Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40-42)

20 NOVEMBER 2003  


  Q40  Norman Lamb: Which makes it even more complex?

  Ms Rosewell: Which makes it very complex. The economy itself is a complex thing. Therefore, that means also that no forecast is a sure bet. Roger and I do not disagree, in the sense that he would agree there is the risk that if you push up interest rates too far the thing could collapse, and that a small rate change might work, but equally it might not. I would agree with that too, it might not. You are always talking about balances of probability here, both in that context and in the context of what is happening in the eurozone economy and when are we going to get a revival of exports. That is why I think I would support the Bank's cautious approach to small changes. Next month is not very far away and then you have another bite at the cherry.

  Mr Bootle: I think you did slightly exaggerate the difference between Bridget and myself, and actually I think we are quite close on it, although perhaps it did not sound that way. I was going to express surprise that the Ö% option had not been considered but trying to emphasise the tightrope character of the decision that they are making. On the tightrope issue, one thing I have not mentioned so far is the danger to the exchange rate, which I think must be a very major consideration for them. If it is the case that US, Japanese and euro interest rates are staying very low and then the British rates are set to go up very sharply and the market wakes up to this, the real danger is that the pound starts going up again, and it has done that over the last month or so. I think we must be very wary of that.

  Q41  Norman Lamb: Which could be very damaging?

  Mr Bootle: Very damaging, yes. So that is an argument for them, slowly and steadily and cautiously.

  Q42  Chairman: Could I ask the question which was referred to earlier on. The Bank certainly seems to be worried about the existence of a large number of highly indebted households with little or no liquid assets, and these could amplify rapidly any adverse shock to the economy. Does anyone think that these dangers could have been averted if the Bank had acted sooner to deflate the house price and credit bubbles?

  Ms Rosewell: No, I do not think so.

  Professor Pissarides: No. I think the Bank reacted correctly to reduce interest rates over the last few years, because of the state of the overall economy and inflation. House prices are rising for a variety of reasons and the Bank's policy probably is not a major reason for that rise.

  Professor Dow: It may be that the most severe problems are with unsecured debt, in fact, in households where home ownership is not actually an issue.

  Chairman: Can I thank you very much for your time, your papers and your oral evidence. It is really helpful to us. We will be seeing the Governor in a couple of minutes, so we will instantly translate your comments. Thank you.

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