Examination of Witnesses (Questions 120-131)
MR MERVYN
KING, MS
RACHEL LOMAX,
MR CHARLES
BEAN, MS
KATE BARKER
AND PROFESSOR
STEPHEN NICKELL
28 MARCH 2006
Q120 Mr Todd: Obviously, in terms
of concrete improvement that must be true, but I think we all
recognise there is a significant amount of voluntary migration
prompted by expectations of a different life in this country.
Mr King: There is, but much of
it also is temporary, that is, the opportunity to get business
experience here and to learn the English language and then to
go back with that expertise is something that, particularly the
young people, from eastern Europe have come here to gain.
Q121 Mr Todd: But the other element
of migrant labour is the effect that that has on inflation, that
is likely, I think we all accept, to hold down labour inflation
costs. Is that fair?
Mr King: In the short run. In
the longer run, the impact of what happens will depend on how
long they stay, whether they add to the demand for housing and
other services, and they will spend money themselves. It is a
different issue in the longer run, but in the short run, clearly,
it eases some of the pressures on wages there might otherwise
be.
Q122 Mr Todd: Just turning to a point
that I am always interested in, to what extent we know about what
is going on, would you agree that this is another area where it
would be extremely useful to have better quality data to actually
measure the effect of what is happening? I think it is a very
exciting part of what is happening in our economy, but one which
is shrouded to some extent in mystery.
Mr King: Yes. We have quite good
data on employment; we do not have good data on population as
a general proposition, and migration is part of that. So we certainly
do not have good information on the latter.
Q123 Kerry McCarthy: On the latest
employment statistics, which came out a couple of weeks ago, do
you think the increased unemployment figure comes about from increased
labour market participation or is it a result of job losses?
Mr Bean: The other thing that
you want to factor in as well as the two things you mention is
reduced hiring rates by firms. Steve earlier on referred to the
unwinding of labour hoarding. It had been a puzzle to the Committee
earlier on in the year, in the face of a slowdown in growth during
the first part of 2005, why employment growth had looked quite
as strong as it had done. We had expected it to be a bit weaker.
In the event, we think that some of what we saw at the end of
last year was an unwinding of that. So an element of that will
have been lay-offs, redundancies and so forth, but it will also
have been firms reducing their hiring rate, holding off taking
on more labour until they see whether demand is picking up or
not. The other thing I would say about this data is you have to
remember that it is subject to considerable sampling error. It
is not a census of the labour force; it is a random sample that
the ONS take, and because of that there is measurement error,
and some of the pick-up at the end of last year and the, to us,
unexpected robustness in employment growth in the earlier part
of last year may well simply have reflected sampling error in
either direction.
Q124 Kerry McCarthy: So you are saying
that we cannot actually say that there is an upward trend in unemployment?
Mr Bean: No. I think it is highly
likely that unemployment has drifted up over the past year, year
and a half by something like 100,000-150,000, as Steve mentioned
earlier on.
Q125 Kerry McCarthy: To what extent
do you think that increased unemployment impacts on monetary policy
in terms of if households have less disposable income, are they
less likely to increase their consumption if interest rates are
cut?
Mr Bean: It basically impacts
on the monetary policy decision in two ways. One is the potential
demand effect that you have already mentioned: real labour incomes
of households will be growing less strongly. Also, the rise in
unemployment may encourage increased precautionary saving by households,
so that will tend to dampen demand. On the other side, higher
unemployment tends to reduce wage pressure and so reduces inflationary
pressures from that side. The thing that is worth stressing is
that the rise in unemployment, however big it may be over the
last year, year and a half—and any rise in unemployment
is regrettable—is small compared to the overall size of
the labour force. It is something like 0.3-0.4 percentage points.
The big picture is really that unemployment came down steadily
throughout the 1990s and into the early part of this decade and
has really been pretty much flat over the last two or three years.
Q126 Kerry McCarthy: So in terms
of monetary policy, it is a factor but it is not a significant
one?
Mr Bean: At the moment it is a
very modest increase in unemployment. It means some slight loosening
in the labour market, and some loosening in inflationary pressures
as a result of that. It is one of the contributory factors, as
Steve has already said, to why there is a bit more spare capacity
in the economy, but it is a very modest loosening.
Q127 Mr Newmark: The focus of my
questions will be on what might be perceived as artificially low
yields on long-dated bonds. Paul Tucker recently said that there
was evidence of a feedback effect from pension funds buying bonds
to match assets and liabilities, and a consequent fall in real
yields, which in turn caused a rise in funds' measured liabilities
and an increase in demand for long-term bonds. Does the rest of
the MPC believe that there is some sort of feedback loop happening
here, and how strong is the effect, and what are its implications?
Mr King: I think it is likely
that the somewhat lower long-term real interest rates in the UK
than elsewhere are explained by the impact of pension funds wanting
to invest in safe long-term, particularly index-linked assets,
government bonds.
Q128 Mr Newmark: Wanting to have
been or forced to, effectively?
Mr King: It is almost certainly
both, because if you are a pension fund looking for a safe way
to finance the additional liability that you have incurred by
hiring people for an extra year, you need to put it into index-linked
bonds in order to be completely sure that you will have the income
in the future to meet the pension payments. So it can be both
voluntary and also required by the regulator. What impact that
has on long-term yields depends very much on the supply of these
assets, and of course, the Government has now increased the supply
of these long-term assets. It announced in the Budget that more
of the borrowing requirement will be financed by issuance of long-term,
particularly index-linked gilts than would otherwise have been
the case, and that seems a very sensible move.
Q129 Mr Newmark: That partly answers
my next question. To what extent did the announcements made in
the Budget regarding the increased sale of long-dated bonds indicate
that the Government was taking advantage of low yields?
Mr King: Clearly, it could not
have been taking as much advantage as it might otherwise have
done because it was not borrowing more at that end. It has sensibly
shifted a bit more in that direction, but this is really all about
long-term strategy for funding the public debt and also for financing
pensions. This is a very big question. There is clearly a role
on both sides of that for the Government to finance public debt
by the issuance of long-term index-linked securities and for pension
funds to invest in it, so those things happily come together.
Obviously, although it is only a marginal change at this stage,
Government funding has moved in that direction, giving the pension
funds greater opportunity to acquire the assets which naturally
they would wish to do.
Q130 Mr Newmark: You have talked
about the advantages and the positive side of things. I am curious:
would there be any disadvantage from increasing the supply of
long-dated gilts further? To what extent does increasing the supply
of long-dated bonds crowd out long-term private sector investment?
Mr King: The answer to the second
question depends on whether it is a ceteris paribus issuance
of more public debt or whether it is a substitution for other
kinds of public debt. On the first, I think it is a natural direction
to go for more of the public debt to be financed by long-term
index-linked securities than has typically been the case in the
past. It is also a natural way for pension funds to invest in
more of those securities than they have in the past. But the big
question—and this is not for us; it is for the Government—is
that this has to be done within the context of an overall plan
or remit for debt management as a whole; it should not be just
a sequence of discretionary decisions. Sensibly, the Treasury
have put it in the context of their debt management remit, and
equally, pension fund financing should also be seen as part of
the longer-term structure. So let me throw it back to you and
suggest that the next time you have a session with those responsible
for those two areas, you ask them what the long-term remit and
plan that they have is.
Q131 Chairman: That will be Thursday,
Governor, so that is good timing. You are sympathetic to the issue
of longevity bonds. This may be something we could be asking about
again on Thursday, is it?
Mr King: By all means, ask whatever
questions you would like, but I have not suggested questions.
Chairman: I understand that. We can take
a hint. Governor, can I thank you and your colleagues for the
evidence you have given us this morning. It was an excellent session.
We also look forward to you coming to our evidence session on
the globalisation inquiry, particularly with the IMF, and we are
delighted that you have accepted our invitation. To Professor
Nickell, on behalf of the Committee, can I thank you for your
significant contribution to the Monetary Policy Committee, for
your cooperation with this Committee and, most important of all,
best wishes in your future life, which I am sure you are ready
to go to now. Thank you very much.
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