Questionnaire in advance of Treasury Committee
hearing for Dr Andrew Sentance
A. PERSONAL AND
PROFESSIONAL BACKGROUND
1. Do you have any business or financial
connections or other commitments which might give rise to a conflict
of interest in carrying out your duties as a member of the MPC?
Are there any relevant personal or other factors of which the
Treasury Committee should be aware in considering your appointment?
I have resigned from my current employment at
British Airways (BA) with effect from 30 September 2006. When
I take up my position on the MPC, therefore, I will have no business
or financial connections, or other commitments which might give
rise to a conflict of interest.
Aside from my economic expertise and business
experience, I am not aware of relevant personal or other factors
which are relevant to my appointment to the MPC.
2. Do you intend to serve out the full term
for which you are appointed?
Yes.
3. Please explain how your experience to
date has equipped you to fulfil your responsibilities as a member
of the MPC? In particular, what areas of the MPC's work do you
believe you will make a particular contribution to, and which
will you have to undertake additional research on on your arrival?
As my CV (attached) shows, I have worked for
most of my career as a senior professional economist in a business
or business-related environment—at the Confederation of
British Industry (CBI), London Business School (LBS) and, most
recently, with British Airways (BA). This has provided me with
a wide range of experience relevant to the work of the MPC. This
experience will help me to carry out my role as an MPC member
in three key ways.
First, I am an experienced analyst of the UK
and global economies, and I have observed at first hand the way
in which the UK has made the transition to a low inflation economy
over the last two decades. I have written numerous articles on
UK and global economic developments while at the CBI and the LBS.
At BA, a key part of my role has been to provide internal advice
on economic developments to all levels of management and to the
Board.
Second, I have first hand experience of working
in and around the world of business, and I hope this experience
will be helpful in judging how business will respond to changes
in the economic climate. The last five years at BA has been a
very good place to observe how a business reacts and responds
in the face of big shifts in market conditions. However, my business
experience is not limited to the airline industry, as I interacted
with a wide range of businesses at the CBI and the LBS.
Third, I have experience in communicating economic
issues to non-specialist audiences, both through the media and
directly. I believe this experience will be valuable as a member
of the MPC, in helping business, the public and opinion-formers
to understand the issues we face and in explaining the decisions
we have taken.
In the light of this experience, the areas I
will be focussing on within the MPC will include he analysis of
business trends through the use of survey information, and how
the structure of the economy is changing in response to shifts
in technology and global competition. I will also be active in
supporting the two-way communication which the MPC has with the
business community and the public through regional visits, speeches,
interviews and articles.
4. To what extent will membership of the
MPC require a different approach from that required in your previous
positions, with regard to the discharge of the duties and responsibilities
involved?
In terms of subject matter, I see a lot of common
ground between the MPC and my previous roles. I also think the
approach needed will be similar. My experience in the world of
business is that success is generally based on good teamwork.
I see the MPC as a team charged with a key responsibility for
maintaining low inflation in the UK economy, through setting interest
rates. The individuals on the team each make a distinctive contribution
based on their different areas of expertise, experience and knowledge.
However, we need work together effectively if we are to deliver
success.
The working environment of the MPC will clearly
be different to BA. However, through my career, I have adapted
successfully to changes in working environment and I am confident
this will also happen when I join the MPC.
B. ACCOUNTABILITY
5. How important do you think it is for MPC
members to be subject to ex post parliamentary accountability?
What are the strongest and weakest parts of the current procedures
in the UK?
The government sets the inflation target and
it is clearly important that the MPC is able to account to Parliament
how it is proceeding in delivering that target. The operational
independence of the MPC is a key element in the current UK monetary
policy framework.
I believe the UK procedures for monetary policy
currently work well, and while that remains the case, I would
not advocate any change in these arrangements.
6. If you were to make yourself available
for reappointment to the MPC at the end of your term, what criteria
should be used to assess your individual record as an MPC member?
I see the MPC as a team which has been delegated
responsibility for maintaining monetary stability in the UK. So
the key measure of individual success is how far each member has
helped the "MPC team" to meet its objective—the
inflation target. The voting record of individuals inevitably
attracts a lot of attention, but just as important is how far
MPC members have contributed to the debate within the committee,
and therefore influenced its collective judgements. Also, MPC
members have an important role in communicating to the public
the issues under consideration and the rationale for the decisions
taken.
I would therefore expect to be judged not only
by my individual voting record and by our collective success in
meeting the inflation target, but also by my contribution to the
debate within the committee and by the way I have helped with
communication—through speeches, articles, interviews and
regional visits.
7. Do you believe there is merit in having
an individual paragraph in the minutes of MPC decisions in which
to explain your most recent vote?
The key issue is to ensure that the MPC minutes
properly reflect the discussion within the committee, and the
reasons for the decision taken. The views of dissenters are also
minuted, and there are opportunities for individual MPC members
to express their views in speeches, interviews and articles. This
looks to be a reasonable set of arrangements, and I would want
to have more experience of working on the MPC before expressing
any opinions on the need for change.
C. OTHER PROFESSIONAL
ACTIVITIES
8. What other professional activities do
you expect to undertake in addition to your position on the MPC
and how do you intend reconciling these activities with your position
as a MPC member?
I have been appointed to the MPC on the understanding
that this will be my main occupation and that I will avoid actual
or apparent conflicts of interest in other activities. However,
the MPC is a three day a week appointment—and remunerated
as such. Therefore, I plan to develop other activities which will
take up the other 40% of my normal working week, subject to the
rules laid down for MPC members.
I am currently a member of the Commission for
Integrated Transport, a government advisory body on transport
policy. This is expected to take around two days a month. I am
also a visiting professor at Cranfield University, linked to their
Air Transport Group. I would like to use this connection to keep
in touch with the aviation sector, though currently my commitment
to Cranfield involves delivering one to two lectures each year.
I therefore have room for another part-time
commitment, as long as this does not conflict with my MPC role.
My current thinking is to secure a part-time academic appointment.
I will seek permission for any further appointments from the Chancellor
of the Exchequer and the Bank Governor, in line with the rules
laid down for MPC members.
9. Outside of MPC meetings, what activities
do you intend undertaking in order to add to the public's understanding
of the role and decisions of the MPC?
I envisage giving regular speeches and interviews,
and making visits to local businesses facilitated by the Bank's
regional agents around the country. I am keen to develop these
aspects of my role as a MPC member, and have a fairly full programme
of regional activities already planned for my first year on the
MPC.
In terms of major public speeches and interviews,
these will probably not get underway until the New Year. I would
like to spend time familiarising myself with the MPC processes
and thinking before making major public statements in my new capacity.
D. MONETARY AND
ECONOMIC POLICY
10. How might the system of control over
monetary policy in the UK, in place since 1998, be improved? Is
the framework of an explicit symmetrical inflation target the
best within which to conduct policy?
I believe the system of controlling monetary
policy in place since 1998 has worked well. It has kept inflation
close to the target set by the government and has been associated
with a period of steady and sustained economic growth. Broader
international conditions have been helpful, with low inflation
worldwide and global competition helping to contain price rises
of tradable goods and services. However, the structure and processes
of the Monetary Policy Committee have also proved effective and
resilient. As a result, I have no specific changes to propose
to the framework.
The existence of an explicit symmetrical inflation
target has been a key element contributing to the success of policy.
An explicit target is helpful in providing clarity about the policy
framework and in providing a guide for inflation expectations.
Given the importance of expectations in the inflation process,
this should reduce the output cost of containing inflation if
it does move away from the target. We have seen in the case of
Japan that deflation can be damaging as well as inflation, so
this provides a basis for a symmetrical target. I can see no case,
therefore, for moving away from the current approach.
11. How great is the risk to UK growth and
inflation posed by high nominal oil prices? How should monetary
policy react to higher inflation caused by increased oil prices?
A significant rise in oil prices—such
as that seen over the last three years—does pose a threat
to growth and inflation. In the mid-1970s and the early-1980s,
a sharp rise in the oil price was one of the factors which led
to accelerating inflation and recession in the UK. However, there
are important differences between the situation now and then.
First, the economy is now less dependent on
oil—both because of improvements in energy efficiency and
a diversification towards other energy sources (especially natural
gas).
Second, inflation expectations are more securely
grounded—because of the experience of low inflation and
the monetary policy framework currently in place. This reduces
the risk that a temporary rise in inflation due to higher oil
prices feeds through into a wage-price spiral. Low world inflation
and competitive pressures in the global economy help to reinforce
these expectations.
Third, we have a better monetary policy framework
now than in those earlier episodes which helps to reduce the risk
of policy mistakes. There were significant policy mistakes in
the mid-1970s and around the time of the second oil price shock.
In the mid-1970s, policy was initially too relaxed in response
to the inflationary shock and this significantly increased the
output costs of getting inflation under control—which was
not properly achieved until the early 1980s.
There is no hard and fast rule about how policy
should react to an oil price shock. The judgement will depend
very much on the broader economic background against which the
price change takes place. In the mid-1970s, the rise in oil prices
occurred against a background of very strong domestic demand and
the subsequent policy relaxation poured fuel on the fire. The
economic background is now much more stable. The key issue for
policy-makers is to ensure that the first round—or initial
impact—effects on inflation, eg through higher petrol prices,
do not feed through into a more sustained rise in inflation, by
affecting price expectations and wage increases.
12. What consideration should be given to
the exchange rate and to asset prices, including house prices,
within the framework for inflation targeting? In particular, how
should monetary policy react to asset price bubbles?
The exchange rate and asset prices are all part
of the mix of economic factors which the Monetary Policy Committee
must take into account in its interest rate judgement. However,
it would be wrong to treat either of them as the sole factor,
or even the dominant influence, on monetary policy.
For very small open economies, the exchange
rate is a key factor driving inflation whereas for a large economy
where trade is a much smaller proportion of GDP—such as
the US—it will be a relatively minor factor. The UK lies
somewhere between these two extremes. The exchange rate is important,
but its impact can be offset by other factors. How the economy
responds to an exchange rate change also depends on the factors
which are causing that change.
Asset bubbles provide a significant challenge
for policy-makers. The first problem is identifying them—often
a "bubble", such as the dot.com boom in the United States,
is not apparent until it has burst. The second challenge is understanding
the impact they are having on demand—and hence on inflation.
Within the framework operated in the UK, the appropriate response
depends on how inflation is likely to be affected.
13. To what degree do you consider the recent
rise in personal insolvencies to be of significance when considering
the vulnerability of UK household balance sheets? What impact
will this have, in your opinion, on setting interest rates?
A rise in personal insolvencies is clearly unwelcome,
not least because of the difficult personal circumstances for
the individuals and families affected. However, while it is one
of the factors which the MPC should take into account in assessing
household finances and consumer behaviour, it is not the most
important factor. Even at current levels, personal insolvencies
affect around 0.1% of households in the UK. There is much more
direct evidence available on consumer spending and household finances,
relevant to a much wider cross-section of the population, to which
the MPC should give greater weight in its decisions.
14. How would you describe the state of the
UK labour market at present? In particular, how has net migration
impacted on growth and inflation in the UK?
The UK labour market is clearly functioning
a lot better now than it was in the 1970s, 1980s and the early
1990s. Then, it was not possible to achieve a low and stable rate
of wage increases without a high level of unemployment, sustained
for many years. In recent years, the UK economy has been able
to operate with unemployment of around 5% on the Labour Force
Survey (LFS) measure, and around 3%, on the claimant count measure,
without inflationary wage pressures developing.
This improvement over the last decade or so
partly reflects the fact that the labour market has not had to
absorb the type of shocks we saw in those earlier decades, with
more stable economic growth and better economic management. It
also reflects the beneficial impact of labour market policies
pursued from the mid-1980s onwards—including better training
and support for those out of work, and changes to the benefit
structure to incentivise employment.
Over the last year, the unemployment rate has
risen—on both the LFS and claimant count measures. The slowdown
in the economy in the second half of last year may have contributed
to this shift—as employment trends often lag economic growth.
However, we should now expect the demand for labour to pick up
in response to the stronger performance of the real economy in
the first half of this year—moderating the rise in unemployment.
The most recent data available—showing that the claimant
count measure of unemployment has stabilised over the summer months—supports
this view.
Labour supply developments also appear to have
played a part in the recent rise in unemployment. In a well-functioning
labour market, employment should rise to absorb an increase in
labour supply—boosting economic activity. But the process
of adjustment may take some time, so unemployment could be pushed
up temporarily by a rise in the labour force. Net migration is
one of a number of factors which could be helping to raise the
labour supply at present. In the medium term, a larger labour
force should have a positive impact on economic growth, by boosting
employment without raising the rate of inflation. In the short-term,
unemployment could rise while the labour market finds ways of
absorbing the increased supply of workers.
15. How would you describe, and account for,
the recent performance of business investment growth in the UK?
The latest official figures show reasonably
healthy growth in business investment in both volume and value
terms—up by 4.5% on a year ago in value terms and by 4.2%
in volume terms. In my experience, it helps to look at both volume
and value data because of the difficulties in measuring the prices
of some investment goods (eg information technology). Recent data
can also be subject to significant revisions. I would not be surprised
to see some upward revision in future estimates.
Of more interest is the composition of investment,
with the growth being driven mainly by construction and the service
sector. Manufacturing investment is more subdued, reflecting the
weak growth in manufacturing production over many years. This
may also reflect the shift in some sectors of manufacturing to
lower cost production facilities in Asia and Eastern Europe. Manufacturing
investment now accounts for about 12% of total business investment,
so the non-manufacturing element is much more important in terms
of its impact on demand.
There is a certain level of business investment
which will take place for replacement purposes and to embody new
technology, which will be relatively unaffected by economic factors.
The two main economic factors affecting business investment are
demand prospects and the health of company finances. I would see
both factors as reasonably supportive of business investment growth
at present.
Business investment is one of the more volatile
elements of demand—and a sharp downturn in investment intentions
can often be an early warning indicator of a broader economic
downturn. Investment intentions should therefore be watched closely
by the MPC.
16. To what extent should fiscal policy play
a demand management role alongside monetary policy in the short
run?
Fiscal policy clearly affects demand and must
be taken into account in the setting of monetary policy. With
government spending and taxation both accounting for around 40%
of GDP, movements in both, and the balance between them, have
significant impacts on demand—and hence inflation.
There is a self-correcting element to fiscal
policy—the so-called "automatic stabilisers" that
should help to stabilise the economy and the growth of demand.
It is generally sensible to allow these stabilisers to operate
and to focus on maintaining a sound medium term fiscal position.
Fiscal policy can support monetary policy by ensuring that it
does not generate large destabilising swings in demand. But trying
to fine tune the economy through the use of fiscal policy has
not generally proved successful in the UK.
September 2006
| 
