Examination of Witnesses (Questions 80-91)
DR ANDREW SENTANCE
12 OCTOBER 2006
Q80 Mr Newmark: Just focussing on
M4, in your opinion what is the recent rise in M4 telling us about
the future path of inflation?
Dr Sentance: It is telling us
that there has been an accumulation of money in the economy that
could feed into spending in the future. This accumulation has
taken place in these other financial institutions and there is
a bit of uncertainty—
Q81 Mr Newmark: They will feed in
because private equity firms, for example, or even a pension fund,
has to put that money to work at some stage.
Dr Sentance: We saw in the late
1980s quite high money supply growth and perhaps did not put enough
weight on it in that time, so we should try to learn the lessons
from that. On the hand, there were situations in the early 1980s
when money supply growth was quite strong and yet other indicators
that real economy was pointing in the opposite direction. All
I was trying to do was counsel about putting too much weight on
one indicator and rather to look at it alongside other, more direct
measures of the rate of growth of demand.
Q82 Mr Newmark: Do you see the growth
in M4 raising a red flag at least with respect to inflation down
the road?
Dr Sentance: I think it is a risk.
I think it is raising an amber light but I would want to see other
confirmatory data before putting a lot of weight on it.
Q83 Angela Eagle: Obviously Mr Newmark
is trying to kick the monetarist corpse alive and you seem to
be saying that you are not really a theoretical monetarist, you
are more of a pragmatic man when it comes to looking at economic
data.
Dr Sentance: I think I would agree
with that broad assessment. I am not a theoretical monetarist
certainly, but I think that any pragmatic person would also look
back at some of the instances we have had before when we perhaps
did not put enough weight on money data, for example in the late
1980s. Your pragmatism can point you in different directions depending
on what the evidence is.
Q84 Angela Eagle: Can you bear to
look at all the evidence rather than cling to one particular theory,
however outmoded or outdated it might be?
Dr Sentance: Yes, I think the
difference schools of thought and different frameworks for analysing
the economy does tend to be a bit exaggerated, particularly at
the moment. There has been quite a bit of convergence in thinking,
a sort of synthesis—
Q85 Angela Eagle: A post neo-classical
synthesis.
Dr Sentance: I am not sure about
that, but what I have observed is when you talk with other economists
people are generally using a common framework and I think that
is very helpful for an organisation like the MPC where we come
together and bring our different judgments. At least there are
no large theoretical differences underpinning our discussions;
that has certainly been my experience.
Q86 Angela Eagle: Could you just
share with us the sorts of things that would keep you awake at
night? What are the major downside worries or risks on the downside
that you think, looking at the current position that we are in,
that would worry you, that you would be watching for?
Dr Sentance: I think the thing
that has to keep you awake at night if you are a member of the
Monetary Policy Committee is not keeping inflation close to its
target level and allowing it to deviate significantly either in
one direction or another.
Q87 Angela Eagle: That is the job
direction, but what do you see looking out there?
Dr Sentance: In any particular
circumstance there will be different things causing me to worry.
Your question is probably directing me to the things I am worried
about at the moment. I think on the upside in terms of inflation
there is the risk that if we have continuing inflation running
above the target level that does begin to be factored into wage
increase and I think that is a significant worry that we need
to reassure ourselves on. The data so far has been relatively
reassuring; the earnings data has been relatively steady but we
need to keep a watch on that. On the downside I think probably
the US economy is probably the major worry at the moment. On the
forecasts that we currently have the US economy is going to have
a slowdown and we are seeing stronger growth in other areas, so
based on the evidence we have at the moment it does not seem a
massive risk. However, sometimes when weaker indicators start
coming through they get followed by even weaker ones, so on the
downside I think that is probably the biggest concern at the moment.
Q88 Chairman: It has been pointed
out that one of your big interests is politics. Are you intending
to jump the desk at any time?
Dr Sentance: I have tried to stay
out of party politics in the various things that I have done.
I am very interested in the political process and policy and the
real world application of economics to policy question, but I
do not have any party political interests.
Q89 Chairman: In terms of research
projects, do you have any?
Dr Sentance: It is early stages
but I have mentioned a couple of things that interest me at present.
One is the way in which survey data can be used based on my experience
in the CBI in helping to understand the short term trends of the
economy. The second is this whole issue of structural change,
particularly driven by globalisation and international practice.
Q90 Chairman: As Andy mentioned,
we are interested in globalisation in this Committee.
Dr Sentance: I would be happy
to discuss those with you in the future.
Q91 Chairman: Dr Sentance, thank
you very much for your evidence to us this morning. Best wishes
in your MPC work in the future.
Dr Sentance: Thank you very much
for the opportunity to talk with you.
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