Examination of Witness (Questions 20 -
WEDNESDAY 22 MAY 2002
20. So you do not really agree with Mervyn King's
view on this issue?
(Ms Bell) I am not aware that what I have said amounts
to a big disagreement.
21. It does really. When he came to see us recently
he clearly felt that at some stage there would be a big drop in
the pound, that was very likely, and therefore we should err on
the side of tighter monetary policy now to take that into account.
That was the difference between him and Dr Wadhwani.
(Ms Bell) I would not like to forecast when a fall
would happen and how dramatic it would be but I would agree that
there could be inflationary risks once the fall happened.
22. And you are aware of that debate within
(Ms Bell) Yes.
23. Last question. Do you think that the current
level of the pound against the euro, which the Governor has himself
described as the pound being over-valued, is a barrier to us going
into the euro in the near future?
(Ms Bell) I think once the Government reached an assessment
of whether or not we were going to go in and got approval from
the country then it would be appropriate to look at the exchange
rate and perhaps bring about some sort of adjustment. I think
it is premature to have that debate.
24. But the Government would not hold a referendum
unless that decision had been made, would it?
(Ms Bell) I am not aware of that.
25. You have referred in your questionnaire
answers to the suppressed level of debt service costs. I wonder
whether you have a view on how you think the debt overhang, the
level of household debt is going to unravel, and whether it is
(Ms Bell) I think it is probably sustainable at current
interest rates, the worry is a continued rise in it and whether,
if it did unravel, that would be rapid and have adverse consequences
for inflation and output and that would have to be monitored.
26. Have you got a view on the probabilities
of a rapid unravelling?
(Ms Bell) I would not consider it to be a high probability
at the moment but you can imagine a situation where it could become
a higher probability if, say, unemployment was to rise markedly
or interest rates were to rise markedly. I think in the current
situation disorderly unwinding is perhaps not the most likely
outcome but it is obviously something that has to be watched and
27. And the relationship between that and asset
price inflation, house prices?
(Ms Bell) Clearly the debt is to some extent feeding
house price inflation.
28. Exactly. So you are expecting at some stage
either a slow or a quick adjustment, but an adjustment, to house
(Ms Bell) I am not sure about prices but perhaps the
rate of growth.
29. We have had Dr Wadhwani's reflections on
his term on the MPC and he concluded in a lecture he gave on 16
May "The MPC has had a tendency to produce inflation forecasts
that have been uniformly higher than the actual outturn".
Do you agree with his conclusion?
(Ms Bell) I read the speech and I think his analysis
is sound and it is actually a similar conclusion to one that the
Bank of England themselves had reached in their Inflation Report
in the previous August.
30. So you think his conclusion is sound?
(Ms Bell) That there has been a tendency, yes, that
inflation has tended to come under, and growth over, the forecast.
31. It is interesting that you say in your written
submission to us that "Purely model based forecasts should
be supplemented by judgment". Given that you agree with Dr
Wadhwani's record on that, will you continue his work on trying
to get the model changed so that we do not get this misalignment
that he is talking about?
(Ms Bell) I think it is a mistake to look at just
one model. The Bank of England, I believe, uses a whole range
of models. My understanding is that the forecasts in the Inflation
Report are not the outturn of just one model. If for any reason
the model is responsible for forecasting errors then that is obviously
something that not just the MPC but the whole Bank and their economists
ought to be keeping under review and trying to understand the
reasons for the errors. I have to say that there is a difference
in the assumptions which I do not think Sushil really unwound
in his speech in that the published forecasts for inflation are
based on unchanged interest rates and clearly the outturns are
based on what actually happened to interest rates.
32. What do you make of the exercise that he
ran through in his speech where he went back and ran the model,
if you like, with base rates of 0.25 and 0.5 lower than they actually
were and drew the conclusion that they could have been there and
would still have delivered the inflation target but also higher
growth. Do you accept his argument?
(Ms Bell) As far as it goes I do. I think he himself
in the speech described his simulation exercise as naive, that
he just dropped interest rates by 25 bases points throughout whereas
if you were really trying to say what would have been optimal
policy you might have done something different. I did not see
in his results that he had looked at the path of inflation, I
think he just looked at the average level of inflation and I wonder
what would happen if you looked at the path.
33. I have just got one more question. In your
written submission to us you said, and I quote, "I believe
it is extremely important for monetary policy to be subject to
democratic parliamentary scrutiny". Do I take it, therefore,
that you would not support a central bank that did not have any
democratic scrutiny applied to it?
(Ms Bell) I think monetary policy is an extremely
powerful tool and very important, so I do think that it should
be somethingit is clearly something that in a democracy
Parliament will have an interest in.
34. So you would be critical of the structure
of the European Central Bank in this respect, which is not subject
to parliamentary scrutiny?
(Ms Bell) It is subject to European parliamentary
35. You said "parliamentary scrutiny"
in your document to us.
(Ms Bell) Yes.
36. It is not comparable to the scrutiny that
we given the MPC here, is it?
(Ms Bell) No. In the larger European Union it is diluted,
37. In your answer to our questionnaire you
said "Consideration should be given to asset prices only
in so far as they affect the prospects for the targeted inflation
rate . . . The creation of an asset price bubble could also have
implications for inflation in the event of a disorderly correction."
Could you briefly tell us how you would define an asset price
(Ms Bell) I am not sure that it is a
term I could precisely define but I would say it is when it becomes
self-feeding so that the prime reason for purchasing an asset
is expectation of a return rather than with a house where you
might get some user value out of it and then the price begins
to grow very rapidly.
(Ms Bell) Do you think there is any evidence
that such a bubble exists now or is likely to exist in the short
run in the UK housing market?
(Ms Bell) I have to say I am not sure.
I suspect not.
(Ms Bell) Yes.
39. Could I put it to you, given the risks of
a disorderly correction, to use your words, resulting from an
asset price bubble, would you place greater weight on such a bubble
should it arise in the light of your answer to our questionnaire
when you were talking about consideration given to asset prices?
(Ms Bell) I would still be of the view
that interest rates have to target the overall level of inflation
and not inflation in any particular asset market.
1 Ev 2, para 8. Back