverty right next to us on our
doorstep?" Frankly, we say that we are responsible for monetary
policy and we are doing everything that we can to deliver the
stability which delivers low unemployment. Frankly, there is nothing
more that we can do.
128. Do you think that emphasising the inflationary
aspects of the correction in the exchange rate, Deputy Governor,
is the most helpful way of addressing these imbalances?
(Mr King) I think when we have discussed the consequences
of a change in the exchange rate we have actually looked at all
aspects of that correction, one of which would be a change in
the trade picture, a change in the balance between domestic demand
and net trade, and, hence, a change in the balance between manufacturing
and services. There might be a short«run inflationary consequence
of that, but we have to look at all of those things together.
I do not think we looked at any one rather the other.
129. I would like to take you back, Sir Edward,
to about four years ago, to the independence of the Bank of England
and the first time I ever met you (so you may not remember it),
discussing the terms of reference of the independent Bank of England.
In looking at the inflation rate, I remember quite distinctly
you discussing the importance of employment and unemployment overall
in making judgments. We are now seeing a rise of 4,300, I think
it is, and when we look at the manufacturing sector we can also
see that the rise in unemployment is fairly similar to the loss
in manufacturing. Do you not think, in your terms of reference,
you do have a very significant and particular duty to look at
(Sir Edward George) Our terms of reference are absolutely
quite clear. They are to achieve 2.5 per cent RPIX inflation on
average over time. The reason that the Government has set us that
objective is because they believe, as I believe, that actually
achieving the stability between overall demand in the economy
and the supply potential of the economy, which will deliver that
low, stable inflation, is actually the best means of maximising
the sustainable level of employment and the lowest sustainable
level of unemployment in our economy over time. I have to tell
you that achieving the 2.5 per cent inflation target is tremendous,
but what really gives me satisfaction is the fact that unemployment
is now lower than it has been for 25 years, or was until, as I
say, the last month or two. I just think that that is as much
as you can ask from monetary policy.
130. I can ask you one more thing and that is
whether you think the trend will continue?
(Sir Edward George) In the short-run, because of the
very severe slow down and recession that we are seeing in the
rest of the industrial world, it is going to be extremely difficult
to sustain that, and I have said that before. That is what we
are trying to do. Others in the committee were suggesting that
we were rather rash to try and do it, and that it would be better
not to have kind of stimulated consumer spending. Frankly, I think
that this is the real objective underlying the low inflation target;
that over time we will have the economy growing faster, we will
have more employment, less unemployment and for the economy as
a whole we will have rising living standards. It is not saying
"That will, in an optimistic way, spread through the economy";
it has spread through the economy. The unemployment figures were
lower in the summer in every region than they have been for 20,
131. This is a very interesting debate and I
would love to prolong it. As a strong supporter of Bank of England
independence I would only chip in that there are some dangers
in exaggerating the extent to which monetary policy directly affects
the unemployment level or can make a huge contribution to conditions
for long-term growth. The unemployment level, I think you would
agree Governor, is primarily determined by the supply side labour
and market conditions and reform. I think if you take too much
credit on the upside, when things are going well and unemployment
has fallen, you are going to find yourself in frame for falls
in employment, over which you do not have much control.
(Sir Edward George) I am quite sure that is true.
We absolutely anticipate that if the economy does not do as well
in future as it actually has done in the past then the people
will say "It is not such a good idea, is it". We operate
on the demand side of the economy. There is not much we can do
directly about the underlying growth on the supply side of the
economy, and that does depend on all of the things that you debate
all the time in Parliament. It depends upon education, it depends
upon health, it depends upon the labour market regulations and
all the details of tax and spending decisions as well as the kind
of basic endowment of a country in terms of resources. What we
can do is to try to ensure that aggregate demandtaking
external demand and domestic demand togetheris kept broadly
in line consistently over time with the sustainable rate of growth
of supply. That is what we are trying to do. So that I do think
monetary policy can affect unemployment. If demand falls short
of the sustainable growth rate then I do think unemployment will
rise. What we are trying to do is to reduce the risk of that happening.
132. I will settle for that. Going back to the
relationship between the UK economy and the global economy, most
of this documentand certainly the growth forecastis
predicated on the view that the balance lies in the likelihood
of some reduction in the exchange rate and, also, that the UK
will benefit from a pick-up in global economic activity as a consequence
of the loosening of fiscal and monetary stances that have been
put in place around the world, particularly the United States.
You said right at the beginning, I think, in your introductory
remarks that September 11 could not have come at a worse time,
and that the effects of September 11 will be to deepen and prolong
the recession. How do you reconcile that view, with your view
that you think there will be a pick-up in the middle of next yearand
I think you also said that the pick-up would be likely to be stronger
than previously thought?
(Sir Edward George) Somewhat. I am not talking about
a kind of real boom, but we were looking for a very, very gradual
pick-up from the United States. Largely, I thinkand I have
to be jolly careful because I got terribly misreportedif
you actually stand back and you look ahead to 18 months, two years,
three years, and you say to yourself "What has actually happened
on the supply side of the global economy which would mean that
we could not sustain, not the crazy 5, 6 per cent growth rates
that we saw in the United States for a period but something stronger
than we saw in the early 1990s?" I find it very difficult
to think. You can point to some supply side effectsthe
security impact which may have a dampening effectbut, by
and large, I believe that the growth that was coming from the
spread of technology through the United States' economy and the
application of technology through the United States' economy has
got further to go. I think that can spread to Europe and to the
United Kingdom to a degree which it has not as of now. So that
the supply potential, looking out, is quite encouraging. Once
we have got over the adjustmentand that has already gone
quite a long wayand once we have absorbed the over-hang
on investment, then I think over that kind of timescale we will
get back to above what we would normally regard as trend rate
of growth for the industrial world as a whole and the global economy.
If we are now pushed down somewhat below where we thought we were
going to be, then there is the prospect that you will have a somewhat
more positive pick-up to that situation when the pick-up begins.
I think I would say two other things. One is that there is an
awful lot which is very positive about the industrial economy
right now. We do have low inflation and that provides more flexibility
for policy stimulus. We do have robust financial systems, which
mean that the pressures that come with this kind of slowdown are
not exaggerated by the financial problems to the degree that they
were at times in the past. I think these are reasons for not being
excessively pessimistic. We have had a very strong policy response
everywhereobviously particularly in the United States because
that is where the thing struckand that has been on the
monetary side but also on the fiscal side and they are talking
about more fiscal stimulus. However, within the Euro zone, too,
there was a point where there was some doubt as to whether they
would even allow the automatic stabilisers to operate on the fiscal
side within the Euro zone, but they decided that they had to do
that. They have given a monetary policy stimulus just as we have.
So that I think it is absolutely wrong to take the view this is
all gloom. I think what we are talking about is the performance
over the next twelve months or so. After that there is every reason
to suppose that we will get back to a growing trend rate. You
do after recessions.
133. You are saying that there is going to be
quite a sharp bounce-back.
(Sir Edward George) No, I am saying somewhat stronger
than we expected before.
134. Stronger than you previously thought. You
already had one built into your forecast, and it is now going
to be stronger than you thought. You think that the underlying
conditions for that coming to pass are good. There is, is there
not, quite a fundamental difference of view within the MPC on
this? If I take some other quotations from today, Dr Wadhwani
said that when bubbles burst the effects on declines in output
tend to be quite long-lived. (I think that was your phrase but
I may not have it absolutely right.) Kate Barker said that the
weakness in the global economy will have a greater impact on the
UK than previously thought. So we have quite a difference of view
in the MPC. Have I got that right?
(Sir Edward George) Yes, there are differences of
degreeabout most things, actually.
135. Can I ask you a semi-historical question,
to which I do not know the answer myself? We now have the three
largest economies in the world either in recession or very close
to recession, with most of the relevant arrows pointing downwards.
When was the last time that those sorts of conditions prevailed?
(Sir Edward George) 1973-74.
136. There is a rider to my question, but by
all means answer that first.
(Mr King) I think what is different now and what I
think does change the outlook is the fact that all members think
there are real downside risks to the world economy. What is different
about the present situation, which has never occurred before since
quarterly data were first constructed in the mid-1950s, is that
if it is true that the US is in technical recession with two negative
quarters of growth, that has never happened before without the
UK having had a quarter of negative growth at the same time.
137. That is just the US but now we have got
Germany and Japan.
(Mr King) In other words, the link between the US
and the UK looks very different now than it has done at any point
in the past. That reflects the imbalances. There is very strong
domestic demand growth in the UK, which is offsetting what is
happening in the rest of the world. The rest of the world is going
through a very severe downturn, there is no doubt, and the outlook
for Japan is particularly worrying because in both Europe and
the United States the thing that I think does affect the committee's
judgment is that in both areas there has been a significant relaxation
of policy in the past few months which will, at some point, come
138. Are you saying that for the first time
in modern, post-war economic history, the worldand particularly
the UScan sneeze and we will not catch a cold?
(Mr King) If you look at what has happened so far,
it is the case that the latest growth figure in the UK over the
last twelve month period is 2.1 per cent, at a time when the US
is showing virtually zero. That is very unusual, but it is true.
The next few quarters may well be very weak. The latest numbers
still show pretty robust consumption growth in this country, and
again that is unusual given the world context in which this is
taking place. So there is enormous uncertainty here. The two factors
which are important in thinking about what will happen to the
world economy and, hence, to the UK, are, first, and far and away
the most important, the very significant policy easing that has
taken place during the course of this year, and, secondly, the
fact that one of the views that we took following September 11
was that the consequence of that was a significant increase in
the degree of uncertainty that would affect investment decisions
for a period but then that uncertainty would be resolved. One
of the factors which explains this weaker profile for the next
two or three quarters and then a slightly sharper pick-up than
before is a switch, in our view, as to what will happen to investment
expenditure, and we do see a sharp slowdown in investment expenditure
in the short-run, but then some picking up further out as the
uncertainty is resolved. However, as Sushil has emphasised today,
there is just enormous uncertainty about all of these things.
We are not saying anything will happen, we are always talking
about a balance of probabilities.
139. That is what worried us at the start. We
are quite happy to go with the remark that there is enormous uncertainty
and we are very happy to go along with the balance of probabilities,
but when the probability is shown in tables as a 1 per cent chance
of recession some of us tend to get a little bit jumpy. We do
not mind even taking the Governor's view that the difference between
1 and 5 per cent is negligible, but to write it in at such negligible
levels is a cause for concern for those of us who watch these
things, even if it is backed up by a group of other commentators
whose forecast you have also published in the same document. I
wonder whether Dr Wadhwani could add to that. Do you agree with
what I have just said?
(Dr Wadhwani) Which particular aspect?