Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1-19)


6 JUNE 2006

  Q1 Chairman: Good morning and welcome to the Committee's hearing on the Inflation Report. Not all of you need to answer every question. Whatever you think is your strength, you can answer. Could you introduce yourselves for the shorthand writer?

  Professor Muscatelli: Anton Muscatelli, University of Glasgow.

  Professor Quah: Danny Quah, London School of Economics.

  Mr Butler: John Butler, HSBC.

  Mr Saunders: Michael Saunders of Citigroup.

  Q2  Chairman: John and Michael, do you think that markets have interpreted the Inflation Report as a clear signal that rates will be moving higher in the coming months?

  Mr Butler: To some degree the markets are already there with the news you had already seen, but the clear message from the Inflation Report, with the constant interest rates and inflation under that scenario overshooting the target in two or three year horizon, was a signal that rates were more likely to rise than fall over that forecast period.

  Mr Saunders: I think that is fair. Markets had got there already and the MPC basically endorsed the market projections that rates were going to rise. Of course, if you look at the pricing of rates which was used as the base case in the Inflation Report, by the time the thing actually came out markets were priced in a further 28 basic point hike compared to what the MPC built in. Always part of the confusion over the Inflation Report when it comes out on the day, is that the market part of the rates which they use is not the same as the market part of the rates as of that date. When the MPC was endorsing the market view, they were endorsing a slightly more dovish market view than what was actually priced in at that point.

  Professor Quah: I think both the Inflation Report and market response have been consistent one with the other. The Inflation Report does pay mind to how markets are interpreted through movements in financial markets and asset prices and how markets are interpreting and forecasting their own policy actions, and from what I can tell the wordings used by different members of the MPC are well in line with that. This is also consistent with actions that central banks around the world internationally have taken recently such as the Central Bank in China, and also the news this morning about developments in the United States and possibly in the Eurozone area as well. All of these are pointing in the same direction, that there will likely be a slight increase in rates over the coming months.

  Q3  Chairman: What do you see as the biggest risks, both on the up and down-side? Anton, you mentioned in your paper about the issue of spare capacity and energy prices.

  Professor Muscatelli: It is a difficult situation to assess. You will probably recall that in my November memo I started to talk about the issue of slow investment feeding through to a slower rate of potential output growth. The difficulty is, of course, a lot of these things might be masked by other cyclical influences on productivity so they are not showing through very clearly. We are seeing productivity pick up, which is probably an unwinding of the labour hoarding situation, but we are not seeing the extent to which that lack of spare capacity might actually be influencing inflation. I am slightly concerned, and I can see where David Walton was coming from in terms of where we might be towards the end of this year. There are possibly signs that the spare capacity is not quite there and we might need to look for an increase in interest rates, but I would not see that coming through until later this year or possibly early 2007.

  Q4  Chairman: Michael and John, as City economists what would you say were the drivers behind the recent volatility in stock markets?

  Mr Butler: I think a lack of clarity and greater uncertainty in the market.

  Q5  Chairman: When you say a lack of clarity, is that more to do with the Fed?

  Mr Butler: Globally, but led by the US, there is a lack of clarity about the challenges facing policy makers. Up until now it has been fairly straight forward. People have just extrapolated forward in terms of rates arising in the US. The questions now are one about the growth of inflation trade-off. There are some signs maybe inflation is picking up globally but also in the US, but also some signs that the balance sheet adjustment led by the big rise in house prices and the considerable strength of the consumer poses down-side risk to growth. The question is how do policy makers react. Do policy makers react to the inflation pick-up or do they react to the prospect that growth could be slowing? That uncertainly has unsettled the market, and the best way to illustrate the lack of transparency out there is the fact that you had a professional economist on the Bank of England Committee looking at the same evidence and deciding to vote in three different directions. That amount of uncertainty had not been there or priced into equity markets and that risk led to quite a sharp correction in equities. The bigger adjustment for the Bank of England was the fact that it also meant people focusing on global imbalances, the dollar falling, and sterling picking up sharply, particularly compared what they had in the Inflation Report. In a sense, they have already had policy tightening from the financial markets.

  Q6  Chairman: Michael, you made the point in your submission that you share the MPC's view that consumption will recover only modestly, held back by high debts and modest real income in growth. In terms of relating that to stock prices, do you see that as a short-term correction or is it a longer term bear market?

  Mr Saunders: I put the slide in equity prices, which is a global pattern not just a UK pattern, as being an unsurprising consequence of the big global tightening of monetary policy. If you look around the world, pretty well every country's central bank is raising rates, or in the Bank of Japan's case is tightening monetary policy without yet raising interest rates. The scale of the global tightening cycle and its breadth makes it one of the greatest of the last 15 years. In those conditions it is not surprising that asset prices suffer. Equities, commodity prices, a range of emerging markets, that is what you usually see when there is a big global tightening of monetary policy. If you talk in terms of a contraction of global liquidity or a rise in the cost of risk, it boils down to the same thing: tighter monetary policy usually means weaker asset prices. The implication of that for the MPC is as John alluded to. They thought at the May meeting that we need to tighten financial conditions a little bit, not straight away but over the next year through a rise in interest rates. Since then the pound is up 2% cent to 3% and equities here are down 6%. Those swings, if they are sustained, deliver more than the amount of restraint which they judged would be needed. In other words, the market has done their job for them without them having to do anything.

  Mr Butler: Since the last inflation move in asset price, it would be interesting to see what their forecast would look like if they did a forecast today on those asset price movements, because the asset price rises, equity markets and the fall in sterling had been very instrumental in their optimistic view about GDP growth going forward.

  Professor Muscatelli: I take a slightly different view. From the latest report, and even the one before, it was clear they were not banking on very strong consumption expenditure anyway, so I am not sure if it really does impact on the monetary policy over the next two or three months.

  Professor Quah: It seems to me there were two aspects to your question: one had to do with the level of asset prices, and the other had to do with the volatility. My colleagues have already spoken on the levels issue so let me say a little about volatility. Your question has to do with why it is that we might see heightened variability, heightened uncertainty, in markets today. There are three large reasons: one is that people are still trying to figure out the new Chairman of the Federal Reserve. Ben Bernanke has done a superb job in communicating. He has always been an outstanding communicator, but there was a moment a few months ago when he made some off-the-record remarks that were subsequently reported. When one reads newspaper reports, things that he says, which seem to be very straight forward, are differently interpreted by many well intentioned, knowledgeable, financial journalists. People are still trying to figure him out. The second large issue is Iran, which has the world's second largest proven oil reserves and has taken a belligerent stance against Israel and most of the West. That might resolve from developments this last week as there seems to be greater reconciliation now, but we shall see. The third, which seems to be moot now, as well as US rhetoric on the dollar, the current account and China. All three of these things are not permanent. My prediction would be they will smooth out relatively quickly and we will see a return to greater stability.

  Q7  Mr Gauke: Why do you think long-term real interest rates have risen, and do you think that is going to continue?

  Professor Muscatelli: We have seen some of the unwinding of the speculative bubble that we were talking about at our last session, so that is partly an explanation. Partly it is also reflecting the tightening of monetary policy, and partly it is reflecting at a global level this reversal of the reduction in risk premium so a greater risk aversion. These are the three effects, both in the UK and more globally.

  Professor Quah: The puzzle I have follows very quickly on your question. We spent a lot of time a few months ago, not just we but in general, trying to explain why globally long-term real interest rates have been low and we came out with very good convincing reasons. Now what we have to do is look back and try and unwind those reasons to figure out why the reverse has started to occur. I would say there is a greater recognition of global economic growth and the general tightening everywhere.

  Mr Butler: The puzzle was why were they so low in the past. What you are having now is a normalisation of long-term interest rates. There is a greater uncertainty about inflation going forward. By historical standards, 5% long-term interest rates in the US is still incredibly low, and in terms of going forward it has the scope to rise further.

  Mr Saunders: I would put it in the context of global savings and investment balances. We know ex post savings and investment must balance as a sort of accounting identity. You can get an ex ante imbalance between desired levels of savings and investment, and real interest rates move to achieve the balance ex post. The last five years have been a period in which the global investment share of GDP was unusually low, hence real interest rates pulled lower and lower. For this year on the IMF numbers, the global investment share in GDP, and I stress global, is the highest since the mid-1990s and slightly above its long-term average. In other words, we have climbed out of that period of low global investment which was the main cause of low global real yields. You can add country specific factors on top of that, pensions and so forth, but the global conundrum, as Greenspan called it, and Bernanke referred to the global glut of savings, really was a story of global shortfall of investments which now is largely finished.

  Q8  Mr Gauke: Can I ask about global imbalances and to what you extent you see that as a major risk? The recent Spring conferences involving the IMF, how significant would that be? Do you think that stock market volatility has been connected to these global imbalances?

  Professor Quah: I think it is a huge risk. The US is still running a 7% current account deficit. Most of that is being financed by poorer countries in the world as part of this global imbalance, as my colleagues have suggested, saving more than they are investing and, therefore, putting their resources into the West. Some of that shows up in the UK. Even though the UK has a negative external debt position, it is getting a net investment income to the tune of 2% of GDP. What is happening is that many of these poorer countries are sending their funds to the West. They are getting a fairly low rate of return. A higher rate of return may be available elsewhere but no-one seems to be searching for them at this point. The poor people in the world are financing the consumption patterns of the rich. Should that unwind, the US is a major source of aggregated market in the global economy so contraction of the US economy has severe repercussions for the rest of the world. The risks are quite high. A flattening or a reverse term structure of interest rates is a rather good thing if it is done smoothly and gradually.

  Professor Muscatelli: I am very concerned because the pattern is very different from the last major dollar imbalance which we saw in the 1980s. First of all, it was not quite as big as the 7% we have just now. Secondly, that was rectified with a mixture of a falling dollar, which fell by about 15% between the mid-1980s and the late 1980s, but also with a correction of fiscal policy in the States, coupled with a correction of fiscal monetary policy in Japan and Germany who were the main surplus countries. The picture is a lot more complex now. It does not just involve three or four G7 countries but involves oil exporters, emerging economies and the US. It is much more difficult to engineer a correction at a global level, plus, as Danny said, it is fairly clear that there is still a continued willingness on the part of these emerging economies to finance the consumption of the US, and there is no evidence that the US is going to correct its fiscal deficit, which for next year is projected to be a structural deficit of 4.2% of GDP which is huge. Hopefully the new US Treasury Secretary will make a difference, but it is very concerning because the longer it goes on the bigger the correction that it will require to unwind. I am very concerned at the moment.

  Mr Butler: Over the last six months there are better signs that may have eased some people's concerns. If you wanted a resolution, one of the resolutions would have been stronger growth in the Eurozone, stronger growth in Japan, stronger growth in China so that the US is not the one powering all the growth around the world. That is happening, although it is not 100% sure that they are domestically driven and can, therefore, sustain global growth if the US starts to slow aggressively. I share the concerns here. One of the major concerns of the UK economy is the global imbalance. If that unwinds, it could unwind fairly aggressively. One of the big implications could be that over the last year the dollar has been supported by the fact the Fed has been hiking interest rates. If you are getting close to a peak in US interest rates, the focus would shift back onto the current account deficit, the imbalances, and you could see a sharp and disorderly fall in the dollar. If that happened, and sterling strengthened aggressively, the net export boost to growth in the UK would disappear and you are once again dependent on the consumer to drive UK growth which is not desirable.

  Mr Saunders: I basically agree with that. The MPC should have that as a down-side risk going forwards. We have had a small taste of that in the last month or so: dollar weaker, sterling pushed higher just on the perceptions that US rates may be near their peak. That is part of the way in which we may get the tightening we need through external pressures.

  Q9  Mr Fallon: You have just spoken of the down-side risks, but in your paper you take issue with David Walton on the up-side risk.

  Mr Saunders: Walton's view, as far as I can tell, is that there are up-side risks to growth coming from investment in net trade. My base case is for growth to be a little bit below the MPC, frankly not hugely different, but the thing which I would disagree with is that the risks around the MPC forecast are to the up-side. If you look back, net trade has not made a significant positive contribution to growth in the UK since the mid-1990s when the pound trade weight was about 20% lower. Export performance since then, once you strip out MTIC fraud, has been poor. Although global growth is good at the moment, as we were just discussing with these down-side risks going forward, I do not see anything which says that export performance is improving so dramatically and net trade suddenly goes from being neutral or minus to a plus. Investment is always more uncertain, either because you know the data is not great quality and can be quite volatile, but it would have to be really strong, far stronger than you see in any surveys at the moment, to produce a significant boost to overall GDP growth just because it is a relatively small part of GDP. There is nothing at the moment which indicates it is going to be that strong.

  Q10  Mr Fallon: You said the key aspect of the May Inflation Report was that the CPI inflation was expected to overshoot the 2% target throughout the forecast period in the current number of rates. Do you think they will change that opinion?

  Mr Butler: As I alluded to earlier, it would be interesting if they re-did their forecasts on the movement in equities and sterling. I think if you had updated for the 2% or 3% move in trade weight to sterling, that is equivalent to a 25 basis rate hike. My issue with the May Inflation Report is that the level of GDP in their forecast is very similar to what they had six months ago in November. The real difference is the inflation trade-off. They have a far inferior trade-off. They believe inflation is going to be higher for any level of growth. One element of that is they seem to be of the view there is very little spare capacity, which is David Walton's view, at a time when actually the labour market structurally seems to be improving. The labour market is probably loosening at the fastest pace since the last recession because of structural immigration issues. I do not see where the evidence is of the deteriorating trade-off between growth and inflation. If anything, I think it is improving.

  Q11  Mr Fallon: Nonetheless, you say there is a bias now towards tightening. Is that just because of Nickell's disappearance from the Committee?

  Mr Butler: It is more than just personalities. It is a feeling on the Committee globally that there is a different set of circumstances. The rising oil prices may raise inflation expectations and central banks around the world are on inflation alert rather than in the past six months they were on growth alert.

  Q12  Mr Love: I was interested in what Mr Saunders said in terms of his view about business investment going forward because Professor Muscatelli in his contribution to us took a slightly more optimistic view. Tell me why you differ from him?

  Professor Muscatelli: I differ from him probably in the sense that last year was such a bad year, and despite what was happening to business earnings I think we were all waiting for this to unwind and we can see the beginning of it. It is always very difficult because business investment figures are quite erratic and they are subject to considerable revisions subsequently, but, on average, if anything, they are revised upwards. We are beginning to see the situation unwind. However, business investment by itself cannot pull the economy. If you begin to see failing global trade and consumption still mitigated, it would be difficult for investment to be the only pulling force on the economy. That would eventually fizzle out but I see it as being a bit of a catch-up from the low investment we have seen over the last couple of years.

  Q13  Mr Love: I will come on to the international trade issues but let me press you a little bit and ask others to comment because the surveys tend to be somewhat contradictory. The CPI survey tends to be relatively pessimistic and do not see an increase in investment, but the British Chamber of Commerce takes an alternative view. What I would like you to do is to tell us what evidence you have for this unwinding that you think is occurring. I suspect your other three colleagues do not see that unwinding occurring. Tell us why you think it is likely to unwind. I think everybody has been waiting for it but nobody is actually convinced yet it is happening.

  Professor Muscatelli: The main evidence I point to is the fact that we have low real interest rates still in terms of long-term rates. We have had a number of years in which earnings have been strong and investment has been held back by a number of causes, including worries about world inflation, worries about pensions, but eventually you would expect some of that pent up investment to happen. People can only hold back so much, especially in a time when the economy is still growing. It is not growing as fast as it has done in some of the earlier cycles but it is still growing. Simply because there is an accelerator effect, you would eventually expect investment to catch up.

  Q14  Mr Love: There are issues about uncertainty there but let me ask Mr Saunders, and perhaps others would like to comment, Q1 of this year shows an increase in business investment of 1.7%. Does that not show that we are beginning to unwind the business investment, it is beginning to increase, or do you think that is just a blip?

  Mr Saunders: It may be a question of degree. My forecast is business investment this year is a bit stronger than last year. I am not sure that it is going to be so strong that it is enough to produce above trend GDP growth, that would need to be 10% plus which is really spectacular growth. In terms of your ranking of the surveys, there is a third one. The Bank of England does a monthly survey through its agents of firms' investment intentions, and that is a little bit better but really nothing much. You can put that between the CBI and the Chamber of Commerce. The story on investment is that it has been weak relative to profitability and relative to long-term interest rates for about three years. Many of us thought that it should pick up, because of those conditions it normally does, but it has not done for a fairly long time. That is partly because of the rise in company pension contributions and partly a global story of investment going from high cost industrial countries to low cost emerging markets and I do not think either of those things have changed. It may not prevent it picking up a bit but I would not look for the shortfall of investment to unwind totally.

  Q15  Mr Love: My understanding is that if you look at pensions, which is often used as the argument for business investment not picking up, it does not take up anything like the amount that is available through profitability and low interest rates. I wonder if I can ask the other two to comment. We have talked a lot in the early stage about uncertainty. Do you think that is impacting negatively on firms' views about whether they ought to increase investment by this mythical 10% that everyone has been talking about?

  Mr Butler: Over the last year companies have just had other priorities. If you are cash rich and you have money to spend, how do you do it? You are not just investing. You mentioned the pension issue and said you do not think it is that huge, but if you look at the annual contributions companies have made to their pension schemes it has gone up by £22 billion when business investments increased by £1 billion, so the numbers are substantial. Uncertainty is a huge issue, and you did mention the surveys which do seem to be pointing in different directions. Even on the British Chamber of Commerce survey, it has improved, but it has improved back to where it was in 2004 and 2004 was a bad year for investment. I think it all becomes a bit circular. If you are of my view, that the global uncertainty is still pretty large and domestic uncertainties are big, then that paints a picture similar to what Michael said, that you get an improvement in investment but it is about degree and it is not enough to drive a recovery in the UK economy.

  Professor Quah: I agree with my colleague, Professor Muscatelli. We ought to expect to see an upturn in business investment soon. The reason I say that is because I am puzzled why business investment has been so low. We can tell stories about uncertainty, the business environment, the prospects for growth are unclear, but then I noticed last time when this Committee met we had a similar discussion. We then turned the story on its head. We said that the world has much less uncertainty and that is why long-term interest rates are so low. We cannot hold both stories in our head simultaneously: one of these has to be the right one. It is a puzzle, and a puzzle not just in this country but elsewhere in the world. The United States, for instance, while we refer to it as 7% current account deficit so that economy seems to be spending a lot, it is just the personal sector and the government sector that is in deficit. The corporate sector is awash with funds, the same way that the UK corporate sector is. Some of this has to be released at some point and that will show up in an up-turn in business investment.

  Q16  Mr Love: If you take out the fraud element, which has been much commented on in recent days, our performance is pretty poor and unlikely to change. Do you see any good news on the horizon? I take, in relation to that, there has been a depreciation of the dollar recently. What impact is that going to have on our trading performance?

  Mr Saunders: If you compare our trade performance, our export growth ex-fraud, with the growth of imports and our main trading partners, our export market growth, we have lagged persistently in recent years. That is what I mean by export performance has been poor. The surveys on export growth in the last few months have been better. Then, as we have discussed, there is this risk going forward, and the reality of the last few weeks, falling dollar rising pound, suddenly our export competitiveness worsens again. It would need a very dramatic improvement on our export performance to turn net trade into a plus for growth at a time when domestic demand is picking up, yet that is what the MPC seems to have as their base case. I would want to get them to flesh out a bit more why they think our export performance is about to improve so markedly.

  Mr Butler: It has been one of the biggest areas the MPC have made on their forecast. It is not the first time they have expected a turn around in the net trade performance for that not to materialise. We have lived under a pretty good global environment for the last couple of years. If you think that is not going to be as rosy going forward, and you have the potential risk of the dollar falling quite sharply driving sterling higher, then I would be much more pessimistic than the Bank of England on that trade position.

  Professor Quah: I too am pessimistic on the trade position. The reason for that is most of the UK still trades with Continental Europe, that is the largest chunk of our trade, and Continental Europe is moribund. The most optimistic people will say it might grow at 2% a year this coming year. For most of the rest of the world, 2% a year growth at this stage of the cycle is a statistical blip. Unless we re-orient, unless something changes in our trade patterns and we re-orient towards faster growing parts of the world, I cannot see we will have a dramatic improvement in our trade balance.

  Q17  Mr Love: Everyone recognises that the exchange rate for the dollar must depreciate if we are going to get rid of the imbalance over time, although we will want to control that. A necessary consequence of that depreciation is that either Europe, Japan, China comes in to offer the alternative for international trade. Does anybody see any of that happening in the short-term?

  Professor Muscatelli: I think it is very difficult to predict, as I said in my paper, how that unwinding of the dollar might work. There is also the issue of what might happen to sterling. Sterling may depreciate against the dollar but there is no guarantee it will depreciate against other major currencies. The position in that trade is quite complicated. I am also not hugely optimistic because of these global risks we have already discussed. The performance, as I said in the paper, in 2005 Q4 is actually stronger than I expected it to be. After a negative contribution of net trade to GDP growth in Q3, suddenly you saw a positive contribution in Q4. It is not as rosy as the MPC have painted but it is not as bad as some of us feared. That lies behind the reason why I think holding rates is probably the right policy because it is not quite as negative as some of us feared.

  Mr Butler: The Eurozone is the big hope. You look at the Eurozone growth and people are becoming more optimistic, but the Eurozone may grow in line with the UK for the first time in 10 years. One of the most optimistic views around is 2% growth. If there is one region where the UK has had a deteriorating trade balance, a current account balance, it is with the Eurozone, more so than with Asia and it goes way beyond the relative to market issue. If sterling is overvalued against a currency, then in my view it would be overvalued against the euro.

  Q18  Ms Keeble: There is one query left on this section which is about the fact that the Inflation Report shows that whilst we have a net inflow of investment income we are an external net debtor. How do you account for that?

  Mr Saunders: Arithmetically the way you account for it is apparently our rate of return on direct investment overseas is higher than the rate of return on direct investments in the UK. Secondly, the pattern of our assets and liabilities is such that we have more in direct investment on the liabilities side, more in loans which have a lower rate of return, than direct investment. We are lucky in that our assets are more in high return assets and our liabilities are in low return things. The US, by the way, seems to have the same position. You have to be uncertain as to whether this is really happening or whether it is just a statistical artefact from numbers which are of uncertain quality. It may be that we have more external assets and the income figures are correct, or it may be that that pattern, relatively high returns on our assets compared to our liabilities, will continue. I am not sure.

  Mr Butler: I have looked at detailed flows of investment income, and the UK has been a huge beneficiary of the big rise in oil prices. UK oil companies registered in the UK made huge amounts of profits abroad, and often those profits are repatriated back to the UK. That has given us this big surge in investment income and it is on the back of the big rise in oil prices. That has implications in that it may be one of the reasons that has kept sterling strong and out-priced other sectors within the UK. Depending on your view about oil prices, you need oil prices to carry on rising for that investment income flow to carry on offsetting that deteriorating trade deficit.

  Professor Muscatelli: My view is that it is the first of these stories that Michael was outlining, it is to do with portfolio composition and not to do with mismeasurement. If you look at the box with the Inflation Report, it outlines the various reasons. It is the first explanation to do with the fact that we hold different assets from the composition of our liabilities. The mismeasurement story is difficult to buy, partly because this strong investment income only comes in the last couple of years. Why should it suddenly transpire? It is much more likely to be coincident with the fact that we have had low interest rates with strong equity markets and strong returns from investment during the last couple of years and therefore it is portfolio composition.

  Professor Quah: I do not disagree with the strength of this first explanation. That is very much the background of our discussion about global imbalances earlier this morning. Global imbalance position is still one where many poorer parts of the world continue to send their finance resources over to the West and invest in lower return assets, whereas the assets that are high paying, high return, are over the other side of the world which they are sending money away from. All that is very consistent, but I do not discount a second explanation that the bank is certainly aware of, which is how we value our debt and liabilities' position. Take an oil company that we have invested a certain amount in oil resources. If the price of oil increases, then the value of those overseas assets ought to rise in a present discounted value accounting way. It is not clear whether we have properly taken that into account, so our external debt position might be more favourable than the book numbers suggest. The investment income figures are accurate and telling rather than the debt position.

  Q19  Ms Keeble: Following on from that, could you say something about what that means in terms of the different type of investment? You said something about different types of holding, but I was thinking about the change of our investments over time, which used to be in manufacturing plants and now perhaps is oil or different types of industry. Equally, investment in the UK is different in type as well. The suggestion by the Bank is it is mostly capital investment. What does that mean in terms of, firstly, the susceptibility of that capital flight; secondly, the instability of having large investments in oil or perhaps in parts of the world which are not quite so stable; and, thirdly, we have talked endlessly in the UK about the need to get Africans to invest in Africa and not to export all their capital. Perhaps it is not going to be the biggest export of capital there ever was, but how do you join up the policy in what you saying in international development and what you are saying on investment and business interests?

  Professor Quah: I am nodding because we do need joined up thinking, but some of that joined up thinking, as you appropriately put your finger on, takes us way beyond the discussion of UK inflation and has to do with patterns of global poverty, income distribution in the world, international development and the efficacy of foreign aid. It is a huge problem and it ties very much to our discussion of global imbalance. Why are the poor people of the world, not just Africa, sending their resources to us, earning lower rates of return, allowing us to enjoy positive net investment income, while lots could be done in the rest of the world. These are huge important questions but I do not feel right pushing them too much because we are here to talk about UK inflation.

  Chairman: We are looking at that aspect in the IMF report.

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