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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