Examination of Witnesses (Questions 60-74)
MR PAUL
TUCKER
13 OCTOBER 2005
Q60 Susan Kramer: You began to vote
for increased rates in February because of a degree of excess
capacity but resumed voting for no change in May 2005 because
of the downside risk to consumption. While I understand, and I
quote "You are remaining ready to raise rates if incipient
inflationary pressure emerged" if this downside risk to consumption
fails to materialise, would the degree of spare capacity still
justify increasing rates?
Mr Tucker: As we went into the
beginning part of this year, the economy looked pretty tight.
Survey measures of capacity utilisation were high, the labour
market was tight and actually, quite strikingly, when one went
around the country talking to businesses, quite a number—initially
I found it surprising—talked about their ability to pass
on cost increases. They were gaining pricing power again, and
at the February meeting, when our inflation forecast was, in fact,
above 2% at two years and going up, I thought we needed to nip
this in the bud. Two or three things have happened since then
to change the picture. First of all—I mentioned this a couple
of times, in my written submission—the extent to which inwardly
migrant labour have eased pressures in the labour market was greater
than certainly I appreciated at the beginning of this year. And
secondly, consumption has turned down more than I think any of
us expected, partly because of the oil price rise, partly because
of our earlier increases in interest rates against a background
of high levels of debt and I think also, importantly, against
a background of considerable uncertainty about the housing market.
I think that is a much better picture now than it was. I was really
quite worried in the autumn of last year about the debate about
house prices. My own view was that most likely house prices would
move sideways but there was such an atmosphere of gloom developing
that there was a severe downside risk that has probably receded
a bit since then. I think we have got a different picture now
from six months ago.
Q61 Susan Kramer: Given what you
just said, could you just tell us why you did vote for no change
in rates at the meeting in August?
Mr Tucker: This brings one to
oil. This is a finely balanced decision. My own view was that
the near term risk was to the downside and there was a case for
taking a precautionary cut in interest rates to offset that downside
risk. In the medium term there is an upside risk to inflation
from the rise in inflation that we have already seen feeding through
into wage bargaining, and the credibility and the stability of
inflation expectations that we have achieved are so precious that
that has been given quite a bit of weight. If you like, it is
a low probability risk but with a high cost if the probability
crystallises. I thought we should err on the side of, I did not
use the word "caution" but caution, if you like, in
August.
Q62 Lorely Burt: Mr Tucker, in a
recent speech you said that for some years UK monetary policy
has been directed at offsetting weaknesses in the external environment
by stimulating domestic expenditure but that this had been accompanied
by accumulated imbalances in the economy such as the rapid accumulation
of household debt alongside burgeoning house price inflation.
You conceded that this strategy always had limits. Are we coming
close to reaching those limits?
Mr Tucker: I think, as I have
tried to explain to Mrs Kramer already, a few years back we were
coming close to those limits and it could happen again in the
future. I do not think we are in that position just now because
I think so much has changed in the intervening period since I
gave that speech.
Q63 Lorely Burt: Would you say that
consideration of household debt was a reason why you did not vote
for an interest rate cut in July, August and September?
Mr Tucker: No, the greater reason
was the upside risk to inflation through the oil price effect
on prices and costs feeding back into wage bargaining. And, as
I have said, I think that is a low probability risk, but one with
a very high cost if it were to crystallise. But my vote was not
motivated by "you must avoid stimulating the housing market".
Again, I have to say, I am pleased and relieved that the housing
market has stabilised, but it did not play a key role in my recent
votes.
Q64 Lorely Burt: You told us you
were leaning against any mis-perceptions of the degree to which
the Bank can successfully fine tune fluctuations and demand. Other
members of the MPC have pointed out that the cost of debt servicing
could be moderated by monetary policy in the face of an adverse
shock. Do you think that people should assume that if there is
an economic shock there will be an interest rate cut to ease the
pain of debt repayments?
Mr Tucker: I do not think it follows
as night follows day. I think there can be a presumption in that
direction but I think our eyes have always to be on the medium
term inflation outlook. This question of fine tuning is one that
preoccupies me quite a lot. The regime change during the 1990s,
I really do believe can insulate this country against boom and
bust and that is good for everyone. I think it is good for businesses
and innovation, it helps to make the economy more flexible, and
it is good for consumers. I do not think we can deliver the economy
on a flat line. Since the Committee was set up we have barely
had a downturn, a fall in aggregate growth, and it will happen
one day. I do not know when it will happen, but it will happen.
I do not think that will mean the regime has failed or let everybody
down. The longer I have served on the Committee, the keener I
have become to get it across, on occasions like today—and
actually I say this almost in every single business meeting I
do now—that we cannot deliver the economy in a flat line.
We cannot sustain month by month, quarter by quarter, growth without
fail. The job is just too complicated and the world has too many
uncertainties for that. It would be an awful thing if the regime
were called into question for things that the regime had no capability
to deliver. I think we have to lean against any perception that
we can successfully fine tune, and there is an element of this
in parts of the academic community. Forty years ago academics
thought we could fine tune using fiscal policy and there is a
body of opinion that maybe we could do that using monetary policy
now, and I doubt we can.
Q65 Mr Todd: You have touched on
the impact of the oil price rise in the MPC's decision, could
you talk us through the dilemma that the MPC face and how you,
particularly, perceive that because obviously there were two potential
responses, one was to see this as an inflationary pressure and
respond with an interest rate rise to deal with the potential
upside impact, the other was to accept that this might be a long-term
process and that you would have to accommodate this. How do you
see that dilemma and how did you place yourself within it?
Mr Tucker: You are right that
it is a dilemma, because "both" is the optimal answer.
We are in un-chartered territory. The last time the country faced
anything quite like this—I have to say it was worse then—was
well over a decade ago, well before this regime. I think that
tests us all, both in terms of our decisions and how we communicate
them. Plainly, there is a negative shock to demand that is weakening
the economy a bit and other things being equal would lead to inflation
perhaps undershooting the target. Inflation has come up a lot
and, as David was saying earlier, part of that is attributable
to oil, and for me there is just a little bit too much risk that
people will say "I need compensating for that. Inflation
is turning high, it is eating into my spending power and I am
going to the next wage bargaining round and want compensation
for that". I do not think that commits me to a particular
course month by month as we go down the road. In August I balanced
it that way. What it means is that we must preserve inflation
expectations around the target at around two years, and so we
need to follow all of the data we have got on inflation expectations.
What has happened so far is that surveys of where inflation will
be over the next 12 months have edged up and it would be surprising
if they had not; so far, further out, they have remained well
anchored. We just have to remain vigilant and take all the fine
judgments, frankly, on what is happening to inflation expectations.
Q66 Mr Todd: I suppose it also depends
on one's expectations of oil prices into the future.
Mr Tucker: It does.
Q67 Mr Todd: How do you factor that
unknown into this decision making?
Mr Tucker: This is tremendously
hard. We are not, as an organisation or individuals, especially
expert in predicting oil prices; and the quite striking thing
is that those that are apparently are experts are not very good
at it. The one reason for thinking that oil prices might remain
firm, maybe even go higher, is that to the extent that this is
a demand shock coming from the growth of China—I do not
literally mean what I am going to say, but just a picture of it—I
wonder how many people in China have a car now, and how many are
going to have a car in five years' time and 10 years' time? Something
remarkable is happening to the global economy and the lead times
for investment in the oil world are fairly slow. I think that
leaves me feeling that the oil price is unlikely to come off a
lot in the years ahead; I may be proved wrong.
Q68 Mr Love: There will be a lot
of very happy oil companies to hear that. In a speech you made
recently on monetary policy, you indicated that there was not
sufficient appreciation of the scale and significance of inwardly
migrant labour and dampening inflationary pressures. What is your
view on that, today and is there research being carried out as
to the exact impact that is likely to have?
Mr Tucker: I think I was not sufficiently
appreciative, to be perfectly honest. It is tremendously hard,
in that the view is based largely on anecdote. We have got a few
numbers on it but they are not terribly reliable. David was talking
about meetings he did yesterday, I did meetings at the British
Chamber of Commerce in the North yesterday. There were about 20
to 25 firms in the room and I asked about migrant labour and was
it being used, and had it helped to get them through the last
12 months, and there was not a firm around the table that had
used migrant labour actively, but one of them said they did know
of a firm locally that had. I do not want for a second to present
that to you as a realistic picture of what it is like out there.
When one is relying on anecdotal data, it is tough. There is an
equal probability of my walking into a room where half the room
said yes, we have used migrant labour a lot. This is another uncertainty
and challenge in what we do just now. I have little doubt that
it has helped to dampen the effect of demand pressures for inflation
over the past 12 months, partly, of course, because the UK was
open to the new Member States in the European Union before some
of the other countries in the European Union.
Jim Cousins: The migrant labour in the
North East is outward migration. There are some Geordies mixed
with the Poles in West London.
Q69 Mr Love: Thank you for that.
The reason I asked that is, of course, I think there has been
some surprise that there have not been the wage pressures that
I think we would have expected in the current circumstances and
everyone is looking for an explanation of that. You said earlier
in relation to your decision on the Monetary Policy Committee
in August—if I can sort of paraphrase it—while in
the short term situation you might be sympathetic to a rate cut
looking out to two years which is, of course, your primary focus,
it did not look as obviously that, you would be sympathetic to
that rate cut, and I wondered whether that was related to likely
second order impacts and particularly to the possibility that
wage inflation might be stoked during that period. Was that a
major consideration for you?
Mr Tucker: Now, as I tried to
explain earlier, I think it is part of it, yes, because of the
oil price rise. I would like to repeat what I said; it is low
probability but high cost if it crystallises and one has to weigh
the balance of the probability and the cost. That is where I was
in August and where I will be in the months ahead. You have to
accumulate all the data, you not only have to revise your views
on what is happening going ahead, you have to revise your views
on what was happening in the past as well. As I said, we could
spend a lot of time trying to work out what on earth was happening
during a particular phase of the country's economic life and then
it turns out that the puzzle was not there in the first place.
One just has to go into each meeting constantly revising everything.
Q70 Mr Love: You mentioned about
your visit to the North East and earlier on in the questioning
by the Chairman you indicated that you have a five day plus week.
There is often the criticism made, especially of the Bank employee
side of the Monetary Policy Committee, that they are very London-centric
and very services-centric. How do you respond to that criticism
and how do you ensure that you both get out of London and do not
only take into account services?
Mr Tucker: Via the Agency visits,
like the kind of thing we were doing yesterday. I have got a dinner
this evening with a group of business people, CEOs, finance directors
and chairmen. The dinner is in London but the companies that they
operate are all over the United Kingdom, these are FTSE companies,
all over the United Kingdom and all over the World. It goes with
what I said about the data. The data gets revised and therefore
the anecdote is absolutely vital. One wants to see whether the
anecdote, the surveys and the data are all aligned. It is an absolutely
integral part of what we do. In my own case, I also travel abroad
a lot to talk to financial market participants and, if you like,
that is serving both my executive job and also my job on the Monetary
Policy Committee.
Q71 Ms Keeble: A small question,
which is based on that, which is also about the way in which you
get and assess regional data and other data. You have mentioned
quite frequently your visits and so on which has been very interesting.
It is also very interesting that when it comes to something which
is politically, and one would have thought economically sensitive,
which is about the impact of migrant labour as a labour market
factor on the economy, that you said you did not have clear data
and you are relying on anecdote. I think it was either you or
your colleague that mentioned about the database. How do you ensure
that the regional data you get is representative and thorough
and that the contacts you have, while they can be very colourful
in comparison with being based in London, that they are actually
relevant and properly reflect what is happening? How do you then
go through a process of assessing that and weighing it up against
the other factors which sometimes are much more substantial when
it comes to making your decision.
Mr Tucker: I think what the members
of the Committee do ourselves are snapshots and I do not think
would deliver what you are getting at. I think the key part of
that is the agencies that we have based in 12 parts of the country,
and they are out there all the time with their deputy agents,
talking to their contacts, of which there are about 8,000. One
quite important comment on that: we have made some improvements
to this, but the balance between manufacturing and services and
their contact base does not reflect the balance of manufacturing
and services in the economy. It is weighted slightly more to manufacturing,
simply because there are so many small services companies. We
try and get to those through local surveyors, accountants, lawyers
and bankers and so on. What they do, they present to the Committee
in a joined up way each month, when we get briefed on the Friday
before the policy meeting on the following Wednesday and Thursday,
so that is put alongside the data; is a kind of compare and contrast
process, if you like. What we try and do is distil questions when
they do not appear to fit together. It is a tremendous process
for generating questions and the right things to look at. I do
not think it can ever give us definitive answers.
Q72 Ms Keeble: Can I come back once
again. I think the regional agents are extraordinarily good because
we sometimes host sessions for them, and obviously that is a very
important role and a very constructive one. How proactive is the
Committee in terms of not just receiving the data but ensuring
that the processes and the consultative mechanism, (which again
it is very easy for one sector to sort of capture somebody) are
properly reflected and they do capture all the different aspects
that need to be considered including the labour market aspects
in a rigorous and systematic way?
Mr Tucker: They have score charts,
which we now publish, and so those are open for public scrutiny.
That is one level that I think goes towards delivering that. Another
is that most months the Committee decides on a question which
we would like to have answered, a special question alongside what
they are normally doing; and the agents themselves have no control
over the questions that we ask, they just have to ensure that
they have got a contact base which can deliver the best answers
that are available to them.
Q73 Ms Keeble: You do not scrutinise
the contact base?
Mr Tucker: I think I have said
that the contact base is weighted more to manufacturing than in
the economy as a whole. We do sufficient scrutiny to identify
that. It is difficult to redress it completely. We have made progress
on that in recent years.
Q74 Jim Cousins: You gave us a wonderful
phrase in the course of our discussions this morning. You said
that "The regime change that occurred in 1997 to monetary
policy can insulate against boom and bust". Well, we are
all New Labour now, but the Governor seems to becoming post New
Labour, if I can put it like that, because in his recent speech
he says, "The business cycle has not been abolished although
monetary policy can affect its amplitude". He finished by
saying, "There has grown up, in recent years, a false sense
of our ability to maintain a smooth and steady growth rate of
output". So you are being New Labour, but the Governor is
being post New Labour, do you think there might be some tensions?
Mr Tucker: I agree with what he
said and in fact I have been urging colleagues to get across precisely
this message for some while, and I have been trying to do so.
We cannot abolish the business cycle; the business cycle does
not equate to boom and bust. On boom and bust, we cannot prevent
boom and bust in particular sectors, we saw pretty close to that
in telecom and ICT a few years ago; we skirted with that in the
housing market. We should be able to prevent boom and bust across
the economy as a whole in the way that we experienced all too
many times in the past. And the Governor does not need me to speak
for him but I am pretty sure that he would agree with that.
Chairman: Mr Tucker, thank you very much.
The description of yourself as "A mainstream economist"
is admirable when you compare it to Mr Walton's mouthful on that.
So with that in mind, would you give him some lessons in brevity
before he appears before this Committee again. However, thank
you very much for your attendance and the work you have done in
the past session with the Monetary Policy Committee. We wish you
every success in your re-appointment. Thank you.
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