Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 20-39)

  Q20 Angela Eagle: I often ask this of Monetary Policy Committee members, to define how they would characterise their view of theory and economics and the last answer to this question I had was a "neoclassical-Keynesian synthesis man". How would you describe your general theoretical economic position, your own beliefs?

  Sir John Gieve: I think the last answer you got was "mainstream" from Paul Tucker and I am happier with that. Actually the gap between Keynesian and monetarists and neoclassical has muddied over time. When I was learning economics as a student I was a Keynesian, in effect, and that was back in the midst of time. Monetarism then came in, but actually—

  Q21 Angela Eagle: Did you leap enthusiastically on that particular bandwagon?

  Sir John Gieve: No, I was sceptical to begin with actually, but there were some fundamental insights in there which have been embodied now in mainstream economic thinking. I suppose I would think of myself as a practical economist.

  Q22 Angela Eagle: You have been described as "relatively risk-averse"; where does that put you in the hawk/dove line—closer to hawk or dove?

  Sir John Gieve: I do not know who has described me as relatively risk-averse. I do not think it is very helpful to think in terms just of hawk and dove, and I have not actually been through one meeting so I do not know where my colleagues in the MPC are and how hawkish or dovish they are. So I am not going to be labelled like that. I suppose the only thing I would say is that my particular responsibility in the Bank is financial stability and I am also on the FSA Board and that is bound to give me a particular concern about risks to financial stability.

  Q23 Angela Eagle: It is probably best to be risk averse in that context then?

  Sir John Gieve: Yes, and I know Sir Andrew Large expressed concerns a number of times about the state of markets and whether asset prices were getting out of alignment, and so on, and I will follow him in being concerned about that, but I do not know whether that makes me a hawk or a dove.

  Q24 Angela Eagle: On inflation, given that there are still great uncertainties as to the further impacts of high and continuingly high energy prices, to what extent do you think it is appropriate to maintain interest rates at a slightly higher level than would have been the case had we not had this phenomenon of much higher and long-lasting energy prices than was originally assumed would be the case?

  Sir John Gieve: Obviously the continuing impact of oil and even more, perhaps now, gas prices is something that the MPC will be looking at this month and next month and it is a continuing cause of concern. I am not sure you are right in saying that you need to maintain higher interest rates in the face of an oil price hike. The oil price hike has a number of effects and one of those is, if anything, to depress output and growth. So the key issue around the oil price hike is: is the impact on consumer prices a one-off or is it getting embedded in expectations and wage behaviour? So far it does not seem to have been but, as I say, particularly on gas prices, that is something we are going to have to watch over the next few months.

  Q25 Peter Viggers: May I say, Sir John, that I well remember your time as Private Secretary to the Chief Secretary of the Treasury and your subsequent career has given me satisfaction, untinged with surprise. May I ask, how serious do you regard the problems facing private sector pension schemes at the moment?

  Sir John Gieve: There are a number of different pension problems. Are you referring to the indexed gilts issue or the fact that there are deficits in many of the schemes?

  Q26 Peter Viggers: The fact that there are deficits in many schemes and that the Pensions Protection Fund is now taking action which could threaten a large number of companies and bring in good companies as well as the less strong.

  Sir John Gieve: I am not going to comment on the last point, I do not know enough about the Pension Protection Fund and I am not sure this is a regulatory problem. My sense over pension schemes is that, first of all, especially on defined benefit schemes, a lot of companies have been closing their schemes to new members and that has changed the way in which the accountants and actuaries and businesses who are responsible for them are looking at their remaining liabilities, which are more predictable. It is their judgment, if you like, that they need to match liabilities and assets more closely. That is definitely having an impact in the very long index gilt market and I know—and it is in the papers again today—that the DMO and the Treasury and so on are thinking about that and what impact it will have on their future debt issuance programme and so on. From a Bank point of view the question is, firstly, is this going to affect consumer prices in the next couple of years, from an MPC point of view? Secondly, is this going to be a source of systemic instability? I do not see that myself. So there is a lot to worry about for the Pensions Regulator but I do not actually see the current level of low interest rates resulting from that as a particular threat to the system.

  Q27 Peter Viggers: The point I am working towards is this: that my colleagues have referred to the comment that the Bank of England might look like the City branch of the Treasury with two Deputy Governors from the Treasury area, and I wonder whether it could be that there is a lack of awareness within the Bank of England of the practical problems of running a private business? It is a reflection of that.

  Sir John Gieve: That is a slightly different point. I think the MPC in particular, but the Bank generally have made a big effort over the last few years to get out and make sure that they do have direct contacts with a wide range of private sector businesses through a programme of regional visits and so on and so forth. I do think that that is highly desirable and necessary and I would intend to do that too. Clearly, switching from Andrew Large, who spent most of his career in private business, albeit in the City and international finance, to me, means I have to work to bridge that gap. He had a broader experience of that than I have had and I am going to have to work hard to try and establish those contacts. There is always a risk that the Bank could get out of touch but I think it has programmes in place to prevent that happening.

  Q28 Peter Viggers: In practical terms how many regional visits do you plan or expect to make each year?

  Sir John Gieve: I have looked at my forward programme and I have one next week to Yorkshire; I have four in the diary for this year, and I will start with that; I will add to them rather than reduce them.

  Q29 Peter Viggers: There seems to have been an attempt recently by a number of members of the Committee to talk down the ability of monetary policy to stabilise output. Do you think that an unrealistic expectation has grown up that the Monetary Policy Committee has abolished the business cycle and will be able to deliver constant quarter-after-quarter growth?

  Sir John Gieve: I think there is a risk, yes, because we have had a remarkable period of stability, both on output and prices. So I think it would be surprising if there was not. I think the public and business tend to have quite limited memories so the fact that this has now been going on for 10 years plus means people are getting used to it. I do not know that they have the view that the Bank in particular can guarantee this, but I think there is a risk that people are a bit too sanguine about the stability in the future. The remarks that you are referring to, that Mervyn, for example, has made about bumpy roads and so on, are intended to remind people that this has been very, very unusual in the last few years and that the Bank and other authorities cannot guarantee a path for output, although I think the new framework can prevent the sort of booms that we have seen in the past, which have been associated with very high inflation—that is the point of the system.

  Q30 Chairman: Sir John, in your time as head of the Financial Regulation and Banking Service at the Treasury and your two years working for a venture capital company, as you mention on your form, surely that must have given you an insight into private industry? What did you learn from that, particularly your two years in a venture capital company?

  Sir John Gieve: I learnt a great deal. It is some years ago now but I had a portfolio of investments largely in West London, largely small. It was in the 1980s, it was a mixture of loans and equity investments which were going bad and new opportunities to invest and I learnt a massive amount about how you judge a business, and I cannot encapsulate that in a few pithy points. I suppose at the small business end, which is what I was dealing with, the key lesson I learnt was that it is all about people and not about models and business plans.

  Q31 Mr Newmark: Turning to consumer spending and taxation, to what extent do you agree with the Governor that the quite sharp rise in the ratio of taxes to household disposable incomes has contributed to the slowdown in consumer spending over the past couple of years? And will the increased tax ratio continue to act as a long-term drag on consumer spending?

  Sir John Gieve: It must have been a factor. There are other factors, the oil price rise, and the fact that the MPC put up interest rates, so a number of factors have contributed but certainly the increase in the tax acts as one of them. As for the longer term, the key thing is what happens to the tax take in the longer term? The government is not predicting a continuous rise in that; if it were then clearly that change would continue to be a factor holding down consumption, but that is not what it is projecting.

  Q32 Mr Newmark: You have just alluded to the interest rate rises in causing the slowdown in 2004 and 2005. In your mind how important was that? Was that critical in slowing things down or were there other factors?

  Sir John Gieve: There were other factors and I have referred you to them, but, yes, I do think that was a very important factor, both in signalling the way that interest rates affect the economy both mechanically, if you like, through changing the balance between savers and borrowers, but also in signalling the future course of the economy, and I think it did both.

  Q33 Mr Newmark: Unfortunately under the Chancellor's watch growth seems to have slumped from about 2.7% to 0.5% growth, probably its worst performance since 1990. What prospects do you see for consumer spending growth over the coming year or so?

  Sir John Gieve: On your first point I think to call it a slump is exaggerating.

  Q34 Mr Newmark: You do not think 2.7% down to 0.5% is a very large drop?

  Sir John Gieve: I think the latest GDP figures, which came out just yesterday, suggested 0.5% in the last quarter.

  Q35 Mr Newmark: I just want to flesh this out a bit. You view 0.5% growth as not bad, reasonable?

  Sir John Gieve: 0.6% for one quarter, at that rate you are around 2.5% for the year, which is not a slump, that is the point I was making. What we saw was quite a rapid slowdown at the end of 2004 and the beginning of 2005 and it looks now as though growth and consumption growth picked up again towards the end of the year and that the Bank's inflation report in November saw growth moving back up to 2.5% to 3% over the next two years at the centre of its range. I think just looking at the newspapers today that that seems to be where the market is now.

  Q36 Mr Newmark: You mentioned the issue of the high price of oil. To what extent did the relatively high oil price explain the slowdown in growth—which you do not believe is a slowdown—that is perceived out there in the rest of the market for 2005?

  Sir John Gieve: I did not say there had not been a slowdown; I said there had been a slowdown. I think it was a factor, it was a factor on consumption; it may have been a factor on investment as well; and, of course, it may well have had supply side effects in changing relative prices and making some capital unproductive. But, yes, I think it has been quite an important factor.

  Q37 Mr Newmark: Given that this is an issue that the markets are looking at and drilling down a little more, what sort of data will you be monitoring to determine whether higher oil price rises have had any second round effects on earnings or inflation expectations?

  Sir John Gieve: First of all, you look at the actual earnings figures and the price figures and the surveys of price expectations as well as, if you like, the embedded price expectations in markets. On earnings, of course, there is a lag between deals being done today and average earnings and so you also have to look at deals today, and January/February are important months, particularly in the public sector. So we will be looking at those and trying to assess whether there is any sign there that things are picking up. As I say, so far there has not been much sign of that but the game is not played out yet, and on gas prices particularly there are some warnings of further increases in gas prices and we will have to watch those too.

  Q38 Mr Newmark: The Governor has said it is important that the fiscal rules are met and that they are an integral part of the overall macroeconomic framework. How much more difficult would it make your job in helping to set monetary policy if the Chancellor fails to stick to those fiscal rules?

  Sir John Gieve: We have to set interest rates to deliver a certain inflation result and if fiscal policy departed or changed in effect to be more permissive then we would see effects on monetary policy. How difficult it would make our job depends how stable it was and what the policy changed to.

  Q39 Mr Newmark: I am particularly interested in how much would the Chancellor have to miss his golden rule before you became concerned, and does the golden rule have any meaning to you?

  Sir John Gieve: I am a supporter of the golden rule.


 
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