Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 120-131)


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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