Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 57-59)

MR LAURENCE SANDERS, MR MICHAEL SAUNDERS AND PROFESSOR JAGJIT CHADHA

6 MARCH 2007

  Q57 Chairman: Welcome to the Committee for this evidence session from City experts; can I ask you to introduce yourselves for the shorthand writer, please?

  Professor Chadha: Jagjit Chadha, I am at BNP Paribas, head of quantitative economics there.

  Mr Saunders: Michael Saunders from Citigroup.

  Mr Sanders: Laurence Sanders, treasury manager and economist at Bank of Ireland Group.

  Q58  Chairman: You are all very, very welcome and we are here to get your expert advice from a City perspective of what we should do in this inquiry, looking ahead to the next 10 years. Could I ask a general question; to what extent do you think that the record of the Bank of England and the MPC over the last 10 years has been due to judgment rather than luck? Laurence, do you want to start?

  Mr Sanders: I believe that it is primarily due to judgment, but there have been global factors. The global factors have been positive from a UK perspective and we have obviously seen the growth of internet purchases by UK citizens which has exerted a downward pressure on growth and on inflation, but I believe that it is primarily judgment. If you look at the track record of the MPC you will see that it not only maintained its target, but it was very close to central target when adjudged by the previous RPIX measure or by the current CPI measure. I believe the fact that the Bank of England was so close to that central target consistently over a period of time represents a strong element of judgment.

  Mr Saunders: Let us start by saying the record has been very good; it is a bit of all three. The framework is good, the judgment is good and they have been lucky. The luck has come from very favourable external circumstances on the whole, the UK has had a much bigger decline in consumer goods prices than any other European country or than the US, and that has made it easier to keep inflation under control. I am not sure that the next decade is going to be so lucky.

  Q59  Chairman: Let us say it will be a less nice decade. Jagjit.

  Professor Chadha: I would agree with everything that went before really. The thing to think about when you think of the MPC is that it has been charged with hitting an inflation target and it has done that throughout its period. It has effected low and stable inflation throughout 10 years nearly; it has been within its monitoring bands at all moments—that is a remarkable achievement. We know that when the current Chief Economist at the Bank of England (before he became Chief Economist) assessed the regime, his own work thought they would been outside the 1% band 40% of the time. That was written in 1998, but it turned out they have not breached the band at all. There was a sharp collective intake of breath in January when we thought the letter may have to be written and it turned out that the CPI was at 3%, not breaching the range of 3.1%. In fact, as a bye-the-bye, I almost would have preferred the letter to have been written, that we could have then judged the efficacy of this particular instrument as well, in terms of understanding what it meant for both the Chancellor and the Governor to have written the letter. There have been many factors in favour of the MPC meeting its target; it is an excellent regime and, as was mentioned by the previous speakers, there has been a widespread consensus for price stability, not only here in the UK but globally, and that has been a tremendously important factor in inflation being stable throughout this regime. The effects of globalisation and immigration have also been important.


 
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