Examination of Witnesses (Questions 100
THURSDAY 13 JUNE 2002
100. The Halifax in a recent press release said
that UK house prices rose by 4.2 per cent in May, seasonally adjusted,
the biggest monthly rise on record. You are telling us that you
are a little surprised by what is going on. The nine of you are
paid to know what is going on, are you not? Do you have a grip
of what is going on in the housing market, Governor?
(Sir Edward George) If we were paid to know what was
going on, I think we would expect to receive rather more than
we do! We cannot claim to know month by month what is happening
with these numbers. Looking at house prices, it is probably more
sensible to look at the last two months taken together, and both
the Halifax and the Nationwide say that is 4 per cent plus, and
that is unsustainably strong; there is no question. I was talking
about moderating consumer demand in the context of the recovery
of the global economy. That would be an element which we would
be watching very closelynot per se, but in the context
of its implications for the strength of consumer demand and the
strength of aggregate demand and the implications for inflation,
which is our jobretail price inflation rather than house
101. Again, Sushil Wadhwani, who seems to be
the ghost at this banquet, said, "I believe a clear signal
from monetary policy makers that they would react to a housing
market bubble if one clearly emerged would make the continuance
of strong house price growth less likely now."
(Sir Edward George) In earlier discussion we have
made it very clear that if consumption growth continues at its
recent rate, driven in part by house prices, we would have to
act to moderate that, and I think that is a clear signal. In fact,
the Chairman was asking me earlier on whether we were actually
saying that monetary policy may have to tighten, to which the
answer is yes, it may, if the slowdown does not appear of its
102. So you can influence the housing market
by signalling that you would respond to a bubble.
(Sir Edward George) We are saying that we would respond
if consumption growth continued at its recent rate in an environment
where the international situation was improving. We cannot and
would not pick out the housing market as an element in itself.
We are not in the business, and I do not think we can be in the
business of seeking to control house prices, any more than we
can seek to control other asset prices, equities and so on.
103. Let me try the Deputy Governor. How would
you explain the recent increase in housing prices?
(Mr Clementi) It is plain that house buyers have taken
the view that, with the lower nominal rates of interest, they
can afford to gear up to a greater extent than they have hitherto,
but from our side, the first point which I would certainly stress
is that which the Governor has already, and it is important to
keep stressing it, because however often we say it, people still
misconstrue it: we are in the business of targeting RPIX inflation
and not house prices. I still keep reading that the MPC is ignoring
house prices or that we should target it. We are targeting RPIX
inflation. House prices are relevant to overall inflation, but
it works not directly; it works through consumer spending. So
we do not ignore it; we take it into account. Nevertheless, no-one
should be confused about what we are seeking to do. We are in
the business of targeting RPIX inflation. On the current level
of house prices themselveswe look at all the ratios and
there is not one that tells the full story; you have to look at
the lotI think it is appropriate that home buyers and lenders
should exercise a degree of caution. But, for myself, I would
not want to be painted into either corner: on the one hand to
be told that there is likely to be an immediate and sharp crash
in pricesthat is not our central expectationnor
would I want to be painted into the other corner of being told
we are completely complacent about it and not concerned. As I
say, our message is a degree of caution about it, that is, about
absolute levels. But you can give a more definitive answer, as
I think we have, on the question of house price inflation. I for
one said in April that the level of house price inflation, then
running in the mid teens, was unsustainable, and since then we
have actually seen, if anything, in the last two months' data
since I said that, something of an acceleration. So I think it
bears repeating yet again: the level of house price inflation,
the growth in prices, is unsustainable, and the longer it goes
on for, the sharper is likely to be the eventual adjustment.
104. The sharper the adjustment, the bigger
the shock there will be to the conduct of monetary policy. Do
you not eventually have an interest in making the policy job you
will have later easier by taking it into account in assessing
asset price inflation now?
(Mr Clementi) I agree with that. We do take it into
account. We look at asset prices. We look at the equity prices
as well. They are actually very much lower, as you know, than18
months or so ago. We look at equity prices, we look at asset prices
in the housing market, and all of these feed through into consumption
through wealth effects. As I have indicated, we do take them into
account, but we are not targeting either equity prices or house
prices; our mandate is entirely clear: it is that we target RPIX
105. No-one is disputing your mandate. This
is just a discussion about how you arrived at making sure two
years outand that is generally what you are looking at,
although there has been some discussion that it may be slightly
more or slightly lessyou are taking the right decisions
now to enable you to stay close to target. Let me put the question
slightly differently: let us suppose house prices doubled. Are
you interested then in bursting the bubble? Does that move this
particular bit of asset price inflation into a special category,
into a category that could be very destabilising for the whole
(Mr Clementi) With great respect, I have said we are
interested in them now. We do not have to hypothecate a doubling
in house prices for us to become interested. We are interested
now, but the message is that we are not in the business of targeting
house prices. We take asset prices into the model to look at what
it means, largely for consumption. We still read that the MPC
is ignoring house prices. We do not ignore house prices, but it
is not our direct target.
106. So it does not really matter what house
prices do; you will set interest rates at a level that you think
will achieve your inflation target on a two-year period, and only
take into account the consumption effects of the increase in house
prices. I think that is what you said a moment ago.
(Sir Edward George) I do think this is distorted.
We absolutely take account of house prices. We do not believe
that the rate of increase in house prices that we have seen recently
is sustainable, but it is a factor which is actually driving forward
consumer spending, and that does matter to us. If it continues
for long at this kind of rate, we would expect to see the moderation
in consumer spending which we expect and need, because external
demand will be increasing as we go through the year, and then
we will have to act to moderate it. In that sense, you cannot
possibly say that we do not care about house prices. What we are
saying is you have to take it in the total picture, which is what
we are trying to do. We do take it very seriously, but it is not
a unique factor. If we were to try to target particular unique
factors, there are all kinds of factors that we would be trying
to target. We have to put them into the overall assessment, and
we have one interest rate.
107. Let us get away from house prices and talk
about an asset price bubble. If you reached a stage where you
were sure that there was a huge asset price bubble in the economythere
was one in Japan, which has burst and generated ten years of zero
growthdo you think that it is the responsibility of the
MPC at least to speak out, even if it does not change its policy,
as early as it possibly can to say, "We think that some policy
action is required to deal with the developing asset price bubble"?
(Sir Edward George) I think the role of the MPC is
to do everything it can to anticipate the consequences of the
developments in the economy, including asset prices, and of course,
if we anticipated that we were going to have a kind of Japanese
impact and that demand considerations, which is what we can influence
directly, were going to cause this, yes, we would not just speak
out but we would act to fend that off.
108. You would raise interest rates to fend
(Sir Edward George) If we were expecting as a result
of our expectation that we were going to see an exaggerated boom
in asset prices, or exaggerated strength, which was suddenly going
to stop, and that was going to cause us to undershoot the inflation
target, there could be an argument for saying, "Yes, we must
try to restrain the upside because we need to avoid the downside."
109. So the fact that you have decided not to
say explicitly you are taking action of that kind in respect of
house prices must indicate you are not expecting a boom and bust
in the housing market.
(Sir Edward George) It must indicate that we are not
expecting a boom-bust in the housing market which would cause
us, as we look forward over the forecasting horizon, during the
bust period to undershoot the inflation target substantially.
That is not what we are forecasting, but I could envisage circumstances
in which we might forecast that. It is just that our judgement
is we are not at that point.
Mr Tyrie: It is useful to have that on
the record. No doubt in a year or two we will have another canter
round the same subject.
110. Could I ask Mr Clementi something? A very
interesting recent paper concluded by saying that central bankers
are paid to worry. The Governor has just expressed the view that
you are not paid enough, and my colleagues have just expressed
the view that maybe you are not worrying enough. I hear you say
that central bankers are paid to worry, and you do express some
concerns about some of the new financing devices that are underpinning
the growth in household borrowing. Do you have any concerns, bearing
in mind the Abbey National situation in their reports this week,
about these factors and financial stability?
(Mr Clementi) I do not have any comments about the
Abbey National's results, which I think were largely in their
wholesale business, not in their main mortgage retail business.
I do have some concerns, as I have indicated, generally in terms
of the level of household credit, which has been growing very
rapidly. I think it is a moment for considerable caution from
the point of view of both those borrowing and those doing the
lending. I do not think that what underpins most of the consumer
credit though is new instruments. I think they are fairly straightforward
instruments, like mortgages, which have been around for some time.
The proportion of fixed rate mortgages might be rising, but I
do not think the broad shape of the instruments is very different.
We do worry, and we look at it carefully, but, as you will see
in our May report, I think we take a slightly central view, and
I am, as I say, keen not to be painted into either corner, either
believing that this is all necessarily going to end in tears tomorrow
or that there is no reason for concern. I think, as I have indicated,
the longer it goes on for, both in the mortgage market and in
the general borrowing market, if the current rates of growth continue,
the adjustment will be quite severe. Our own central projection
is for a gradual slowdown in the inflation rate.
111. One of the figures that is in the May Inflation
Report and is specifically referred to in the minutes of the MPC
is the growth in unsecured lending to individuals, which grew
by 15 per cent. Do you have any concerns about the impact of that
on financial stability? Could it have an impact on financial stability?
(Mr Clementi) It clearly could, and that is why my
cautionary comments are directed as much to those who are doing
the lending as to those who are borrowing. One hopes very much
that their standards of credit criteria, their credit scoring
measures, are not weakening in any way. We have just been through
a round of results from the UK banks, and profitability, return
on equity, is slightly down this year. That is largely to do not
with their main operations but through greater provisions, so
they will be on notice of this. Having said that, our overall
analysis is that the UK banks remain well capitalised, certainly
by reference to any historical or international benchmark.
112. Mr King, can I take you back to the MPC's
meetings this year and the decision making process. At the MPC
meeting in May, the first paragraph expressing views discusses
those members who are worried about inflation projections moving
up and the possibility of the pound falling, which is now beginning
to happen, concerns which have been identified with you in the
past, yet in the past couple of meetings you have not voted for
a rate rise. Why have you not voted for a rate rise?
(Mr King) I think the May minutes make it fairly clear
that there was a difficult judgement to make and that overall
there was a unanimous view that although the forecast did suggest
that if events were to turn out exactly as the central projection,
a rise in rates would be necessary at some point, that time had
not come, because the central projection for inflation was below
the target for most of the two-year horizon, and it is only right
at the very end that it was starting to pick up above the target.
113. Do you personally think that we are pretty
close to needing to increase interest rates?
(Mr King) I am not going to comment on the present
situation. We are here to discuss the May minutes and the May
Inflation Report. The judgement in May was a unanimous one that
although there was an issue to discuss, the time had not come
for a rise in interest rates.
114. After the Committee makes its decisions,
which are obviously reflected in the minutes, you then chair a
press conference following all that, and you set out there some
comments of your own about the view of the Committee and the views
of the Bank. How do you ensure that the views that you are putting
forward in that report, which is obviously widely reported in
the press, reconcile with the views of your colleagues?
(Mr King) Because I follow the agreed text of the
Inflation Report almost exactly. If you look at the text of my
speaking note, you will see that it contains all the points identically
in the same order as the key paragraphs of the Overview. The Overview
section of the Inflation Report is agreed by the Committee as
a whole on the Friday before the press conference, and that is
agreed word for word, as indeed section 6 of the Report is. The
press conference is not there to explain the minutes or the decisions
as such; it is there to explain and elaborate on the Inflation
Report, and that is what I do.
115. When we saw our advisers earlier on this
week, we saw Roger Bootle, who you obviously know. He said to
us, "I happen to know that some MPC members have on occasion
been somewhat surprised, as it were, by the tone taken at the
MPC Inflation Report press conferences." I asked him, "Do
you think they were surprised by this particular conference or
not?" and he said, "I think it is possible that they
were." Have you been aware in relation to this press conference
or previous press conferences of any concern amongst MPC members
about the tone that you strike compared with the views of MPC
(Mr King) No. I am surprised Roger said that. I have
a high regard for Roger, but on this occasion I think he is way
off beam. No-one has ever said that to me at all, either privately
or in a meeting of the Committee. Indeed, they tend to say the
opposite, which is, "Rather you than me." On this occasion
I think what people picked up on and discussed was what some people
thought of as a difference between the tone of the Inflation Report
and that of the minutes. That is a quite different issue. The
press conference is there to explain the Inflation Report. But
again, I think that view was a mistaken one, because we have tried
for some time to point out that there is no mechanical link between
the central projection exactly two years ahead and the policy
decision. As I said at the May meeting, I think that the forecast
we had in May was consistent with a range of different decisions.
There cannot be a simple mechanical link. What the forecast does
is to raise the key questions for the Committee, and the judgement
of the Committee comes to the fore. Certainly I have not been
aware of any concerns of that kind at all.
(Sir Edward George) If I could just intervene, Chairman,
I have to say that I have not been aware of any concerns. No member
of the Committee has raised this with me. I would have thought
it was more appropriate for them to raise it with me than to raise
it with Roger Bootle, so I would not attach too much importance
to it, frankly.
116. Coming back to the question the Chairman
asked at the beginning, when you gave your briefing after the
May MPC meeting, you put in your concluding paragraph the sentence
that although the Committee had agreed to leave interest rates
on hold, "it stands ready to counter building inflationary
pressures as and when they emerge." What was your intention
in including that sentence?
(Mr King) To repeat what was in the Inflation Report.
As the Chairman said, that sentence appears in the Inflation Report.
117. What was your expectation of the effect
that that would have on the financial markets?
(Mr King) I did not go into it with the intention
of trying to manipulate or influence financial markets. I went
into it with the intention of trying to explain the views of the
Committee as expressed in the agreed draft of the Inflation Report.
118. You will be very well aware because of
your experience in these matters that this is the kind of wording
that is used by other central banks, including the Federal Reserve
in the US, when it wants to indicate that a committee which has
been having a view of no change in rates is moving towards a bias
to believe that it may be on the point of moving rates in a particular
direction. Were you not concerned that the financial markets would
conclude from this that the Committee is very close to coming
to a decision to increase interest rates?
(Mr King) With respect, I do not accept the premise
of that question. It is not true that there is any single method
of wording which the Fed has used consistently to indicate that
it either does or does not have a bias. Indeed, the Federal Reserve
has changed several times in recent years the wording of its statements
in order to change the way it indicates bias. We have never had
and do not have a concept of a bias, and there seems little point
in having one. We look at these decisions afresh every month,
and the Committee does not collectively sit round and spend time
trying to work out what we might do in a month's time. There seems
little point in doing that because we know that by the time we
get to our next meeting there will be new data that we cannot
predict now, and there seems little point in wasting time doing
119. Mr King, what you say at a press conference,
particularly in the section that deals with the conclusion that
the Committee came to, is incredibly important, is sensitive and
will be looked at very carefully.
(Mr King) Yes, and I say at almost every press conference
I have given for over ten years now that we do not speculate on
what decisions we will reach in the future, and I make quite clear
that I see no point in doing so. What I am trying to do is to
explain the outlook for the economy as the Committee currently
sees it. It may well be different in another month.