Examination of Witnesses (Questions 40-47)|
8 JUNE 2004
Q40 Mr Walter: I wonder if we could look
at sterling and perhaps direct this question to Roger Bootle because
you told us back in November that the risk of gradual increases
in interest rates was that it would put sustained upward pressure
on sterling. To what extent do you think recent sterling appreciation
has been as a result of those increases in interest rates?
Mr Bootle: That is very difficult
to know as one cannot quite tell what the position would have
been without this policy. I think it has been an added major factor
in the sense that operators in the markets have been faced with
a level of sterling interest rates which has been very high by
international standards1% in the US, 2% in the eurozone
and 0% in Japanand, what is more, a pretty confident view
that that level was going to increase over the next year or 18
months or so, which I think is a pretty encouraging background
for the currency, other things being equal. The counter-approach
I suggested which I think might have the added benefit of easing
pressure on sterling was to get the policy of rate rises over
as quickly as you possibly could, and this chimes in with the
idea of the shock, which I think would produce a lower peak as
well, but would foreshorten in financial operators' minds that
period of rising rates during which I think they naturally would
be buyers of sterling.
Q41 Mr Walter: Do you think that the
fact that people now expect the Fed to increase rates in the US
and that the European Central Bank is probably not going to have
any more rate cuts for the time being will take the pressure off?
Mr Bootle: To some extent, but
I think all the indications are that the rise in interest rates
is going to be pretty slow, and, after all, from this very low
level rates are going to be at the lower sterling rates for as
far as the eye can see and meanwhile in the eurozone I guess similar
points apply and, if anything, it is not obvious as and when euro
rates will go up and I still think they might even come down,
so I do not think there is a great deal of room for confidence
on that score, that the pound is back.
Q42 Mr Walter: I wonder if we could go
on to look at the trade situation. The MPC expects a solid recovery
in export growth in the near term. Now, this is in the face of
what is an enormous trade deficit which we are facing at the moment,
sterling is currently pretty strong against the dollar and Asian
currencies and we have continued weakness in the eurozone, in
domestic demand there, so do you think there is a risk that we
are not going to get that solid recovery in export growth and
in fact UK exporters are going to be squeezed out of those markets?
Mr Bootle: Broadly speaking, I
would concur with the Bank's judgment. It does look as though
the UK's export markets are going to be growing pretty reasonably.
If you weight the projected recovery in world growth by the UK's
exposure to different markets, I think you ought to expect a reasonable
recovery in UK exports. The big source of anxiety is the one you
referred to, namely the fact that well over half of our goods
exports, goods, not services, go to the eurozone and that of course
at the moment is not doing very well. If the eurozone were to
stage a decent recovery, in this context of overall world recovery,
then I would be pretty confident that UK exports would pick up
Q43 Mr Walter: What about the comment
which is in the February Inflation Report from the Bank's regional
agents that trade with the United States is only profitable with
an exchange rate between 1.60 and 1.70?
Mr Bootle: Well, it would not
be entirely surprising. I think that the movement of the exchange
rate has done some significant damage and what we know about movements
of exchange rates is that the effects do not come through very
soon and the lags are quite long. If you go through a long period
of high exchange rate, you may first of all think that it is perfectly
okay and only subsequently do you find that it is not when people
are forced out of business or decide not to move into a particular
market because they find there is no money in it.
Mr Walton: It is also the case
that business surveys, both the CBI and the Purchasing Managers'
Index, their export components are at eight-year highs, so it
does suggest at least at the moment that companies think that
conditions are really quite good for them and it is a bit of a
puzzle why the Office for National Statistics actually showed
a more than 5% decline in non-oil export volumes in the first
quarter, so if there is a discrepancy anywhere, it is there, I
Q44 Mr Walter: Do you point to any reasons
why? There is always optimism, yet the figures seem to be showing
a contrary picture.
Mr Walton: Well, I think the figures
are probably wrong, is the most simple answer.
Q45 Mr Walter: Can I move on and just
look at another technical aspect, and I am not sure who might
want to answer this. This is the criticism which has been expressed
with regard to the Bank of England's operations in the sterling
money markets and the volatility in those markets. I know that
the Bank is currently undertaking a review of its operations in
the markets, but there does seem to be a significant volatility
in the overnight rates, some in the region of 200 basis points.
I do not know who has a view on this, but do any of you think
that the Bank is not fine-tuning the markets in the way in which
other central banks do and do you think there is scope here for
Mr Walton: I do not really have
a view. Clearly you do not particularly want volatility and I
think the Bank is, therefore, right to be looking at ways in which
it can improve its money market operations, but I do not really
know enough of the specifics to have a very good view.
Chairman: Would any of you?
Q46 Mr Walter: Perhaps we should ask
the Governor when he comes.
Professor Miles: Volatility in
the overnight rates, it is hard to see that has any advantages
at all and if the Bank, in changing its operations, can reduce
that, I think that is something they will self-evidently want
to do. It is going to be hard to find anybody who would be against
that. I think Paul Tucker on the MPC has been taking the lead
in undertaking some research on how changes might be made to volatility.
Mr Walter: The problem is that it tends
to be the corporate borrowers who suffer from this because other
market operators are anticipating the moves.
Q47 Chairman: Finally, in your paper,
David Walton, Goldman SachsWhere Has The Money Gone
of 12 December 2003, your estimate of the output gap is around
one half of that of the Treasury's, suggesting that there is less
room for nominal inflationary growth. How do you interpret the
analysis in the Inflation Report of measuring the impact of government
spending on inflationary pressure and do you think this analysis
lies behind the MPC's pessimistic assessment of the amount of
spare capacity in the economy?
Mr Walton: Well, I actually think
the MPC approach is a very sensible one because actually we do
not know precisely the split between real output and inflation,
but we do know the nominal amount of spending that is going on
and that is ultimately what is putting the pressure on resources.
If, as a result of this review of public sector output, we find
that productivity growth has been stronger in the public sector
and that we have got more real output, then real GDP will be higher,
but it does not mean to say that there is any less or any more
slack in the economy. I think this approach of looking at, "Well,
this is what overall spending is and this is how it is impacting
all parts of the economy", that, in principle, is probably
a more fruitful approach than trying to be too specific about
the split between prices and output.
Chairman: Well, can I thank you for your
attendance this morning; it has been very helpful to us and we
only had an hour, but I think we got across all the points which
we wanted to, so thank you very much.