Examination of Witnesses (Questions 40-42)
20 NOVEMBER 2003
MR ROGER
BOOTLE, PROFESSOR
SHEILA DOW,
PROFESSOR CHRISTOPHER
PISSARIDES AND
MS BRIDGET
ROSEWELL
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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