Examination of Witnesses (Questions 60-79)
DR ANDREW SENTANCE
12 OCTOBER 2006
Q60 Mr Love: One of the interesting
factors is that foreign companies investing in Britain seem to
do a better job in terms of capital investment than our own indigenous
companies, but let us not go into that now. Can we sustain the
increase that there has been recently? Is that sustainable?
Dr Sentance: The increase in business
investment?
Q61 Mr Love: Yes, business investment.
Dr Sentance: Investment, on the
latest figures, is growing at about just under 5% per annum. Giving
that investment is more volatile than other components of demand
in a time when demand and output are growing reasonably healthily,
I think that is the sort of rate of growth we might expect. It
is faster than GDP growth because when we have seen a downturn
investment is then normally weaker than GDP growth.
Q62 Mr Love: Finally, I was interested
to see in a recent CBI survey they suggested that 40% of their
respondents with defined-benefit pension schemes said that pension
deficit was a real factor in their overall business investment.
The EEF survey—a similar survey—suggested that it
was hardly a factor at all. What role do you think that the pension
deficits of companies has played in the lack of business investment
overall?
Dr Sentance: I think that is a
very difficult issue to gauge. I agree it is a factor that we
should be considering. The Bank has done its own survey and it
is slightly more in line with the EEF conclusion than the CBI's
conclusion, but I would not want to dismiss it as a factor at
all. I have worked in a company where they have significant pension
issues—British Airways—and it is clearly a factor
affecting management decisions, but the way in which that comes
about obviously will depend on the circumstances of the company.
I suppose my observation would be that if companies are able successfully
to deal with pension deficits then it should not be too much of
a barrier to investment. I think the key factor will be how successfully
companies are able to feel that they have got on top of this deficit
issue and then can move on and continue to invest as they normally
would.
Q63 Mr Gauke: It is noticeable looking
through your comments from your period on The Times MPC
that you consistently raised the issue of the international economy
when explaining your analysis. Given your background with BA that
is not altogether surprising. Do you think that as a member of
the MPC you will focus perhaps more on the international economy
and the influence that has on international businesses than perhaps
the MPC as a whole has done up to now?
Dr Sentance: It is certainly a
very important factor for me because so many UK businesses do
deal internationally. We are a relatively open economy to international
trade. Our biggest exposure is to the European market but we are
also exposed to US and Asian markets. It is a bit early for me
to say whether I am going to put more emphasis on that than other
members; I have only participated in one round of meetings. What
I have observed in that is that the Committee as a whole places
quite a bit of weight on international development. I think the
area that I would like to put emphasis on—I indicated this
in my written responses to you—is that how those international
factors are driving structural change in the UK economy I think
is a very important issue. Structural change is obviously a continual
factor of business life and I have come from an industry where
there have been an awful lot of changes in the structure of the
industry driven by competitive pressures and other short term
factors. I think something that will help the Committee to understand
better as it goes through its deliberations is how shifts in the
structure of business are taking place.
Q64 Mr Gauke: Do you think over the
last few months the fact is that you have been—to use the
terminology—dove-ish compared to the MPC is because you
have placed greater weight on what you perceive as the weaknesses
in the international economy than the MPC has done?
Dr Sentance: No, I do not think
it is because of that. If you go back to those instances earlier
this year it was because we had seen quite a slow down in the
UK economy during 2005 and it was uncertain at that stage whether
the economy was going to rebound. That was my main concern. That
had been driven quite a lot by consumer factors. I do not want
to underplay the importance of international economy generally;
I think it is a very important influence because international
trade and investment is so much an important feature of the UK.
Q65 Mr Todd: Your business background
is appealing. Previous economists with a strong business background
have tended to be dove-ish in my experience; indeed I think the
one who came from BA right at the start of the process had that
gravitation. Is there any linkage between practical business experience
and a wish to see the economy grow faster but take some risks
with it?
Dr Sentance: First of all I think
it is very useful for the Committee to have access to people with
business experience and the way in which that should impinge on
judgment is through a greater depth of understanding about how
businesses which ultimately make up the economy respond to developments.
I would not want that to be caricatured into a view about whether
interest rates should be lower or higher. I think that understanding
could lead in a number of different directions. I think the important
thing for the Committee is that they have access to that knowledge
and expertise of how businesses actually work.
Q66 Mr Todd: Certainly business representative
groups tend to favour rate cuts earlier than the MPC has actually
made them and be more resistant to rate rises when they happen.
Dr Sentance: Yes, but I would
like to distance myself as an independent member of the MPC from
the views of business representative groups.
Q67 Mr Todd: Does your business experience
bring you any uncomfortable baggage? I noticed that you had responsibility
for environmental policy in your airline which some might think
pose some rather challenging choices?
Dr Sentance: I do not regard that
as uncomfortable baggage in the sense that climate change is going
to be a very major business issue looking over the next 10 to
twenty years. Indeed, it is an issue that I would want to keep
an interest in.
Q68 Mr Todd: It would have a profound
effect on the economy at large if some of the steps that are being
proposed to us were actually put in place.
Dr Sentance: Quite possibly over
the longer term, but I would want to make clear to this Committee
that by leaving British Airways I am putting myself in a different
position from the one that I was in when I was employed by British
Airways and contributing on their behalf to some of these discussions.
Q69 Mr Todd: So we should not scrutinise
too carefully articles on aviation growth and emissions, for example.
Dr Sentance: I actually think
there are a lot of very good things in those articles. What I
would like to make clear to the Committee is that in anything
I do in this area in the future I will not be acting as a representative
of British Airways.
Q70 Mr Todd: Do you think we know
enough about the impact of labour market growth from immigration
into our economy? I think you listened to the questioning of Professor
Besley on this where there is huge uncertainty. Do you agree?
Dr Sentance: I do not think we
know as much as we ought to about this. It is a very difficult
area in terms of developing statistical measures and so on. I
think one of the strengths that the Bank has in this area is through
its network of agents who are in contact with businesses around
the country. I was actually with other members of the Bank of
England down in Southampton yesterday to look at businesses in
that area. It is clearly a very major factor in that local economy;
a lot of workers from Eastern Europe have come into that part
of the local economy. Hopefully we are in a good position to try
to improve the understanding, but I think it is something that
we do not yet properly understand.
Q71 Mr Todd: Is there enough active
commissioned research in this field? Looking at the comments of
the MPC and in questioning the MPC in this Committee before, it
has become clear that their knowledge is very, very limited indeed.
Is there a lot of value in actually actively commissioning this
amongst economists?
Dr Sentance: The Bank has a lot
of economic resources and some of them already do this but I think
there is scope for other parties to contribute, such as the Government
and the private sector.
Q72 Kerry McCarthy: You were fairly
dismissive in your response to the questionnaire about the significance
of personal insolvencies in terms of assessing household finances.
You said there were other factors that were actually more important
or that we ought to be paying more attention to. Can you elaborate
on that?
Dr Sentance: First of all I am
sorry if I came across as dismissive; I did not want to dismiss
something which obviously has some great significance to the individuals
concerned. The point I was trying to get across is that the area
that the MPC would be interested in from this data is what is
it telling us about consumer spending and household finances more
generally. I think there is a lot of other evidence that we have
from retail sales figures, from measures of consumer spending
and consumer confidence data, from direct measures of household
income that are relevant to a much greater proportion of the households
in the UK and should probably be given more weight than this insolvency
data.
Q73 Kerry McCarthy: So you would
not see the rise in personal insolvencies as the tip of the iceberg?
Dr Sentance: I would want to look
at it alongside all the other data that we have. I would want
to look at whether it suggests that it is consistent with other
data that is suggesting quite a significant change in the trend
of consumer spending. I think that is one of the key issues that
we would want to understand on the Monetary Policy Committee.
I would want to look at it alongside data of retail sales, consumer
spending, consumer confidence, household finances and so on. I
think taking it in isolation it could lead us to some slightly
misleading conclusions.
Q74 Kerry McCarthy: To what extent
do you think that banks are responsible?
Dr Sentance: Commercial banks?
Q75 Kerry McCarthy: Yes.
Dr Sentance: I find it very difficult
to comment on that. It is not something that I have done any particular
analysis on. I feel I cannot really comment. I think the figures,
even though they have come up, are probably lower than they have
been at some other times, for example in the early 1990s I know
this was quite an important issue.
Q76 Mr Newmark: The August Inflation
Report noted that in response to rising energy prices companies
have squeezed other costs such as wages. Using your experience
at British Airways, is this how firms have been reacting?
Dr Sentance: Certainly observing
the way in which BA has responded as the energy prices have risen
they have had to look at other costs. I would say that they would
look across the board; they would look at other supply costs as
well as employment costs. In terms of looking at employment costs
they would look at the numbers employed as well as the wages that
are paid. Indeed, it is my observation that businesses perhaps
have slightly more flexibility in the short term in varying the
numbers that they employ either by stopping hiring or by allowing
employment to reduce through natural wastage for example, than
they have in changing wages. Wages change subject to annual or
sometimes even less frequent negotiations.
Q77 Mr Newmark: I guess where I was
leading to is that if oil prices then drop will there be tendency
to fill that gap by some sort of wage increase which would then
put added inflationary pressures. Do you see that happening as
oil prices drive because from what you have said they have managed
to cut costs by natural wastage and putting pressure on their
suppliers?
Dr Sentance: I think that whilst
companies have sought to try to offset the fuel cost rise I am
sure they have not been able to do it totally through other mechanisms.
Q78 Mr Newmark: I am trying to look
forward now. Looking forward, is there a threat of inflation through
any wage inflation?
Dr Sentance: The logical consequence
of that probably means that companies have had a higher increase
in costs than they would like and would be very happy to see the
reduction in oil price feeding through to lower costs without
feeling the need to increase costs in other areas. I do, however,
think there is a more general issue which is that it is quite
clear that even though the increase in inflation has been muted
there has been an increase in inflation from higher petrol and
oil prices and energy prices more generally. I think we do need
to safeguard against that feeding through into higher wage settlements
because that was the sort of mechanism and influence that set
off the wage price spirals which were so damaging in the 1970s
and early 1980s.
Q79 Mr Newmark: Attention has recently
been paid to the rise of money supply in the UK. How important
in your thinking is money supply when setting interest rates?
Dr Sentance: I would be interested
in money supply because there is some concern that over some period
of time it might feed through into higher money demand and therefore
that could contribute to inflation. My observation is that linkages
are quite indirect and variable and so I would be looking at money
supply data alongside other data—and perhaps giving more
weight to other data—in the short term with the more direct
measures of money demand. Actually what we have seen is that nominal
domestic demand—the amount of directly measured spending
in the UK economy—has picked up over the last six to nine
months and is currently running at 6% as the Governor mentioned
in his recent speech. If we have other data that is showing demand
is picking up then I think we should give some weight to money
supply data which is in a sense confirming that. On the other
hand you may have a situation where the money supply data is pointing
in a rather different direction from the other data and therefore
you would perhaps put less weight on it.
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