Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 46 - 59)




  46. Mr Tucker, welcome to our confirmation hearing today. Can I welcome you and congratulate you on your appointment to the MPC and perhaps start with the question asking you that I know that you have been involved in producing the Minutes for the MPC for the past number of years, so that gives you real inside knowledge probably about that. Do you think your inside knowledge of the views and the relationships on the MPC will give you an advantage when you join?

  (Mr Tucker) I am not sure that it will give me an advantage. The fact that I am familiar with the process and the fact that it will not be a completely novel experience for me to be in the room might make me feel slightly more comfortable than I personally would feel otherwise, but I think there is a world of difference between being in that room taking objective notes, concentrating on providing a true and fair view of what has occurred in a discussion amongst other people, and being a participant in that discussion. Whilst, on the one hand, I would like to think that I have benefited from working in the Bank close to monetary policy in a variety of ways over recent years, I most certainly do not under-estimate the step change that I am about to go through in forming my own judgment each month.

  47. You have been 22 years with the Bank and for only two of those years you have been involved with monetary policy. What answer do you have to the critics who may argue that you have an insufficiently strong background in economic analysis compared with your MPC peers?
  (Mr Tucker) More than two years involved in monetary policy. Two years running a part of the monetary area, which I was asked to do by the Governor, Mervyn King and their colleagues. They showed faith in me in that and they are quite robust individuals in their judgments and I feel comfortable that I have learned a lot from that experience. My career over the past dozen years or more has involved me in a variety of ways with monetary policy. When I was conducting the open market operations on behalf of the Bank when the Government was setting interest rates, this was a job where I had to follow monetary policy carefully; and when I was a speech writer, amongst other things, in an earlier part of my career I needed to follow monetary policy. I would like to think that in a variety of ways I have picked up relevant experience and I feel comfortable with that.

Mr Fallon

  48. So you are an insider, you have been there man and boy, what was the last interest rate decision of the Monetary Policy Committee that you disagreed with?
  (Mr Tucker) Your question assumes that I have been tracking monetary policy decisions each month, forming my own view on whether this is right or wrong, and what I would have done. I think in the context of writing the Minutes it is quite important not to do that, and I have not done that, since what one has to do is follow and understand the arguments of all the members of the Committee. That is why in my response to the Chairman I was saying that this is a change, and I recognise it as being a change, from reporting the views of others to reaching my own view.

  49. Over the last long five years you cannot remember or identify a single MPC decision that you disagreed with?
  (Mr Tucker) My answer to you was that I was not going from month to month saying "I would have voted this way, I would have voted that way". I have certainly followed the analysis and formed views on how I would have conducted the analysis and I think I contributed to that analysis over the years.

  50. Has there been a very recent decision that you disagreed with that is fresh in your memory?
  (Mr Tucker) My answer is the same, I am afraid. I am sorry if I disappoint you. What I will need to do going forward is reach a view on what I think is right having listened to the debate amongst colleagues and looked at the information.

  51. You are coming at this from the inside and people are bound to be somewhat suspicious that you are, as I said, the ultimate insider, that you are not ready to take an independent view of this. I just find it very surprising that you cannot identify a single decision over five years that you yourself thought was wrong one way or the other.
  (Mr Tucker) I think you should have no doubt on the point of reaching my own view, and there are two reasons for that, amongst others perhaps. The first is that the statute makes it absolutely clear what the responsibility is. The responsibility is one person and one vote, and that is a duty. The second thing is that you join a public policy institution because you want to be involved in public policy, and if you are lucky enough to get to the position where actually you can be one of the decision-makers, you do not throw that off in any light way. I shall form my own view each month on what I think the level of interest rates should be, you should have no doubt about that.

  Chairman: I am sorry, you hear the Division Bell has gone. I will suspend this sitting for ten minutes.

  The Committee suspended from 4.26 pm to 4.36 pm for a division in the House.

Mr Fallon

  52. In your own answers to us you refer to "the greater the imbalances in the economy become, the greater the risk of abrupt adjustment", I think is your phrase. Given the current imbalances which may have a longer-term effect, should you also consider the RPI-X projection beyond the two-year horizon setting monetary policy? Do you think that two-year horizon is now rather limiting?
  (Mr Tucker) I do not think that the two-year horizon has been, or more to the point for me should be, the single fixed point on which the Committee focuses. It should be looking at, and I should be looking at, the profile of inflation throughout the two-year period and—which your question gets to—what is implied thereafter by the slope. I think that the weight that one gives it as one pushes out in time beyond two years has to get somewhat less for perhaps two or three reasons. First of all, the band of uncertainty around it becomes greater just because predicting the future becomes harder the further out you go. Secondly, the projections are done, of course, on the basis of a constant interest rate assumption, and whilst that is convenient, I think the sensible assumption to be made in terms of using these projections in policy-making is it becomes a more difficult assumption to make the further you push it out. So my answer to you is yes, but qualified in terms of the weight. Certainly I do not think it is a question of if you hit 2½ per cent two years on you are fine, irrespective of what the slope is or the inclination thereafter.

  53. What do you think the neutral rate is for UK interest rates?
  (Mr Tucker) That is a good question, if I may say so. I would have thought—

  Chairman: You may say that!
  (Mr Tucker) It is an important question in terms of making monetary policy, because in a world with price stickiness, part of the way in which monetary policy works is to shift the short-term real interest rate around, above or below the neutral rate. I would have thought at the moment somewhere in the area of 5 to 5½ per cent, but this is a hazardous thing to judge and it is based on ex-post world interest rates. I emphasise the band of uncertainty around that, and it is the kind of view which one needs to update as one gets more information.

Mr Beard

  54. In your submission you argue that the MPC has created risks by increasing domestic demand to compensate for weak external demand. Is the risk of further imbalancing the economy going to be a restraint on your decisions when you are a member of the MPC?
  (Mr Tucker) I think that there is no doubt at all that the imbalances—and I tried to set out three ways in which these imbalances manifest themselves—are a complicating factor in policy-making, yes. However, I do not think addressing those imbalances can be the objective of policy in some way. The objective of policy is to maintain stable inflation around or at the target in the medium run. It is the case, in my view, that the longer the imbalances persist, and to the extent that they grow, the uncertainty about the path of inflation looking further out is increased, and that makes policy-making a more difficult business.

  55. Could I refer you to the answers you gave us in your submission, answer 13a[2]? The question, for the record, was "What weight do you place on a) the monetary aggregates . . . in your assessment of inflation prospects?" Could you actually explain what the answer means, because I find it extremely obscure?

  (Mr Tucker) Then I apologise. The point I was trying to make, which I think is an important one, is that inflation is a nominal thing, in the sense that—I am probably not doing very well again, I am afraid, and perhaps repeating my words—to keep the economy in balance in real terms—real demand in line with real supply—would tend to produce a stable rate of inflation, but it will not of itself deliver the stable rate of inflation that you want. It could be 2½ per cent, it could be 3 per cent, it could be 1 per cent. Therefore, what one has to do, I believe, alongside examining the real economy, is to look at the rate of expansion of nominal variables and the variables expressed in terms of money. In the past, and in some other countries, the monetary aggregates, broad money and narrow money, have been a principal way of doing that. This is only feasible in circumstances where one has stability in the relationship between the monetary aggregates and between output and inflation, and this country has not been in that position for many years. So what I was then trying to go on to point out was that if one cannot calibrate these things from monetary aggregates in such a precise way, what other purely nominal measure is there which can held guide policy-making? I picked up, which I believe to be important, inflation expectations, and by that I mean the public's inflation expectations, people on the two sides of the wage bargaining process. We can get measures of inflation expectations from surveys and from the bond markets. These are fallible, but they should be given some weight.

  56. Those answers, both the written answer and the oral answer you have just given, give me the impression that they would go down very well in a symposium of bankers, in your own fraternity, but they would be far less transparent to the public at large. Are you going to be able to break out of that sort of world and explain how you have arrived at your decisions as required on the MPC?

  (Mr Tucker) I hope so. What I would say, I think, is that this is a different set of circumstances perhaps from this, but I would say inflation is, at the root of the problem, too much money chasing too few goods—and therefore one needs to track the rate of growth of money. That is point one. Point two, I would say that we are trying to achieve the inflation target of 2½ per cent not just in some short term but also further out. That is what the job is in serving the public, and therefore we need to take account of what the public think inflation is going to be further out.

  57. Could I refer you to question 14 of your response[3]? The question was: "To what extent should fiscal policy play a demand management role alongside monetary policy in the short-run?" In response you say, "The most important contribution that fiscal policy can make to monetary stability is to maintain a prudent level of government debt". That does seem like a banker's answer, considering that the balance of monetary and fiscal policy is one of the crucial issues, is it not, of the Monetary Policy Committee and the Treasury?

  (Mr Tucker) The reason I emphasised that point—and I do believe it to be important—is that the experience internationally is that when the level of government debt rises and questions creep in about whether the Government can sustain that debt, then people start to expect that that level of debt, the real burden of that debt, will be inflated away, that the credibility of the monetary policy process, whatever it is, becomes impaired. Most—not all, but most—of the big inflation problems around the world have been rooted in one way or another in that, and therefore I do think it is important that the Government, any government, should have a prudent debt policy, which we have.

  58. If you were explaining that to a sixth-form, say, would you use the same language as you have just used or which you used in your written answer?

  (Mr Tucker) The language I would use then is that if you owe money, you would like inflation to reduce the value of that money so that you could repay it more easily.

Kali Mountford

  59. I would like you to stick with the sixth form, if I may. I notice that in your answer to question 3 of the questionnaire you seemed somewhat proud of synthesising macroeconomic financial markets and banking information systems. I am wondering how far your view of synthesis goes? You also have very clear views, do you not, about the Government's role in fiscal policy and the MPC's own role? Do you not see any role at all for the MPC to be pressing for further co-ordination between the fiscal and monetary roles?
  (Mr Tucker) I think that the important thing is that the various different agencies do their jobs and we do not get into the business of commenting on other people's jobs. That is quite important. One of the advantages of the current setup is to have the Bank of England and the Monetary Policy Committee focussing on monetary policy and keeping inflation at the target, rather than trying to do, or comment on, lots of other things at the same time, and I think that is a real strength in the current setup. Where I completely agree is that fiscal policy has an important effect on demand in the economy, alongside what is going on in the household sector (consumption), the business sector (investment), and therefore that is something which we of course need to take into account and understand. The arrangements that we have with the Treasury allow us to gain an understanding of what it is that they are doing, but of course they publish virtually everything as well.

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