Treasury Committee Questionnaire ahead
of appointment hearing for Sir John Gieve
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?
No.
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 and as Deputy Governor responsible for financial stability.
My experience in HM Treasury over 20 years gave
me considerable exposure to the main issues of economic and financial
policy and involved working closely with the Bank. In particular,
as Principal Private Secretary to the Chancellor, I was privy
to all the main policy discussions across the range of the Treasury's
responsibilities (which then included monetary policy). Later,
as the director responsible for the Budget and Public Finances
and then Public Services and expenditure, I was closely involved
in the decisions on overall fiscal and economic policy. That experience
will be of value to me as a member of the MPC.
The skills I developed as Permanent Secretary
in the Home Office and, before that, on the Treasury Management
Board will enable me to support the Governor in leading and managing
the Bank.
My responsibility in the Home Office for counter
terrorism and financial crime will be of value in taking responsibility
as Deputy Governor for contingency planning and in my work as
a member of the board of the Financial Services Authority. I was
for three years head of the division in the Treasury dealing with
financial regulation and banking. In that role I worked closely
with the Bank on issues relating to the financing of small firms,
negative equity, the regulation both of domestic and EU banks,
and the potential impact on financial stability of banking failures
including the collapse of BCCI. Later I was the Board Director
responsible for financial regulation and a member of the Standing
Committee which brings together the Bank, the FSA, and the Treasury
to discuss their work to maintain financial stability. I also
spent two years working for a venture capital company. The experience
and knowledge I gained in these jobs will be directly relevant
to my responsibilities as Deputy Governor for Financial Stability.
4. To what extent will membership of the
MPC require a different approach from that required in the senior
civil service with regard to the discharge of the duties and responsibilities
involved?
Both roles require a similar commitment to the
public interest and public service values. The main differences
lie in the Bank's independence from Ministers and the individual
public accountability of individual members of the MPC for their
votes.
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?
I think it is important for any public body
to account to the public for its decisions and performance. It
is particularly important for the Bank and for the MPC because
maintaining public trust and credibility is essential to its ability
to deliver monetary and financial stability. Accounting to Parliament
both in written reports and in committee hearings must be a central
part of that. Given the individual responsibility of MPC members
for their votes, the Parliamentary process needs to include some
individual accountability. As far as I can see, the present process
works well. I will have a better feel for how this works after
Thursday.
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 think the criteria should include: the success
of the MPC in meeting its target; my contribution to that in terms
of my voting record and also my contribution to internal debates;
my contribution to building the public's trust and understanding
of the Bank and its decisions for example through speeches and
regional visits. Obviously my contribution to leading and managing
the Bank and its work on financial stability would also be relevant.
C. MONETARY AND
ECONOMIC POLICY
7. How might the post-1998 monetary policy
control system be improved? Is the framework of an explicit symmetrical
inflation target the best within which to conduct policy?
It is too early for me to judge whether there
are practical ways of improving the process but I am convinced
that the main features of the present system are right in principle
and they have been remarkably successful in practice. In particular
I think the clarity of a public inflation target not only ensures
that the Bank focuses on the final outcome but helps to condition
inflation expectations. I favour a symmetrical target because
it requires the Bank to take the risk of an excessively tight
policy as seriously as the risk of too loose a policy and thus
contributes to the broader goal of economic stability.
8. What issues do the increasing levels of
household indebtedness present for financial stability and monetary
policy?
The MPC is bound to give a lot of attention
to the household sector balance sheetboth assets and liabilitiesin
judging the likely course of the economy and prices. It is a major
factor in determining consumption. At present I doubt whether
the increases in unsecured borrowing are sufficiently large to
have great significance for monetary policy although they raise
some social concerns. The rise in mortgage borrowing has accompanied
the rise in the value of the housing stock. Given that, it is
not likely that the level of secured borrowing poses a risk to
monetary or financial stability over and above the risks posed
by the current high level of house prices. I would expect the
MPC to monitor this risk closely as part of its wider assessment
of the inflation prospect. We need also to assess the impact of
the rise in the levels of household debt on the sensitivity of
households to interest rate changes.
9. How great is the risk to UK growth and
inflation posed by high oil prices? How should monetary policy
react to higher inflation caused by increased oil prices?
I think the general view among economists is
that the immediate impact of a rise in oil prices on the CPI cannot
be offset by monetary policy which should look beyond that first
round impact to how it will work through the economy over the
next two years and on the second round impacts for example on
wages. This seems reasonable to me but I will want to go into
the issues closely in the coming weeks. So far the sharp rise
in oil prices over the last couple of years does not seem to have
fed through into a longer-term rise in earnings or inflation expectations
but that is something we will need to continue to monitor closely.
Both the impact on prices and the wider impact of the rise on
the economy will depend on the causes of the increase (which seem
different now than in the late '70s for example).
10. 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?
I know from experience both how critical these
questions are for monetary policy and how easy is to get them
wrong. The MPC's starting point has to be our target ie we need
to focus on the impact of asset prices and the exchange rate on
inflation and not give them an independent standing. We need also
to be careful in interpreting relative price movements. While
history has demonstrated that asset price bubbles can arise, it
is rarely possible to be sure at the time whether an asset price
rise is sustainable or is seriously overshooting. Even in cases
where asset prices do seem substantially too high, it may be best
for the monetary authority to draw attention to the risks of market
participants and prepare to respond effectively to the expected
correction rather than to seek to impact asset prices directly.
11. The IMF recently recommended that "it
would be worthwhile for the [Bank of England]to expand the number
of key macroeconomic variables for which quantified projections
are published".[6]1
Do you agree with this statement? Which additional key economic
variables should the Bank publish projections for?
I will need to get more experience of the forecast
process before I can answer that. In general I do think that the
MPC should be as transparent as possible in its working and reasoning
and the Inflation Report and the monthly publication of the minutes
contribute to that. I am not clear whether that should lead to
publication of quantitative forecasts for more variables. There
is a danger that the need to reach agreement on a wider range
of variables would distract the MPC from its key task of forecasting
inflation and assessing the risks around that forecast. The publication
of a wide range of quantitative projections could also weaken
the focus on the key messages about inflation prospects that the
MPC needs to communicate.
12. Do you believe that the natural rate
of unemployment is a useful concept? On your assessment, where
is unemployment currently relative to the natural rate?
The natural rate of unemployment like the output
gap is a helpful part of the framework for thinking about the
economy, but I do not see it as a reliable method of pin-pointing
exact numbers or actions. The MPC does need to think about how
much slack there is in the labour market in assessing the future
prospects for inflation but it is not possible to do that by simply
comparing the current rate with a known natural rate. The natural
rate is uncertain and liable to change (indeed there are some
grounds for thinking it has been reducing in recent years).
13. What weight do you place on (a) the monetary
aggregates and (b) the output gap in your assessment of inflation
prospects?
I need to do more thinking about this but my
initial view would be that both are useful in forming a judgement
on the likely course of inflation, but should be seen as just
part of the tool set. While in the long term the quantity of money
does determine the level of prices, in the near term the velocity
of circulation is not sufficiently stable or predictable to use
monetary aggregates as a reliable guide to future inflation. The
output gap is not directly observable; judging what it is and
how it is moving requires a broader analysis of labour and other
markets.
14. To what extent should fiscal policy play
a demand management role alongside monetary policy in the short
run?
While a sustainable fiscal policy helps alongside
monetary policy to create economic stability, I do not think fiscal
policy should be expected to play a role in short-term economic
management. Both changes to taxation and public spending take
time to implement and to impact on demand and growth and they
are usually difficult to reverse. As I know from experience, attempts
in the past to use fiscal policy for demand management have not
been encouraging.
January 2006
6 1 International Monetary Fund, Staff report for the
2004 Article IV Consultation, para 42, page 27. Back
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