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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 48-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE TREASURY COMMITTEE
NOVEMBER 2004 INFLATION REPORT
Tuesday 30 November 2004 MR MERVYN KING, MS RACHEL LOMAX, MR CHARLES BEAN, PROFESSOR STEVE NICKELL and MR RICHARD LAMBERT Evidence heard in Public Questions 89 - 186
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Treasury Committee on Tuesday 30 November 2004 Members present Mr John McFall, in the Chair Mr Nigel Beard Angela Eagle Mr Michael Fallon Mr David Heathcoat-Amory Mr James Plaskitt Mr Robert Walter ________________ Witnesses: Mr Mervyn King, Governor, Bank of England, Ms Rachel Lomax, Deputy Governor, Monetary Policy, Mr Charles Bean, Chief Economist, Professor Steve Nickell, External MPC Member, and Mr Richard Lambert, External MPC Member, examined. Q87 Chairman: Good morning. May I welcome you to this session and ask you to introduce your team for the benefit of the shorthand writer. Mr King: On my immediate right is Rachel Lomax, Deputy Governor for Monetary Policy and on her right is Richard Lambert, one of our External Members. On my immediate left is Charlie Bean, our Chief Economist, and on his left is Professor Steve Nickell, another of our External Members. Q88 Chairman: Fine. I believe you have an opening statement, Governor. Mr King: Yes. Thank you very much, Chairman. I am grateful for this opportunity to explain the reasons for the committee's decisions on interest rates since we last appeared before you in June. Since then the MPC has raised interest rates only once, by 0.25 percentage points and that was in August. The official repo rate is now 4.75 per cent. Since our November Inflation Report appeared less than three weeks ago I can be brief. The UK economy ran into a softer patch in the third quarter. The official estimate of output growth in Q3 was 0.4 per cent, substantially below the rate expected by the Committee in August. But business surveys and reports by the Bank's Agents from around the country paint a more positive picture. Nevertheless, it appears that the economy lost some momentum through the autumn. That is visible in the data from employment, investment, retail sales and the housing market. The Monetary Policy Committee has had to balance the impact of weaker activity and house prices on the one hand against indications of stronger future cost measures on the other. Taking all these developments into account, the Committee's central projection for the UK economy remains one of steady growth with low inflation but with many uncertainties which means that no one can be sure about the outlook for inflation and hence interest rates. Despite recent rises in petrol prices, CPI inflation, the rate we are supposed to target, has been lower than expected and below the two per cent target, reflecting continued downward pressure on the prices of imported food and clothing, competition in the distribution sector, and modest wage inflation. For some years now the link between estimates of spare capacity in the economy and retail price inflation has been surprisingly weak. Why that has been so is one of the key questions facing the MPC. Looking ahead, there is the possibility that for a period the link between inflation and estimates of the degree of pressure of demand on supply capacity will be weaker than has typically been the case in the past. But the absence of spare capacity in the economy apparent in surveys suggests that there are also upside risks to the central projection for earnings and inflation over the forecast period. And the upside risk from a tight labour market chimes with the views that I have heard on my regional visits in recent months. But you can be certain of one thing, and that is that the MPC remains ready to take whatever action is necessary to keep inflation on track to meet the target. Chairman, those are the remarks that I would like to make this morning and I and the other members of the MPC stand ready to answer your questions. Q89 Chairman: Thank you very much, Governor. Can I start by referring to the speech which Richard Lambert made in Glasgow in October, when you said, "So we are now getting very close to the point where the Governor would have to exercise his letter writing skills" in his letter to the Chancellor. As we know, the MPC only narrowly avoided breaching the lower limit of its permitted range around the target in September. Is it fair to see such low inflation as indicative of past policy mistakes? Mr King: I will leave it to you to decide whether there have been mistakes or not, but let me just try to explain why we think inflation has been lower than expected. Remember that when we came before you at this time last year we had been faced with a period in which inflation had been above target for a year and in fact we were coming then to the end of a period of 14 months in which inflation was either above target or, as in one month, bang on the 2.5 per cent target. So for much of the period leading up to this hearing last year the question would have been the other way round, ie why was inflation above target. There are bound to be periods in which inflation will be above or below. The chance of it being on target is zero. As to why has it been particularly weak in the past year, obviously we have moved to a new target since we appeared before you last year and, as I said at the time, that would mean that we would suddenly move from being above target to below target just like that and that is exactly what happened. Since then we have been considering what measures we need to take in order to keep inflation on track to meet the target and we have raised interest rates in the way that we did in the first half of the year because we saw some upward inflationary pressure coming ahead further down the track resulting from the pressure of demand on capacity. Broadly speaking I think that is the picture there. This is not a particularly large pickup in inflation and we have asked ourselves the question of whether we think it will be likely to come through in the next two years. It is certainly fair to say that if you go back to the beginning of the year, say in February, the spring, inflation has turned out in the second half of this year to be lower than we had expected then. I do not think that is directly as a result of monetary policy because we knew what the setting of monetary policy was and it is too soon for that to have fed through. What we are seeing is not a slow down in output price inflation, in fact both the data and the surveys from businesses show that output price inflation in manufacturing has picked up, but a squeeze on retail margins. What we are seeing is that prices in the high street have been lower relative to prices at the factory gate than we had been expecting. That may be because productivity growth in the retail sector has been growing quite rapidly. There is a chart in the Inflation Report in November which shows the quite strong productivity performance in retailing. That itself may be the product of greater competition. The direct impact of greater competition in retailing has clearly squeezed margins and at least for the moment held down prices. I think that is one reason why we have seen particularly weak inflation in the last few months. Q90 Chairman: Richard Lambert, in your speech entitled "Why is inflation so low?" you mentioned the squeeze in retail prices and I think you cited clothing and ITC coming down. In your discussions with business people around the country have you detected any general sense of anxiety about further increases in interest rates whilst inflation remains low? Mr Lambert: Business people are concerned about the outlook for interest rates and it is one of the first things they want to talk about. The more general discussion that I hear is people concerned about rising input costs and the effect on their profit margins, that seems to be a frequent subject of discussion. I do not get the sense that people feel that interest rates at their current level, even though they have gone up markedly since September, are the central question for their business. People are more concerned about the squeeze between input costs and particularly they mention energy costs and steel and scrap prices and their ability to pass those prices on, which is still limited. Q91 Chairman: Rachel, there was quite a bit of press comment on the issue of statistics that you mentioned in your speech in north Wales. You highlighted the unreliability of some of the economic data you have to work with. You noted that "there is no magic about monetary policy: good decisions depend on good information, and this continues to be a challenging area." Is the recent sequence of rising interest rates but unexpectedly low inflation in any way a consequence of misleading data over the past couple of years? Ms Lomax: I do not think the data on inflation has been a particular problem to us. I think understanding the information on activity has and particularly the different sources of information on activity. The difference between the ONS early estimates and the surveys was the particular issue that I was drawing attention to in the speech. Q92 Nigel Beard: So this inconsistency between the inflation rate and the belief that the economy is at capacity is not true and the reconciling factor is that we really are not at capacity and that the statistics are misleading? Ms Lomax: I think it is very difficult to know where we are in relation to potential output, it is hard to observe even in principle let alone in practice and views vary as to how much spare capacity there is in the economy, there is an uncertainty in that area. It is not just a measurement of uncertainty, I think there is considerable uncertainty about what rate of growth the economy is capable of. Q93 Chairman: You mentioned that the highest quality data comes to the ONS and national statistical agencies, but I think you quoted private business statistics two years out that was maybe more reliable than the ONS. What do we need to do to get better statistics? The impression given was that there is something wrong and something needs to be done. Ms Lomax: I was trying to make two points and perhaps it is just worth separating them out. One is that although the ONS is undoubtedly the source of the most complete information, the sample size for ONS data is hugely bigger than the sample size for private sector surveys and it does take time to put that information together. They are always prone to being revised for several years after the data is initially collected. So there is a trade-off between timely statistics and fully complete and accurate statistics for the ONS. The strength of the private sector surveys is that they are available quickly, you get them much earlier than even the earliest ONS data. They are giving you a very quick take on what is going on in the economy which is valuable particularly if you think the economy is moving in one direction or the other. Q94 Chairman: Governor, the MPC's central forecast in the November Inflation Report was that inflation will stay below the two per cent target throughout the next two years. In addition, you perceived the balance of risks to be on the downside. Even so, there was a unanimous vote to maintain interest rates at their current levels. Why did you not consider a forecast of two years below target inflation, with the risks biased to the downside, as grounds for cutting rates? Mr King: The forecast for inflation was picking up throughout that two‑year period towards the target and indeed we published a forecast over a three‑year horizon and beyond the two‑year horizon the central projection for inflation was above target. So I think this is a balance between when monetary policy is likely to have its effect. I think our feeling is that the big picture here, the one that really matters, is that inflation is somewhat below the target. I do not think we should exaggerate this thing; it is still relatively close to target. As you have said, we have not had to write a letter yet. We would expect it to pick up slowly towards the target over the next two years and, in the absence of further action, to rise above it but with a risk slightly on the downside. That picture taken together with the shortfall of inflation below target, the fact that inflation would reach the target and probably go a little bit above it looking ahead and the fact that there were some risks slightly on the downside, when put together led each member of the committee to judge that no change in interest rates was the appropriate response and this is something we look at in each meeting. Q95 Chairman: Could I ask other members of the committee what your views are on the under‑shooting of the inflation target? Have any of you considered voting for lower rates at recent meetings and, if so, what factors have persuaded you against this course of action? Professor Nickell: Let us start with inflation below the target. One of the things that has not been mentioned up to now, which I think is quite important, is that while factory gate price inflation is rising and has been rising for some time, we have heard this has not gone through to retail prices because of squeezing margins in the retail sector. The other important thing is that imported manufacturers' prices are actually falling and have been falling for quite a long time. One of the interesting features of the economy at the moment is the way in which more and more companies are sourcing from cheaper and cheaper places abroad, which offsets the domestic price inflation. The fact that factory gate inflation is rising is a little bit of evidence about how close to full capacity we are. Looking forward, my belief is that there will be some rise in inflation. I think it is very uncertain how far towards target it will get, but I think the best guess is that it will get up to target in two or three years and as a consequence I am quite happy with the level of interest rates as they are. Of course, if evidence starts to suggest that this imported goods effect is going to get stronger and that that could easily happen then I would obviously reconsider my position on interest rates. Q96 Chairman: Charlie, you gave a speech at Colchester where I think you referred to the fact that the Romans in 600 AD failed to recognise the chances of everything working out exactly. Have you improved since that date? Mr Bean: Certainly, as regards the prospects for inflation, one of the things I wanted to emphasise in the speech was the considerable degree of uncertainty about a number of aspects of the conjuncture but in respect of the particular issue that we are talking about now. The issues that I flagged there and I think are important - and they are issues that we have talked about on the Committee and essentially they have been mentioned already by my colleagues - are, firstly, the prospects for earnings. Wage growth has been remarkably subdued and we do not fully understand why. Part of the story may be inward migration recently helping to relieve strategic bottlenecks, but we do not have a lot of hard evidence on that. Part of it is presumably connected with changes to the structure of the labour markets as a result of various reforms that have taken place over the last ten or 20 years. On the product side of the equation, as Steve has already said, there have been issues connected with both import prices and particularly the issue of pass through from producer prices to retail prices. Producer prices are up nearly four per cent on a year ago and producer input prices are up nearly eight per cent on a year ago. There is quite a bit of inflationary pressure in the pipeline. The question for us is how much of that is going to show through into consumer prices at the end of the day and how much of it is just going to be reflected in a squeeze on margins in the distributive sector or possibly even some of it being pushed back to producers and the answer is we do not know at this stage. During the course of next year we will be monitoring that very closely to see whether inflation does pick up at the rate that is indicated in our central projection or whether it is less rapid or it might even be more rapid. I think all of us recognise there is a lot of uncertainty in there. Q97 Chairman: But you were quite confident in your decision to vote for no change, were you not? Mr Bean: I was quite confident that that was the appropriate decision at the last meeting. Of course, as things change I may well change my position in either direction. Q98 Mr Plaskitt: Governor, your opening statement has got some very nice anodyne central banker phraseology in it. You talk about the economy running into a "softer patch" and having "lost some momentum". If we look at the series of data, we have got output growth for the third course and by your own admission a lot slower than expected, manufacturing output is declining, industrial production is also declining and employment growth has slowed, wage growth in your own phrase is "muted", house price inflation is slowing very rapidly, retail sales are going a bit sluggish and employment growth is slowing. Have you not hit the brakes a bit hard? Mr King: I think that is overstating the case. We will know over the next year how the data come out. So far the figures for the fourth quarter, particularly in the surveys, look, if anything, a little stronger than for the third quarter. In other words, the softer patch does not look to be the portend of a real slow down. Even at 0.4 per cent it is actually fairly close to trend output, it is not much below trend output growth. I think it is an exaggeration to regard this as any sign of a really serious slow down. We do not have very good data on the break down of expenditure for the third quarter. The first estimate of that has appeared and that is always subject to revision. It is much too early to expect reliable estimates. For what it is worth, the components of spending, which is usually the smoothest and the one that gives you more comfort in whether growth is likely to continue, is for consumer spending and that was still growing at around trend. I do not think the signs for slowing are particularly great. There is clearly a slowing from the first part of the year, but that was not entirely unexpected, we had expected some slowing. It was more in the third quarter than we had expected, but, as I say, we do not yet know what estimate the ONS will publish finally for that quarter and the business surveys continue to come out showing much more optimistic pictures. They certainly are consistent with a slow down. There is no doubt that in that third quarter there was a slow down and both the official data and the business surveys are in line with that. What the business surveys are not consistent with is evidence of an actual fall in output in manufacturing. We do not know yet what the final estimates will be, but I think there is enough room there for caution. I think our view at present is that there was a slow down in the third quarter. The fourth quarter, if anything, looks a bit stronger, but we will see when we get the estimates for that. Nothing has led us to change our view that growth is likely to continue to be around trend as our central view over the next two years, but there are risks, although the risks are in either direction. Q99 Mr Plaskitt: At the end of your statement you said that we could rest assured you would do whatever was necessary to keep inflation on target. You do steer to that target and it is two years out from where we are. I think the interesting Inflationary Report to read is the one of November 2002, not November 2004, although I have got that as well, and we are still in the same situation. In November 2002, when you were in front of us then talking to that one, the inflation line is well below the central target and your fan chart has it neatly going right the way back up to target, which is where we should be today. Where we are today in the 2004 report is with the red line even further below the inflation target than it was two years ago and your fan chart is still going right the way back up to target in two years' time. Is the statement in your August Inflation Report that there is a tendency to over‑predict inflation on the two‑year horizon not correct? Are you not still doing that? Mr King: Each August we publish the numbers for that and actually, if you look at the projections, the average outturn for RPIX inflation, which was our target between when the MPC was set up and when the target changed, was 2.4 per cent, which is remarkably close to the 2.5 per cent figure. There are bound to be periods when you are going to be above or below the target and for most of 2003 inflation was turning out both above the target and above our central projection that we made back in 2001. It is true that this year inflation has turned out a little below, although it is much more marked with the change in the target, but that is not something that we could have anticipated in 2002. We have a new target now and that has made the starting point further below the target than we had expected. Now the question is how quickly will inflation pick up. Our remit makes it pretty clear that we are not supposed to try to target inflation month by month because that might result in undesirable volatility in output, and I think the idea of trying to create an unsustainable boom in order to get inflation up quickly to the two per cent over the next six months would be a recipe for disaster. Q100 Mr Plaskitt: Nobody is suggesting you should do that. Mr King: Indeed. We are looking ahead two years. As Steve Nickell said, there is a great deal of uncertainty as to whether inflation will pick up to the target, but there are risks on both sides to that and we have to make a judgment as to the level of rates that seems in our view most likely to get inflation back to the target and, for better or worse, we have set interest rates at the current level, they were unchanged at the last few meetings because we think that is most likely to bring inflation back to the target. When we get to two years ahead the chance of inflation being exactly two per cent is close to zero. It will be above or below according to various surprises that will occur along the road over the next two years. Q101 Mr Plaskitt: I understand that. Given that you work on a two‑year horizon, it is always instructive to read the reports two years apart all the time to see if we are where you said we were going to be, but the lines are the same. Broadly speaking there is the inflation rate considerably below the target and your fan chart takes it back up. Your own August report says that you have a tendency to over‑predict inflation on the two‑year horizon. Are you still saying that is the case? Mr King: No, I am not. We publish it openly so that you and others can see the track record and it is still a very short track record, but each August in the Inflation Report we publish the average two year ahead errors in both output growth and inflation. It turns out that the average two year ahead errors have meant that on average we slightly over-predicted inflation. I do not think it is particularly large relative to others, but it is there and we are open about it. We try to take that into account when we look at the future. So we ask ourselves why is it that that has been the case and we have made a number of adjustments during the year which have affected our projections looking further ahead. We have not mechanically projected forward to past relationships because in part we have been trying to learn from our forecast track record in the past. Q102 Mr Plaskitt: Do you agree that we have had quite a long period of very, very low inflation and that it is possible that what economists call the "transmission effect" may have changed and that it is now the case that quite small changes in interest rates can have an impact more quickly than used to be the case in a high inflation, high interest rate climate? Have you considered that? Mr King: As a general proposition it is certainly true that a number of aspects of the transmission mechanism may well have changed. Perhaps the single most important one is that with inflation expectations seemingly well anchored on the inflation target interest rates may have a faster effect and that may mean that we need to do less on interest rates to achieve the same change in inflation as was the case in the past because there inflation expectations were quite responsive to actual shocks to inflation and that may well be the case. I think we were reluctant when the committee was first set up to take that for granted and to build that into our projections, but I think as the data have come out we have learned that some of those relationships have changed. Q103 Mr Plaskitt: Have you altered your modelling to reflect that? Mr King: Yes, relationships in the model have changed, we have changed it. What is very important to understand is that when we make our forecasts each quarter we do not mechanically use relationships estimated in some black box way from a computer and project it forward. We ask ourselves how different is this projection, what does it imply for the rate at which earnings will pick up or the rate at which retail price inflation will pick up relative to costs compared with the past, and we ask ourselves do we believe there is a story here which we can justify for not using simply the same relationships from the past and we certainly do not do that. Perhaps Charlie would like to talk about the changes we have made. Q104 Mr Plaskitt: Let me put one last question to you first, Governor. When you are back here in two years' time, are you confident that the track inflation will have followed pretty much what is on your prediction now? Mr King: I think the chance of a central projection is low, it is close to zero. Q105 Mr Plaskitt: Will it be closer to the target than it is now? Mr King: I think it is much more likely than not that it will be closer to the target. Many surprises can come along. I cannot predict what will happen to the world economy or oil prices. Many things could come along to make that very uncertain, that is why we have the fan chart. You can read off from the fan chart what we think is likely to be the range of uncertainty. I think it is more likely than not to be closer to the target. Forecasting is not about saying what will happen, it is about the balance of risks. Mr Bean: Without wanting to be exhaustive about all of the changes that we have made, which I think would take up the whole two hours of this Committee meeting, let me give some examples. In the light of continued subdued wage outturns over time we have changed our estimate of the underlying level of potential in the economy, so that is learning from the forecasters that you have been talking about. Let me give you a couple of particular changes that have affected the transmission mechanism. Firstly, there is evidence not just from this country but also from other countries that the extent of pass through from exchange rate changes into consumer prices is less now than it was in the Eighties and Seventies and that is something that we have incorporated into our modelling. That was a change that we first introduced about three years ago. More recently, and it is highlighted in the latest Inflation Report, we have changed our assessment of the relationship between house prices and consumption. Obviously house prices are affected by interest rates and the extent to which house prices then affect consumption and demand is therefore also important in the transmission mechanism, and we have taken the view that the correlation going forward between house prices and consumption is likely to be more subdued than it was in the past. But there are lots of other areas where we have also discussed and often changed aspects of the model which will have ended up changing the impact of policy. Q106 Chairman: Rachel, in your speech you mentioned how that you can get all sorts of sophisticated information from the textile industry, but the reality of the situation is now that it is small compared with the service sector industry, which is now over 70 per cent of UK output. In those circumstances is it not virtually impossible to have firm views on output growth, capacity or productivity trends in the country? Ms Lomax: It certainly poses quite a big challenge to measuring output. I think it is one of the areas where the ONS needs to do the most work, like other statistical agencies, collecting more information about services. It is a key reason why the output data they publish gets so substantially revised and a major source of uncertainty, yes. Q107 Chairman: You said in your recent speech that it is not possible to find out how much the large supermarket chains had contributed to GDP growth from the national accounts but that it was possible to find out the output growth of manufacturers of knitted and crocheted clothing garments. Why does our measurement of outputs seem to be stuck in the 1970s, with an overemphasis on manufacturing? What steps should we take to tackle this problem? Ms Lomax: As you suggest, it is an example of historical lag that the manufacturing activity is very well measured. Services, which is the growing part of the economy, have required new surveys, new techniques and new investment to collect the information and that has not happened, that is the major challenge of the future. It is one of the key focuses of the ONS's modernisation effort to try and improve their capacity in that area. Q108 Mr Fallon: Governor, can we turn to the way the MPC is managed. Every vote since last April has been unanimous, the longest period without dissenting votes since the MPC was established. Does that bother you? Does that not show the lack of independent thinking? Mr King: It certainly does not show the lack of independent thinking. The functioning of the committee, how we operate and the style of the meetings has not changed at all over the seven years that I have been a member of it. These periods of unanimity come and go. In 1997 every decision was unanimous and in 1998 only one was. We have had alternations. The years 2000 and 2002 had a lot of unanimity during the year; this year has had somewhat more than that. I think in periods when interest rates are some way off from what people might think of as their likely normal average level in the long run, when they do start to move, as they did from last November, it would not be very surprising if you found, as in the case of the Federal Reserve, that there is unanimity for a period. As you get to a period when it is less clear where interest rates should go, maybe we are entering such a period now, then I would expect that we would see differing views. I do not think one should exaggerate the importance of this because what really matters is the level of interest rates for which people vote and there the differences never amounted to 1/4 per cent either way. I think we have had a couple of meetings in the past where the gap between the highest and lowest level of rates that people voted for was half a percentage point, but that is the method one should use rather than the actual number of dissenting votes. Q109 Mr Fallon: Since you became Governor there have been over 150 individual votes and only nine of those dissented from yours. Have you changed the practice? Do you speak and vote last like your predecessor? Mr King: Absolutely. There has been no change at all in the practices of the committee, as I made clear when I took over. I think when I came to the confirmation hearing I did say to you I would operate in the same way and that has been true. Q110 Mr Fallon: Only nine dissenting votes out of 150 in a year and a half does not sound like a lot of orthodoxy has been challenged, does it? Mr King: The aim of the process is not to have dissenting votes for the sake of it. The idea is to have argument and discussion at the meetings and there has been just as vigorous a debate about what is happening in the economy and about why inflation has been lower, for example in the last six months, and whether inflation will pick up over the next two years and why have the data been conflicting between the official data and the surveys and why have exports appeared to be so weak. That debate, which it is the main function of the Committee to carry out, has been as vigorous as ever and you can see that in the various speeches of members. I can see why for some commentators in the press it is a bit disappointing if your livelihood is to write a column about the MPC. We are trying to be as unexciting as possible. Our function is not to be newsworthy, it is to try and create greater stability and the more successful we are in achieving the latter the less will be the former and that will put those columnists out of business. Q111 Mr Fallon: Let us not worry about the columnists. The Committee was composed of internal and external members for a purpose presumably. Richard, it has been a year since any external member voted differently from the majority. You have been on the committee for a year and a half and you have never voted against the majority. Are you doing enough to challenge the orthodoxies? Mr Lambert: My view is that the past 15 months has been rather an exceptional period. If we throw our minds back to the autumn of 2003, we had interest rates then at the lowest for 30 years and the economy was picking up to trend and above trend, moving into a period of rather rapid growth in the first half of 2004. As we made clear in our minutes at the time, we were quite anxious about what would happen when we changed the direction of interest rates after a prolonged period of moving down into a period of moving up and when people had taken on a lot of debt over the preceding years. When we came to make the starts to the increases in November 2003 first of all we made it clear that it was going to be gradual and that we were not going to frighten the horses and, secondly, that we were going to signal it as clearly and as well as possible. In those circumstances, over the past year, as we moved from what seemed to me at any rate to be very low rates up to where we are now, it seemed to me the only question was time and pace of increases. Since we had made it clear that we were going to have a gradual approach during this period there was not much of a question about that either. I think we are now in a much more interesting phase and obviously I have no idea how people are going to be voting over the next year, but I think the next year in that sense will be more interesting from those who like to look at the outcomes. Q112 Mr Fallon: Have you seen the House of Lords recent report? Mr Lambert: I have, yes. Q113 Mr Fallon: They regret the decline in the contribution of external members to research papers and things of the type that used to be published by, as they single out, Charles Goodhart, Wilhelm Buiter and Sushil Wadhwani and so on. How important do you think it is that external members of the MPC are seen to be producing high quality work independently of the Bank? Mr Lambert: I do not share the view that the Committee should consist entirely of monetary economists. As somebody who is not an economist I sit in admiration of my colleagues, Steve Nickell, Kate Barker and Marian Bell, who make formidable contributions to the debate. It is not for me to say whether I make a contribution to the debate, others can talk about that. My role I see as being that Central Bank talk is as important as action in quite a lot of cases and I think the way the Bank communicates around the country is something in which I can play a useful part and that is what I am endeavouring to do. Q114 Mr Fallon: Do you think it would reassure people about the contribution that external members are making if they participated in your press conference for example? Mr King: The point of the press conference is that I do not speak for myself, I speak for the committee as a whole in presenting the forecasts. When there are dissenting votes and there may be disagreements about the forecast, the press conference is not there to explain all the disagreements and individual points of view, that is a function for the minutes. The role of the press conference is to explain the Inflation Report, that is a collective document that we agree and the Inflation Report describes the forecast and the outlook for the committee. It may say there are different views about the forecast. My job at the press conference is to explain the Inflation Report, not to give my view, and the role of the press conference is to do exactly that. Q115 Chairman: Charlie Bean, this summer you were reappointed to the MPC for a third time. Has the way the MPC operates and deliberates changed significantly since you first joined the committee? Are there any changes you would like to see going forward as to how the MPC uses economic analysis and data? Mr Bean: I would not have said there are any substantive changes. Obviously as the individuals on the committee change the internal dynamic of the way that we discuss things may change, but the substance of our decision making is exactly the same as it was when I joined the committee, ie the way we organise the meeting on a Wednesday afternoon to discuss the data and on Thursday taking the decision. The way that is structured is exactly the same now as it was when I joined the committee and I think it works pretty well. There is no point in changing something for the sake of it. As regards other aspects of the internal processes, those have evolved over time. We have changed some of the details of the way we run the internal forecast process. We are currently in the process of re‑engineering some of the briefing that takes place every month and that is in response to the comments of members about how we can improve things or the benefits perhaps of doing them differently, so there are changes that take place there. But the core of the process really is very much the same as it was when I joined it four years ago. Q116 Chairman: Will the Bank be publishing details of its new economic model? Mr Bean: Yes. There will be a book in January. Q117 Chairman: Will you be making the Bank's new forecasting model available for public use in the same way as the Treasury's model is? Mr Bean: That is something we have not taken a firm decision on. It is not as straightforward to use our new model as, say, the Treasury model, it requires a certain amount of prior training. The other thing that is worth stressing is that these are not black box machines where you press a button and out outcomes a forecast at the other end. They need a lot of input and tender loving care and what comes out at the other end is as much reflective of that input rather than the structure of the model. The issue of whether we provide the set of equations and machinery that will form or not is actually a rather secondary issue. What is important is that we explain the economics that lies behind our thinking and that will all be explained in the book in January. Q118 Angela Eagle: I would like to congratulate you on running an extremely unexciting monetary policy and I hope you continue to be as boring as possible with it because I think the excitement of a 15 per cent rate increase in one day is something that probably most of us would wish to avoid. I want to ask about the labour market. By the looks of it we have now got a 29 year low in unemployment and we also have the highest labour market participation rates, one of them anyway, in the OECD and yet we have no real sign of wage inflation and this is causing puzzlement. Have you any observations to offer on why this might be happening? Mr Bean: I cannot give you a simple answer. There are several factors that we have thought about, no one of which one can demonstrate entirely why this is coming about. I think one can explain why it has been possible to maintain low inflation and low earnings growth at much lower levels of unemployment than we had a decade ago through a combination of a series of structural reforms in the labour market over 20 years and a fairly steady growth of nominal demand in the economy. We have not really had rapid periods of sharp expansion and then decline which make it more difficult to bring about slow and study reductions in unemployment. The macroeconomic picture has enabled unemployment to come down and the microeconomic reforms have enabled unemployment to stay low without generating inflation, and I think that is a large part of the broad explanation of why unemployment can be so low without generating wage inflation. Why it can be so low and precisely at this level is harder to say. We had expected some pickup in earnings growth two years ago and that did not materialise and so there is still a further question as to why. One possibility is that productivity growth in the economy is now starting to pick up. It did so in the United States but there is no sign that it did here. This is a story that is easy to exaggerate in two ways. One is that before the mid‑1990s our productivity growth in the private sector, output per hour, was growing slightly faster than in the United States for the previous 15 to 20 years. The idea that we have always had a lower growth rate of productivities is not correct. There has been a sign in the last year or so of a pickup in productivity growth but I think it is too soon to be confident as to what that means for the future. Another possibility is that over the last year we have seen a continuation of a growth in real incomes without the need for rapid growth in nominal pay, so the terms of trade have continued to move in our favour which has meant that living standards can increase without the need for exceptional growth rates of nominal pay and again that has helped to remove some of the pressure. Finally, I think we all feel, although there is no statistical evidence to support this, that there are some reasons to suppose that the use of migrant labour carefully targeted, the numbers are not particularly large, by employers to deal with particular skill shortages have been used as a means of dealing with the shortages without the need to make general pay increase offers and that has also helped to remove the upward pressure on pay that might have been there. I suppose overall, to go back to the point that Mr Plaskitt made, the fact that we are living in a low inflation world means that people are now more confident that they can wait to see what happens, they do not need to rush and demand a pay increase now because of the fear that inflation will pick up. Inflation expectations are fairly well anchored to the target. That is my view of why that has been low. Steve Nickell is an expert on the labour market. Maybe we should ask him. Q119 Angela Eagle: Steve? Professor Nickell: It is probably true to say that most companies are facing more competition than they used to face and that undoubtedly means that they are much less willing to grant pay rises than they used to be basically because they cannot afford to, otherwise the reasons the Governor has annunciated seem to me completely correct. Q120 Angela Eagle: I was quite interested, Charlie, in your recent speech where you were talking about the favourable terms of trade and the shifts there. What do you think we can do strategically as an economy to try to ensure that those terms of trade and our comparative advantage remains as favourable as it is now so that essentially we can get more economic activity without having the kind of pressures in costs or inflation than we have seen happen in the past? Do you think, for example, that the expenditure in the science base is one example or do you have other examples of what we can do to try to ensure that we maintain comparative advantage in a globalised market? Mr Bean: The key is obviously identifying activities that you can do well that other parts of the world cannot do so well and where we have a natural advantage. An obvious area that we can build on is financial services. I have a lot of sympathy with the notion that what we want to do is improve the skills base, improve research capability and so forth. The one thing that is important to bear in mind is that it is not always easy for the governments to know how expenditure is best targeted in this area and so it may be better to make sure that what you do is, whether it be business or academia, whoever is carrying out the research, provide them with the best opportunities for undertaking it. We learnt in the Seventies that it can be a mistake if Government actually tries to pick winners. Its track record of picking winners has not been terribly successful not just in this country but in other countries. Q121 Angela Eagle: We should have a more intermediate structure between academia and basic research and turn it into something practical. Mr Bean: Facilitation is the key word and this is somewhere that Richard Lambert's report was particularly directed at. I think one of the things that Richard focused on was precisely trying to improve the flow of ideas between various parts of the economy and they are the sort of things which I think are valuable to try and do. Q122 Angela Eagle: There is another issue that I see as quite interesting which is that there are some skill shortages beginning to appear now and the Equal Opportunities Commission recently published a very interesting paper demonstrating that all of the areas where there are skill shortage emerging, such as at apprenticeship level for example, such as engineering and some of the building trades, plumbing, are overwhelmingly male and there are almost no women involved in them. Do you agree that if we can try to get women involved in non‑traditional training such as that we could solve skill shortage problems without creating some of the wage pressures and full capacity pressures that we have seen in the past, and that shifting opportunity to those areas where it has not been before for new forms of employment for women might be another way of making our labour market more efficient than it is at the minute? Mr King: It is an interesting point. Clearly steps in that direction will take time, the idea that suddenly in the space of this business cycle you can transform engineering and its image as being an all male profession. It is not an all male profession, it is changing, certainly in universities it is changing, but nevertheless it will take a long time for this to feed through. It is an interesting point which I had not really thought about, but the current set of labour shortages are very much in these areas. It does suggest that there are clearly benefits to making these long‑term changes, but I suspect that this business cycle is not going to be the cycle where we will see the benefits of it, it will take longer to come through. Ms Lomax: I think the return to becoming a plumber could be very good. I do not see why girls could not re‑think their attitude towards plumbing quite sharply. Q123 Angela Eagle: Or even their employers, the people who are offering the apprenticeships. Ms Lomax: I do not think I would put the faith in the power of economic incentives to speed up change even in an area like this which is absolutely beset with cultural inhibitions on the side. Q124 Angela Eagle: If we had more women builders they might clear up after themselves rather better than some of the current ones do. Mr King: Almost certainly. Q125 Mr Fallon: Governor, if I interpret page 22 of the report correctly, you believe the weight of evidence suggests that companies are now operating pretty close or above normal capacity levels. Mr King: Broadly speaking, yes. There is no precision to be had here. It is difficult in our view to think there is a great deal of spare capacity. Q126 Mr Fallon: Earlier in the report you warn that "the government's current plans imply further strong growth of nominal spending into 2005. And the quantity of resources absorbed by the government is expected to rise." That looks like a coded message that you would expect government or want government to tighten fiscal policy. Mr King: No, it is a statement of the implications of existing fiscal policy. Q127 Mr Fallon: The implication that it should be tightened? Mr King: No. Q128 Mr Fallon: That it will be tightened? Mr King: No. It is not a statement about what should happen to fiscal policy in the future. It is merely a statement that under current fiscal policy the resources absorbed by the public sector will go on rising. Q129 Mr Fallon: You are clearly worried about this because in a speech in June you were hoping that the golden scales would "swing back to what is known in the trade as a sustainable fiscal position". Are you more worried now than you were then? Mr King: What I said in June and what I feel now is that as far as the Bank is concerned, I will repeat the point, it is important that the fiscal rules are met and the Chancellor has said he has every intention of meeting these fiscal rules. I am not in the business of trying to second‑guess whether or not those rules will be met because we are not in a position to make those forecasts. It is not an optional extra, it is an integral part to the overall macroeconomic framework and I think the Chancellor clearly agrees with that. Q130 Mr Fallon: You will have seen the total borrowing figures and it is the first time in ten years that we have been in the red for October. You are not seriously suggesting to the Committee you are less worried than you were in June, are you? Mr King: I am not saying either more or less. Q131 Mr Fallon: You are not more worried? Mr King: I am saying that the position we have adopted is one in which we are concerned that the fiscal rules be met, that is an underlying part of the overall strategy. I am not making any commentary on whether or not those rules will be met, we are not in a position to do that. What is important for the framework as a whole is that the fiscal rules are met. That is a view I hold today. It is one I held in June and it is one I held back in 1997. It also seems to be one the Chancellor holds too. Q132 Mr Fallon: You have seen the figures for October? Mr King: Yes, but what the figures turn out to be at the end of the fiscal year is almost impossible to judge. We have seen time and again that changes in the last few months in the fiscal year make quite a big difference. That is a question for the Treasury, Customs and Excise and the Revenue to answer. The figures for tax revenues have probably come in lower than expected. Why and what that means for the rest of the year and whether there are compensating factors is not something on which I feel qualified to give an opinion. It is something on which the Treasury is qualified to give an opinion and I am sure you will be probing their views after the PBR on Thursday. Q133 Mr Fallon: We certainly will. You are accounting for the actions of the Monetary Policy Committee since last June, certainly for that quarter. Is the current level of public spending and public borrowing sustainable? Mr King: The Chancellor's view ---- Q134 Mr Fallon: No; your view. Mr King: We do not have a view as to whether the numbers in this particular year will or will not turn out to be consistent with ---- Q135 Mr Fallon: At the moment do you think it is sustainable? Mr King: I am not giving any judgment as to whether or not the current set of numbers is or is not consistent with the rules. I am not in a position to do that. Only the Customs and Excise, the Revenue and the Treasury, which have access to those detailed calculations, will be able to say whether, given what has happened in the first six or seven months of the fiscal year, there should be a change to the projection for the fiscal year as a whole. On Thursday we will see what their expert results tell us. I do not know what those numbers are and I am certainly not going to speculate on what we will see about the PBR on Thursday. What I have said is it is important to the MPC that the fiscal rules be met. Whether or not they will be met is not something I feel qualified to judge. Q136 Mr Fallon: You did judge in June that the position was not then sustainable because you were worried about the scales swinging back to a sustainable position. Mr King: I was merely repeating what was the view expressed in the budget which was that tax revenues would pick up. That is the projection which underlies the budget projections. Whether or not that is likely to happen is not something on which I feel qualified to judge but it was part of the budget projection that tax revenues between then and the end of the cycle would pick up quite sharply. Q137 Mr Fallon: You are not able to say, given what has happened since June, whether that is more likely to happen or less likely to happen? Mr King: No, I do not feel able to say that because, as we have seen time and again in the past, changes to flows of revenues in the last few months of the fiscal year which we do not know about yet often offset apparent shortfalls in revenues in the first six or seven months. Many commentators have got this wrong in the past and I do not feel qualified to judge that. I am not saying that the commentators are wrong; I am merely saying that I do not feel qualified to judge. Q138 Mr Heathcote-Amory: Governor, you just said something rather surprising which is that you cannot or do not estimate the fiscal position at the end of the year. You said it is difficult to measure. Everything else is difficult to measure in the future by definition but it is your job to anticipate events rather than simply reacting to them. Are you saying that you do not have estimates in the Treasury for tax receipts and/or total government expenditure for the end of the year? Mr King: What we have are the actual figures that have been published for the part of the fiscal year that we have seen the outturns for so far and the Treasury's view, published in the budget report - that is the basis on which we make our projections - as to what the effective tax rates for the year will turn out to be and nominal spending bands. We always take as the basis for our forecast the latest published plans of the Treasury for both nominal spending on the one hand and, given a path for economic spending and activity, the tax revenues that will be generated on the other. Q139 Mr Heathcote-Amory: There have been some up to date estimates made, notably by The Financial Times a few days ago, about an overshoot on public expenditure and a further undershoot on tax receipts, notably on corporation tax. Indeed, the paper says that for the government to meet its corporation tax target receipts would have to be over 40 per cent higher for the remainder of the year than they were last year, which is clearly unattainable. Are you saying that The Financial Times have an estimate but you in your work simply operate on published Treasury figures? Mr King: Yes. I am in no position to generate an estimate. I do not know how The Financial Times do it. I suggest you ask them. I do not have access to the detailed, internal information of Customs and Excise and the Revenue about these figures. There are big swings in revenue flows between the early and later parts of the year. We have seen that time and again in the past. Many commentators were proved wrong because they had not taken this possibility into account. I simply do not know. I am not making a forecast. It is the government's responsibility, not that of the Bank of England, and you will see the PBR on Thursday. That is a set of numbers that we can take into account. Q140 Mr Heathcote-Amory: Can I establish that you have no internal forecast other than what we have seen? Mr King: No. Q141 Mr Heathcote-Amory: I find that alarming and surprising. Could I turn to monetary policy? There has been a swing in economic fashion against monetary policy which one watches with some surprise. I do not think you have mentioned monetary aggregates at all today. Ms Lomax, you are responsible for monetary policy. Are you surprised by this switch away from attention to monetary aggregates or does the Bank watch them rather more closely than is apparent from the inflation report? Ms Lomax: I think we watch them more closely than has been apparent from the conversation so far today. We certainly discuss them and monetary aggregates are a regular part of the armoury of statistics on which we are briefed. We discuss them in some detail every month and try to work out what they are contributing to our understanding of the overall position. The fact that we have not mentioned them so far today is misleading. There is something in the inflation report about monetary aggregates. There is regularly a section. In fact, I think this is more or less where we start and it appears in the minutes every month, so I think we do pay attention. Q142 Mr Heathcote-Amory: There is one short paragraph I find in the latest minutes which simply records that there is a marked contrast between monetary growth which continues at a rate way above any retail inflation and actual inflation. This is just another disconnection. We are discovering all the time. We have discussed the disconnection between capacity constraints and low inflation. There is an apparent disconnection between housing price growth and household expenditure. Is it another puzzle, do you have a reason for this or has your faith in the quantity theory of money as a guide to policy completely collapsed in the Bank? Ms Lomax: I am sure that we all would give a different answer to that last question as to how much weight we put on monetary aggregates. Marion Bell is not here today but she pays a great deal of attention to monetary aggregates. Each of the people at this table probably pays slightly different attention. My faith in monetary aggregates as a guide to setting interest rates is considerably less now than it would have been 20 years ago as a result of somewhat bitter experience then. I would not dismiss monetary aggregates as an important source of information. I would certainly want to put them alongside other pieces of data and, where it raises questions, as it has done in recent months, I think it is well worth having the discussion. Mr King: I think they are important and I do attach attention to them but the idea that there is some fixed time, invariant, mechanical relationship between a particular measure of money and the subsequent growth in nominal demand is too much to expect. There are all sorts of changes in the velocity which occur. The important thing is to ask do we understand why there might have been a change in velocity which would explain why in the past the link has not been quite so strong, but it could well be in the future. I think the buoyant growth of the monetary aggregates is one reason for thinking that our main projection is steady growth with low inflation. We are not projecting a sharp slow down and one of the reasons for that is that the buoyancy in the monetary aggregates would give one some confident thinking that there is clearly upward impetus to the growth in nominal spending. Q143 Mr Heathcote-Amory: Clearly there is no easy connection between monetary growth and inflation. We have all learned that. Would it be in order to analyse this and the reason for it? You have alluded to the possibility of changes to the velocity of money but this still is a puzzle. Given the really quite large increase in monetary growth, there could simply be a longer lag before this manifests itself. Is it perhaps a suggestion I can make that the Bank does publish some more information about disconnection? Mr Bean, I do not know if you are a monetarist by trade or background or whether Keynesianism is back again, but these things are so prone to fashion that we may be missing something here. Mr Bean: This is an area where we have already done quite a lot of work. One of my six divisions in monetary analysis is called monetary assessment and strategy. A large chunk of what they do is following and understanding what is happening to monetary aggregates and their credit counterparts. Part of the story for rapid monetary growth recently is essentially portfolio shifts. Savers feel happier holding their wealth in the form of monetary assets rather than equities because of what has happened recently in the stock market and other forms of wealth holding. It is probably also partly connected with what has been happening to the dynamics of the housing market. As house prices have risen, as older people have been selling their houses to younger people who have had to take on bigger debts to buy the houses, the older people have been taking out the proceeds of that and typically putting them into relatively liquid form. Q144 Mr Heathcote-Amory: Could that process reverse or unwind to the detriment of inflation? Mr Bean: The issue would be how quickly it unwound because at some stage presumably this extra wealth that the older people acquire will be spent, unless it is passed on to their children. The issue probably for us is whether it gets spent slowly or comes through in bursts. Our view is that it is more likely to be spent relatively slowly. You have to offset that against the fact that younger people have acquired more debts which hold back their spending. There are subtle issues involved here. Going back to the point about should we report more of this, we have in the past had boxes in the inflation report on the behaviour of the velocity of circulation, both from our own money and abroad money, not just for this country but also from an international perspective. I think we have already put quite a bit into the public domain. Mr King: It is interesting that this phenomenon that you mention and that Charlie referred to, the switch of portfolio wealth by households into money rather than other assets, has also been noticed by the European Central Bank as something which they have seen occurring in their area as well. It is conceivable that if this has been occurring primarily in those countries which have moved from high to low inflation following monetary union, again, it is one of these consequences of a shift to a world of low inflation. Q145 Mr Heathcote-Amory: They do track monetary growth more closely. Mr King: No. They have a reference range for it which we do not have for good reason, which is that we then spend all our time explaining why, because of movements in the velocity, money was not close to its reference range. What we have is an inflation target because that is what monetary policy can hope to achieve. That is the objective of monetary policy. I gave a lecture a couple of years ago pointing out that we spend a great deal of time looking at money. If you ignore money, you would find yourself ultimately in the completely ludicrous position of trying to say that inflation was always and everywhere a real phenomenon. Inflation is a nominal phenomenon so you have to bring it back to the growth of nominal magnitudes in the economy, of which the growth of money and spending are key parts. It does not follow from that that therefore you should think in terms of any mechanical or stable link necessarily of a given monetary aggregate and the path of nominal spending. It certainly is not something that we either ignore or say is old fashioned or not something one should look at. We do and, as Charlie said, there is a division which monitors these things very carefully. It is the Bank of England that collects the statistics on money. It is our major statistical responsibility. Q146 Mr Walter: In the inflation report press conference you stressed the importance of ensuring that the euro and other floating currencies do not have to bear all of the adjustment against the dollar. The deputy governor of the People's Bank of China, Mr Li Ruogu, in an interview with The Financial Times last week insisted that an appreciation of the Chinese currency would not solve the US's structural problems. Were you disappointed that China has apparently rebuffed pressure to revalue its currency, which it did at the recent G20 meeting? Mr King: I was at the G20 and there was no pressure at all on China to do that. I had breakfast with the governor of the People's Bank. We had a very good conversation about all these things. The point I was making was a much broader one. It is not to do with China; it is to do with the international monetary system, which is something that has not been talked about very much for a long time. We went through a period since the Second World War when we had the Breton Woods system when the idea was that all the major economies would have fixed exchange rates. Then, after the collapse of Breton Woods, around 1970, we moved to a regime in which all the major economies had floating exchange rates. Now, in the last few years, we have moved to a sort of hybrid system in which some of the major currency blocks float against other - Japan, the euro area, the dollar, ourselves - but in which other growing and very important parts of the world economy, not just China but the whole of Asia, have fixed exchange rates against one of those currencies, the dollar, and that currency happens to be one which has a very large current account deficit. That hybrid system, combined with the existence of a large US current account deficit, does raise some potentially very awkward questions about how adjustment to the US current account deficit, which at some point will be necessary, can come about. Those are issues that we need to talk about collectively. I think the combination of the UK presidency of the G7 next year and the Chinese presidency of the G20 next year offers a natural way in which we can bring the different groups together to talk. It is completely wrong to see this as some people, even in officials positions do, that the US current account deficit is the fault of the US or someone else's surplus is the fault of that country. None of these things is true at all. These surpluses and deficits are the equilibrium outcome of all policies which all the countries are adopting. It is no good just pointing to one policy and saying, "That is what is to blame." Therefore, I think that during the course of next year under both our presidency and I am sure that of the Chinese with the G20 there will be an opportunity to start to talk again about a set of issues that have not been talked about for a long time, such as how does the international monetary system operate. Q147 Mr Heathcote-Amory: Have you discussed with the Chancellor that, when we do have the presidency of the G7 or G8 next year, we will have that on the agenda? Mr King: Yes, it is one of the things. The one I would say he would put at number one is interest in development, in reducing poverty worldwide, but the fact that the international monetary system is something we must talk about I am sure is something he would wish to push. He has encouraged us to do that. The central bankers already do this in their fora and I think we need to involve finance ministers as well. Q148 Mr Heathcote-Amory: Can you give us any flavour of how you see that debate evolving? Mr King: No. It is for the participants in the debate to decide for themselves where it goes. We should discuss the issue but I do not want to say what the answer is. That is something that must come out of the discussions that we will have. Q149 Mr Heathcote-Amory: Can I focus on the position of sterling for a second? In your inflation report, in the overview at the front, you use the sentences: "The price of imported goods and services increased reflecting the pick-up in global trade prices. The recent depreciation of sterling is likely to accentuate this tendency." You obviously highlight the fact that the sterling exchange rage index fell between the August and the November reports by 3.9 per cent and you go on to say on page five, "Sterling's depreciation can also reflect longer term factors. In particular market participants may become more concerned about the sustainability of the UK trade deficit which has averaged more than 3 per cent of GDP during the past year." Do you want to expand on that? Mr King: It speaks for itself, does it not? Is there a particular aspect you would like me to comment on? Q150 Mr Heathcote-Amory: Do you see the UK trade deficit as something which is entirely due to domestic policies or do you think it is part of the overall problem of sterling's relationship particularly with the euro and the dollar? Mr King: There are two main factors lying behind it. One is that we have had a much stronger growth of domestic demand than our major trading partners in Europe and that has inevitably meant that during the course of this cycle we have had pretty robust growth and they have not. We have had a larger current account deficit and trade deficit than we would otherwise have had. The second one is that we are still seeing the lagged effects of the very sharp appreciation of sterling against the euro following 1996 until about a year or so ago. It has come down and I think the exchange rate now against the euro could not fairly be described as uncompetitive. Against the old Deutschmark rate, if you remember, when we left the exchange rate mechanism, the central parity was 295. That exchange rate went up to the 320/330 range. It is now down to around 280. That does not pose major competitive problems but I think there is a legacy of that, which is that some capacity disappeared during the period of very high value of sterling against the euro. Those markets will need eventually to be won back, so a combination of the legacy of the high value of sterling against the euro and the fact that domestic demand growth has been pretty robust in the UK in comparison with our major trading partners both account for the size of the trade deficit. What will happen in the future is hard to tell and I think we have to recognise too that the overall current account deficit is much smaller than the trade deficit because we have a surplus on investment income. That is a much more unpredictable item and that can move all over the place. I would not be entirely dismissive of the size of the current account deficit, but I do think that with exchange rates, particularly against the euro, having adjusted now to a much more competitive level over time that may well come down and I would expect that, as the euro area gradually picks up, as we hope, again that will contribute to a reduction in our trade deficit. I do not think it follows inevitably that sterling needs to fall to reduce the trade deficit from here but it has been in recent years at pretty high levels and it has now come back to a much more sustainable level. Q151 Mr Heathcote-Amory: Can I go back to the situation with regard to the dollar? Your November minutes identified market concerns about the US deficit outlook as being the key factor driving currency markets this autumn. How much weight do you put on the US being able to find a sustainable solution to both its current account and its budget deficit? Mr King: I think the United States itself realises that and Chairman Greenspan has spoken on a number of occasions about the need for both budget consolidation in the long run and that, at some point, the current account deficit will need to adjust. These factors have been there for a long time and I do not think in themselves they are terribly helpful at predicting currency movements. When the G7 met in Boca Raton in Florida, I remember very well we had a discussion then on exactly these lines. None of the arguments that we can make now was absent then, so again there was a US current account deficit. Nothing that we knew in that room was not known to people outside. Everyone knew there was a large current account deficit and budget deficit that would need to adjust in due course. If everyone knew that, surely the dollar would have adjusted already? Indeed, it has come down quite a long way. What is the argument for thinking it will fall sharply further? I do not know what will happen to the dollar over any particular finite period. That is extremely difficult to predict, almost impossible, but that there will be a need ultimately to see adjustments to the US current account deficit balance between savings between savings and spending in the US and corresponding adjustments in the rest of the world economy is undoubtedly true. The issue is the speed and how that will come about but that is not something which is a matter of high frequency concern. This has been an underlying issue for some time. It will be an underlying issue, I am sure, for quite a long time to come. It does play very much into the international arena as to how quickly these adjustments can be brought about because an adjustment in the US current account deficit by a matter of arithmetic means an equal and opposite adjustment in other countries' deficits. Their policies and how quickly they are prepared to make adjustments also comes into play. Q152 Mr Heathcote-Amory: You were talking about the G8 and restructuring the international monetary system and so on. If we look at the US current account deficit and the US budget deficit, there is a rather convenient relationship that those who are building up large dollar holdings are then spending those dollar holdings in financing the budget deficit. Do you sense that there is a tendency on the part of particularly the Asian central banks to move some of those dollar assets into euro assets and that could be a prelude to what might be a further downward pressure on the dollar as they move out of dollar assets? Mr King: I am sure they are very conscious of the dangers of specialising solely in one currency, although I think there are two important caveats to be made. One is that I am sure everyone else in the currency markets can work that out too. The idea that there is to be some diversification in the future I do not think will come as news and, if it is not news, it should not in itself change the level of the exchange rate. Secondly, there was a very good reason why many of the Asian central banks built up their foreign exchange reserves in terms of dollars. During the Asian financial crisis, what became very apparent was that they felt quite strongly that the terms and conditions under which the IMF was prepared to lend to countries in Asia were rather different than the terms and conditions on which the IMF was prepared t lend to countries in Latin America and the degree of conditionality was excessive. Therefore, the idea that one way to get round the difficulty of relying on the IMF was, as I said in a speech at the time, to build up a facility for a do it yourself lender of last resort to your own banking system, to hold very large dollar reserves. The problem that Korea faced, for example, in the late 1980s was not because Korea was insolvent; it was because Korea had a shortage of dollars to lend to its banking system which had got into a very unmatched position. Therefore, if their central banks have access to large dollar foreign exchange reserves, that can help them in helping to deal with potential difficulties with their own banking systems. I am sure that one of the reasons for the large build up of foreign exchange reserves in Asia is to give them the ability to deal with some of the potential problems that could arise in future with their own banking systems. From that perspective, they need dollars, not other currencies. I doubt that there will be a wholesale shift into other currencies. These issues clearly are ones that the Asian central banks will have to think about and there is no doubt is that a big change over the last 20 years is that most foreign exchange reserves are now held in Asia, not in north America or in Europe. Q153 Mr Beard: Whichever way the American current account is balanced, is it not likely to reduce its role in providing demand for the world economy and therefore reduce the growth rates in the world economy? Mr King: I do not think that last bit necessarily follows because the best way to achieve adjustment would be for the growth rate of demand in the United States to come into balance with supply. An interesting question is what that means. If the rapid growth in demand in recent years has been in anticipation of a faster growth rate of the US economy in future with higher productivity growth, then maybe the US economy can grow in the future faster than it did in the past. Even the US economy may not be one that sees growth rate falling back too much. That is one aspect. In terms of the rest of the world, what has happened is that the growth of demand has been running below the growth rate of supply. We need a pick-up in the growth rate of demand elsewhere. The areas that is most true of are the European Union, continental Europe, if you like, and Japan. We are seeing gradually a pick-up in both of those areas. It is not dramatic yet but there are signs that they have picked up over the past year and I think it reasonable to suppose that they will continue to grow in the future. Those are the two parts of the world economy that need to grow rapidly to offset any slow down, if it occurs, in the growth rate of the US economy. Q154 Mr Beard: You do not think a continuation in the falling dollar would inhibit that necessarily? Mr King: This goes back to the initial question that Mr Walter asked. If the entire burden of exchange rate adjustments in the world economy takes the form of a change in the bilateral dollar/euro exchange rate, it could make life much more difficult. It would be much more difficult for the euro area to maintain buoyant growth than if that change in the dollar exchange rate were to occur through other means. What the adjustment in the dollar would require, if it does indeed require a further adjustment, is in the real dollar effective exchange rate. That is quite different from the nominal dollar/euro exchange rate. There are two ways that there can be differences. One is the exchange rates can change. The dollar can move not just against the euro but against a wide range of other currencies, not just the Chinese but other currencies as well. Also, there can be changes in inflation. One of the issues which I am sure the Chinese authorities have been thinking through and are very conscious of is that it is possible that, at the current level of exchange rate, inflationary pressures might build up in China. If that were to occur and the Chinese inflation rate were to be greater than that in the United States, there would be a fall in the dollar real exchange rate without a change in nominal exchange rates. In terms of the trade deficit, it is the real, effective exchange rate index for the dollar that matters. That is not the same as the nominal dollar/euro exchange rate. It is important to distinguish between those two and that is what I think the debate is going to be about. Q155 Mr Beard: If those factors were not necessarily an inhibition on growth, what was the reason why your estimate of growth fell between the August inflation report and the November inflation report? Mr King: The estimate for growth of? Q156 Mr Beard: GDP. Mr King: In the UK? Q157 Mr Beard: Yes. Mr King: We are seeing a slower growth rate in the third quarter. We have seen some slowing in the pace of consumer spending - at least, we thought we had. Retail sales appear to show some slowing. The reports, surveys and our own agents support that, although the ONS estimate of total consumer spending has not slowed down. Consumer spending on services has picked up enough to offset the slow down in spending on goods. There has been a slow down in investment spending but all these are still pretty provisional. What we have seen overall in terms of our forecast for the next two years is that we expect slightly slower growth during the course of the next year, although there is not really any change to our forecast looking further ahead. Our central projection for growth of the UK economy is that growth is going to be fairly close to trend right through the forecast period. That is only a central projection and it could well be on either side of that, but we start now with growth fairly close to trend. I would guess at about the fourth quarter we are pretty close to trend and we expect that to be maintained. Q158 Mr Beard: Moving away to other factors affecting the stability of the market, Sir Andrew Large recently intervened in the debate about the problems raised by the way the European Commission has chosen to only partially implement International Accounting Standard 39. Would the Bank agree with the chairman of the Financial Services Authority, Callum McCarthy, that it is a matter of principle that only standards issued by the International Accounting Standards Board should be endorsed by bodies such as the European Commission? Otherwise, confusion is going to arise. Mr King: Yes. What Sir Andrew was saying, "Let us just take a moment to stop and think before everyone rushes down a road that could lead inexorably to having multiple accounting standards around the world." The effort to develop and put in place international accounting standards is very important and there are many areas in the financial sector - accounting is only one; the whole aspect of supervision and regulation is another - but the idea that one can carry out this solely domestically is unrealistic. We need to make international progress together and I think Sir Andrew was saying, "Let us be a bit cautious now. Let us stop and think for a moment." It is very important that we maintain the international character of these standards. Q159 Mr Beard: Given that the United Kingdom is a major centre of banking and financial markets, what are the Bank and the FSA doing to create a coordinated United Kingdom approach to this sort of matter? Mr King: We talk to them regularly about these things but in terms of legislation that is primarily a matter for the FSA. I have regular meetings with Callum McCarthy and Andrew Large has regular meetings with both Callum, Hector Sants and other members of the FSA. Of course, he is a member of the FSA board. Q160 Mr Beard: What do you think can be done about it? Mr King: I do not want to say in public what should be done about it. What Sir Andrew was saying was he did not want to give a prescription either. He just wanted to say, "Let us just stop and think for a moment before people go too quickly down the path of divisive differences in international standards." Q161 Mr Beard: The Bank has announced profound reforms in the way it operates in the money markets, widening commercial banks' access to the Bank to try and reduce overnight volatility in the UK money markets. You said in July that you expected to publish details of the reforms in the early autumn. Could you give us details of the current situation? Mr King: Yes. We have just published the consultation document for the market and the details of how the system will work. We would hope that some time next spring/early summer we would be in a position to announce a final timetable for the process. What I would hope is that around the end of next year is the sort of time that we would like to see these reforms being introduced and going final. I do not want to give a precise date now because the whole point of the consultation is to find out from the firms involved precisely what will need to be done. We set out the principles. This exercise started by saying that we wanted to initiate reforms to reduce overnight volatility, to bring us up to the frontiers of international best practice in this area. We then consulted with the market and we announced the broad direction in which we wanted to go with averaging so that banks would only have to hold an average balance with the Bank of England. That is similar in principle to the systems which are used abroad, both in Europe and North America, and we deliberately chose it. I hope we can make some refinements and improvements to the system so that we will be right at the frontiers of international best practice. We want to consult with the market on the long list of detailed questions that were set out in the consultation document. We will look at the responses to that and, around next spring, we will announce our final timetable for that and then we will work with the market to put them in place. I am glad to say these have been broadly welcomed by the market and I am very keen on this because I think it is important in all areas of our activity in the Bank that we really are striving our best to be at the frontiers. I think in terms of money market operations we were not. Q162 Mr Beard: Will these reforms have any implications for the conduct of monetary policy or for the retail markets? Mr King: No, they will not. It does mean that the MPC can be more assured than they were that, when they set their policy rate each month, the interest rates and overnight markets will be very close to the rate that they have set. There is not much point sitting in a room and agreeing what the repo rate should be if it does not turn out to be that. I think it will give some confidence and assurance to the MPC that our decisions are implemented in the markets. Q163 Mr Beard: Moving to hedge funds, in the US we have seen a split open up between the Securities and Exchange Commission, which wants to monitor hedge funds more closely to ensure orderly markets, and the Federal Reserve which values the liquidity hedge funds have brought to markets and feels they should remain virtually totally unregulated. Should we in Europe initiate moves to monitor the activities of hedge funds more closely? Mr King: Let us start from the position of why one would want to regulate hedge funds. What would be the motive for wanting to regulate hedge funds? In general, one might have two motives. The first would be to protect consumers. In the case of hedge funds, that does not seem to be a terribly compelling motive. Very few individuals invest in hedge funds and those that do must be extremely high net worth. Whereas I am inundated at home with offers of credit cards and cheap loans allegedly, I have not received a single offer at home to invest in a hedge fund. That may reflect a rational appreciation of my net worth. There does not seem to be a strong motive there from the point of view of consumer protection and anyway that is a matter for the FSA, not the Bank. The second motive is to do with concern about the impact of hedge funds on financial stability. In turn, there are two aspects to that. One is would the activity of hedge funds pose risks to the banks that finance the hedge funds? That is something which both the Federal Reserve and the Financial Services Authority in the UK think about very carefully and monitor very closely. I have talked to Callum McCarthy about this. The FSA have done a lot of work trying to make sure that the banks in Britain when they lend to hedge funds both know about the funds to which they are lending and that their exposures are not too large and are not creating any risks to the banks themselves. That is one aspect of financial stability and that is for the FSA and they are working very hard on it. The second one is could the hedge funds be creating risks to financial markets directly? That is, are there any situations in which they are building up very large positions or holding assets for which there are at most only one or two counterparties in particular exotic instruments, for example, such that if the hedge funds had to unwind their positions they could lead to big impacts on market prices which would then have an impact in turn on a wider set of financial institutions. That is much harder to find out about. Then the question is how would you discover information about this. It has been suggested by some that we impose reporting requirements on hedge funds and that form of regulation would give us information about financial stability. It is conceivable that those reports would be useful but I am a little sceptical because the trouble is that hedge funds are par excellence examples of institutions whose balance sheets change quite dramatically from week to week, particularly when they get into trouble which is when you need to know about it. Turning up the last report three months ago that they submitted to some regulatory body with their balance sheet has very little value when you get to a crisis. What you need to know is what is their balance sheet today and how did it change over the last 24 hours. I suspect that imposing typical regulatory requirements would not show up any useful information at all and we will do far better by trying to do something a little bit old fashioned. It sounds a bit naïve but it is just sharp eyes and ears. The market intelligence function of the Bank which I set up last year is designed precisely to do this. It cannot guarantee success but the idea is that, by being out and about in financial market and just keeping one's eyes open and one's ears attuned to what people are saying, we might pick up information about whether particular institutions such as hedge funds are getting themselves into positions such that there is a real risk that, in one market or another, there is a very large build up of positions that could be unwound quickly, and where the number of counterparties is sufficiently small that it could lead to very sharp swings in prices or the market will simply dry up altogether. That was the LTCM position. What I would suggest is that maybe the most practical way forward in this area is for the central banks and regulators to develop market intelligence functions to find out what is going on, because typically the broader range of investment banks and other financial institutions that act as prime brokers picks up a lot of information about what is going on. They are willing to share it with the regulators and central banks in general terms. Q164 Mr Beard: The head of the New York Fed has warned that the standard of financial controls in banks is eroding as they vie with each other to capture business from hedge funds. Is that going to be dealt with adequately by just having sharp eyes and ears? Mr King: No, but that aspect of it is the one I referred to earlier. It is the role of the FSA in ensuring that the banks that are lending to hedge funds and acting as their prime brokers are indeed themselves very careful about the risks they are taking. That is a matter for the FSA. Q165 Mr Beard: A particular point of issue in UK financial markets recently has been the explosive growth in stock lending activity, now worth about 80 billion a year, having doubled in less than two years. While this may provide benefits in terms of more efficient markets overall, recent cases have shown that in some instances this can lead to distorted markets in individual shares. Should short selling be monitored and regulated more closely? Do you see any need for greater disclosure? Mr King: That is a matter for the FSA so I do not want to pass judgment about whether it requires greater regulation or whether there should be more disclosure. That is very much in their area of responsibility. I would just offer one general comment which is that normally one would expect that the opportunity to engage in short selling would increase liquidity in the market and reduce volatility. It is the absence of short selling which often reduces liquidity and means that there is more volatility when there is a change in demand. I am sure there may be instances where people go overboard and that is not the case but, as a general proposition, if you were to ask what would happen if you ruled out all short selling, I would expect greater volatility rather than less. That may not be true in individual markets but as a general proposition I would say that. What happens in terms of regulation and disclosure is very much a matter for the FSA. Q166 Chairman: Professor Nickell, the November inflation report concludes that the net impact of an oil price rise is to restrain demand, suggesting that you see little need to tighten policy in the face of higher oil prices. Others have argued that this risks repeating the policy mistakes of the 1970s with a focus on demand, ignoring the danger that higher oil prices, by restraining confidence and investment, are likely to also constrain overall supply in the economy. Do you think the Bank is taking a major risk in its view that higher oil prices are ultimately deflationary? Professor Nickell: No. The key issue here is whether there are inflationary second round effects. The comparison with the 1970s is very instructive because in the first oil shock we had wage indexation in this country which meant that the second round effects came through month by month and that is one of the major causes of the serious problems we found ourselves in. At the moment, we are in almost exactly the opposite situation. That is to say, the inflationary expectations are currently very firmly anchored. That situation keeps tight control of the second round effects so our current judgment, with which I concur, is that we look at the oil price in terms of its impact on world demand and domestic demand and we in some sense allow the first round effects to go through, just as the standard argument. I do not think there is any risk. Obviously, we are always watching the stability of inflationary expectations and the behaviour of the labour market in this regard so that, were we to see or detect any significant second round effects, we would have to act on that. Q167 Chairman: Mr Lambert, the November inflation report formally forecasts a modest fall in house prices for the first time although the Bank warned of those risks through the summer. Some have accused the MPC of deliberately trying to talk the market down. Do you think you are? Mr Lambert: No, I do not think so. In our projections, we have to make assumptions about how we think house prices are going to perform over the period and, because we want people to know the basis on which our projections are made, we disclose what our central projection is. If we did not do that, we would not be being open and frank with the world. Q168 Chairman: Is there any sense in which the MPC will feel under pressure to bail out home owners with lower interest rates should house prices fall? Mr Lambert: Our central projection is of modest price falls. I think we are going to see on a month to month basis very erratic movements in house prices. I do not see the circumstances in which we repeat the experience of the early 1990s. My job is to look at demand and supply in the economy as a whole and set interest rates accordingly. That is what we do. I do not see the circumstances in which the position you suggest would arise. Q169 Chairman: As a former Financial Times editor, you do not have any special insight? Mr Lambert: As a former Financial Times editor, I know how headline writers work and one day they say, "House prices collapse. End of the world" and another day they might say, "House prices up." I do not rule that out at all in the near future. Q170 Chairman: Mr Bean, the November inflation report judges that there is now little linkage between house prices and consumption. As recently as the summer however you confessed that the MPC simply do not know how consumers will respond to a softening housing market. Has anything happened this autumn to make you more confident that the consumer can ride out any fall in house prices? Mr Bean: I do not think things have changed hugely since the summer. Our view that the link prices between house prices and consumption may be weaker now than it was in the past is something that certainly goes back to the main inflation report, the first time we explicitly mentioned it, even though we go into it in more detail in the box in the latest report. Even though the box makes clear that our central expectation is that the relationship may be weaker now than it has been in the past for economic reasons that are explained there, we are uncertain about that. That is something that is explicitly recognised in chapter six of the report. It is mentioned as a risk that the historical relationship may re-emerge and, just as I felt in the summer there is considerable uncertainty here, I still feel there is considerable uncertainty. That was something I also flagged in my speech last week. It is something that we would all share on the committee. Q171 Chairman: If there is no strong linkage between consumption and house prices does that mean you can ignore even a sharp fall in house prices when setting interest rates? Mr Bean: A lot will depend on what the impact is on demand. If it was the case that there was no impact on consumer spending given that our interest is in demand because it helps us steer inflation towards the target, yes, we would be pretty much ignoring it. I should emphasise that the box in the report does not say there is no link; it is just that the link is probably rather weaker than simply looking at past correlations might suggest. Q172 Chairman: According to the Halifax house price data over the past four years house prices in the north have risen by 135 per cent, in Yorkshire by 113 per cent and in the North West by 100 per cent. This compares to growth of 68 per cent in the south east and 58 per cent in Greater London. Given that over the past few years house prices have risen more rapidly in northern regions, is there anything that the regional data can tell you about the relationship between house price growth and consumption? Mr Bean: The big problem is we do not have good regional data on consumption or certainly up to date data on consumption. There is something you can learn from some of the microdata sets but the data is typically rather out of date. What we really need is good regional consumption data. If we had that, we could juxtapose it against the regional house price data and learn something useful but unfortunately we do not have the data. Q173 Chairman: Ms Lomax, Several independent economists have highlighted the risk that any decline in house prices will stretch a household sector balance sheet that is more than usually exposed to the housing market. What is your view on that? Ms Lomax: There might be some people who find themselves in that position but if you look at the aggregate, if you look at the average, over the whole household sector we judge that there is not a general problem. Current levels of debt are affordable even with higher interest rates and house price ease back. We have done some experimentation. We keep it very closely under review and publish projections in this international stability report as well as in the inflation report. Q174 Mr Plaskitt: Can I follow up on the regional consumption data? Mr Bean, who does collect the consumption data that is transmitted to you? Mr Bean: The Office for National Statistics. Q175 Mr Plaskitt: Who gives it to them? Mr Bean: It is surveys of consumers. Q176 Mr Plaskitt: Presumably they are done all over the country? Mr Bean: Yes, but the data is not provided on a regional basis to us. Q177 Mr Plaskitt: It is collected on a regional basis, is it not? It must be, surely? Mr King: Many are not. Many are surveys of large retailers. Q178 Mr Plaskitt: What about the big retail chains themselves? They collect their data store by store. Mr Bean: As it stands, the data that is provided to ONS will be a report from Sainsbury's or Tesco or wherever. Q179 Mr Plaskitt: They collect it store by store so it must be possible to see what is happening regionally. Mr Bean: In principle it may be possible but it would require a considerably larger data collection effort by the Office for National Statistics. It would require asking Sainsbury's to give them a detailed breakdown by regions. Q180 Mr Plaskitt: I do not understand how it makes more work because it must exist. All those groups count their performances store by store so the data is there. Mr Bean: The data exists in the sense that it could be retrieved. However, the data has not been collected on a regional basis in a form that we could use. Q181 Mr Plaskitt: If you want it, it does not seem to me to be so difficult to get it. Mr Bean: It would require ONS changing the forms. It is quite significant. It is not straightforward to change the basis on which you collect data. Mr King: Can I add a point which goes back to the original purpose of the question about regional data: what do we learn? One thing we can learn which does require regional disaggregation is the difference between spending patterns of those who own homes and those who do not. That is quite instructive because if you look back at the eighties and nineties much of the upward movement in consumer spending and the fall back was the same for home owners and for tenants. That suggests that the factors that were leading to the sharp movements of consumer spending and house prices were driven by some third factor common to home owners and tenants such as changes in expectations of future income. There is some evidence, although it is probably controversial, that in the down turn in the early nineties negative equity problems particularly hit the consumption of home owners. If that is the case, if you look at the more recent period, it is not the case that consumer spending seems to have been driven by expectations of future incomes because over the last five years the saving ratio has been broadly constant. You do not need to invoke a large house price effect in the last five years to explain the pattern of consumer spending. It is fair, as some people have said when commenting on our chart B, that you cannot just rely on a correlation in the last few years. That is absolutely right but the point of the chart is not to end there; it is to say there is something to explain. Why could it be that this correlation has tailed off so quickly? Part of the explanation has been that in the past much of the movement that has been assumed to imply a causation from house prices to consumer spending has been that both have been influenced by a common third factor. If you look at the last few years the other chart in the same box in the inflation report shows also strikingly that, whereas in the eighties and nineties, house price movements were quite closely correlated with the share of spending devoted to durable goods, that is exactly what you would expect if on the way up people were very optimistic about the future and their future incomes. That supported the high spending on durables. That correlation is very clear; whereas in the last five years house prices were rising quite rapidly but there is no upward shift at all in the share of spending on durables. What that tells you is that the structural factors determining consumer spending have been rather different in the last few years than they were in the late eighties/early nineties. Hence, it is not sensible just to conclude that because we saw a correlation in the past between house prices and consumer spending therefore we will see the same thing again in the future. Q182 Mr Walter: I wanted to end on a rather depressing note. Personal insolvencies in England and Wales are at the highest level they have been since the DTI collected the data in its current form since 1995. People filing for their own bankruptcy were up 40 per cent in the third quarter of this year compared with the third quarter of last year. Housing repossessions are at a four year high. Your report seems a little complacent about this. Mr King: No. There will be cyclical movements in those variables. Some of them are probably associated with changes in the legal form of bankruptcy and in the way repossessions are carried out. I do not think it is easy to adjust for that but you would expect to see movements over the business cycle and that is what we are seeing. We are seeing a slow down during the course of the past year, but we are a world away from the levels of all these variables in the early nineties. The broad economic variables that we are responsible for - primarily inflation - are still really on track. The picture of steady growth with low inflation seems in tact. We are not complacent about those things but I do not think there is much evidence that they are having a major, macro-economic impact. They may be having an impact - and certainly are - on certain households and certain families. That is a major problem but it is a problem for those families and households. Maybe it is a social problem. We should certainly think of how to deal with it but the responsibility given to the Bank of England is the macro-economic picture and I do not think at present those things are threatening the macro-economic picture. Q183 Chairman: There is a view that, as far as external members of the MPC are concerned, it should be the exclusive preserve of professional economists. As a non-economist, what qualities has Mr Richard Lambert brought to your forum? Mr King: It goes back to the discussion we were having before. I judge the quality of all members of the Monetary Policy Committee primarily not by whether they write large research reports or add to the burden of paper in our in-trays but by what they say and do, the decisions that they make and the contribution they make to the discussion on Wednesday afternoons and Thursday mornings. In other words, it is match day performance that matters. I am immensely impressed by the contributions that Richard makes on match day. I listen very carefully to what he says. He explains very clearly the nub of the question that we are facing and that is what matters. I would rather listen to a few minutes of Richard Lambert getting to the nub of the question than 30 minutes of many technical economists rambling on without getting to the point. Q184 Chairman: Mr Richard Lambert is not only a 90 minute man; he is also an extra time man. Mr King: He is an extra time man and a good striker too. Chairman: Thank you very much to you and your colleagues. |