Examination of Witnesses (Questions 80-97)|
6 MARCH 2007
Q80 Mr Gauke: Do you share the concern
that if we make it more transparent and there are names produced,
whether by this Committee or what have you, so it is a much more
open process, that it will be market-sensitive?
Mr Saunders: It may be, but there
may be some way in which that itself could be handled so that
there is a list which is produced by somebody else and is not
released in general. Plenty of things happen which are market-sensitive
and are not broadcast.
Professor Chadha: I go back to
the points made before. In terms of the performance of the MPC
we have had an excellent quality of appointment, so what we have
had to date has done a very good job. I would not see any great
market sensitivity in discussing openly the kind of people who
may be up for the job. Some arguments have been put in terms of
having people apply for the job to a deadline, or we continue
with names emerging. What we must avoid is a situation where we
know vacancies are coming and appointments are made in a hurried
way at the last minute.
Q81 Mr Gauke: Do you think the gap
in 2006 was damaging?
Professor Chadha: Given that in
a number of cases we knew the appointments were upcoming it would
have been better to handle them so that we knew who was going
to be appointed in advance without a sense in which they were
hurried. I do not know whether they were hurried or not, all I
see is second-hand stuff through the media. There is a sense in
which we should be managing that process, so that people are in
place. We also talked earlier about how long it takes to get up
to speed; we have had two new appointees saying that they did
not want to say much about policy for the first three meetings,
for example, and we had a discussion earlier on about the complexity
of the Bank model which can take even professional economists
a year to understand. In that context it might be good for people
to know that they were going to be going onto the Committee some
time in advance so they could prepare themselves.
Q82 Mr Gauke: Mr Sanders touched
upon the role of this Committee. Can I ask the other two members
of our panel what role you see for the Treasury Select Committee
in the appointments process?
Professor Chadha: Thank you. My
understanding of the current process is that the MPC appointee
has been chosen and they will come to this Committee to discuss
themselves and outline their plans and explain to you how they
approach monetary policy, so in that sense it is not a conferral
meeting such as you have in the United States when people are
appointed to office. I am happy to stay shy of going to that level;
we would not want to necessarily introduce an overtly political
dimension to the appointments, I would prefer that we thought
of the appointments as essentially technical appointments of professional
economists to the role of managing the British economy and that
is really what I want to see achieved in this process.
Mr Saunders: The hearings which
they have with you are very important. It is important for MPC
members to show their understanding of the issues and that they
have their own voice and are willing to debate these things. As
to whether it should be a binding vote, it would only have to
be if it was a very overwhelming vote of the Committee because
otherwise you could get into a position in which you get political
games being played. The testimony to yourselves is a very important
part of what they do.
Q83 Mr Gauke: There has been some
comment that perhaps there should always be one external member
with City experience. Do any of you have strong views as to the
criteria that should apply to external members and perhaps the
balance of their experience?
Mr Sanders: My feeling is that
first of all they must have an excellent track record in applied
economics; that is very important. We obviously need the academic
ability and a very high academic ability, but it is the ability
to apply economic theory which is crucial to the MPC appointment.
I believe also in the modern world that the person has to be a
communicator; you must have a person who is not only very good
at looking at their econometric models, econometric forecasting
and macroeconomic theory, but also a person who can communicate
the Bank's views to industry and to other important parts of the
economy, and it is also very important that the person is able
to listen because there is a limit to the amount of information
you can gather from economic statistics, however good. An important
part of the job is to ascertain what is actually happening in
the real world outside, and the communication aspect will be more
important over the next five years or so.
Q84 Mr Gauke: Do you have anything
Mr Saunders: They should be good
economists and whether they come from City backgrounds or anything
else does not really matter.
Professor Chadha: I agree with
that, just good professional economists.
Q85 Mr Gauke: Do you think the terms
and conditions perhaps preclude economists coming from a City
background joining the MPC, and is that something we should be
Professor Chadha: Do you mean
in terms of the length of the appointment?
Mr Gauke: The length of the term.
Q86 Chairman: The three-day week
Professor Chadha: We should leave
it reasonably flexible on the time of appointment. We could get
into the length of their appointment as well if you wanted to,
but I would not imagine that the initial appointment of three
years would be a hurdle for people from any background to go into
the job. That said, there may be a case for considering longer
appointments in the sense that if we want these people to be carrying
out a role, we have discussed earlier some of the technical hurdles
that have to be jumped in order to carry out the role properly
and also we want a sense that the individual is free after appointment
of any sense of the political cycle and we ought to think about
appointments that may be three years extendable to six years,
which is longer than the length of a Parliament or something like
Q87 Mr Todd: One or two fairly quick
questions. To what extent do you think the Bank should publish
its future path of interest rates and their expectations of that?
Mr Saunders, you have already given a view in your submission.
Mr Sanders: In respect of publishing
the path I personally think it is important because of course
interest rates are such a key driver of the economy, and the Bank,
which has published its econometric model, should make clear the
means by which it has arrived at its decision. It sends out monetary
minutes, it provides a detailed quarterly inflation report, so
since interest rates are such a key driver of the economy my personal
view is that the Bank should publish its interest rate forecast.
That would help an understanding of the Bank of England's position
in respect of macroeconomic management.
Professor Chadha: It is a live
academic debate at the moment, so we have not got a clear answer.
The examples that have been cited are very small open economies;
in Norway for example the MPC itself is not critical in setting
the interest rate, it is mainly the governor and deputy governor.
Very briefly, by publishing interest rates and in terms of the
balance between managing expectations and learning from them there
is a danger that by publishing interest rates we may stifle the
market revelation of private information about interest rate paths,
and there is a practical problem about getting large numbers of
people, such as nine, to agree on the interest rate path instead
of a relatively simple interest rate decision, so I would be against
it right now.
Q88 Mr Todd: Good, I have got the
range of opinions there. Individual MPC members are encouraged
to publish articles and make speeches which reflect their individual
opinions; do you think there should be a more formal process of
reporting those opinions at the time of the meetings?
Mr Saunders: For myself I do not,
otherwise you just end up in a position in which everyone starts
off by doing their 10-minute read for the minutes and you lose
the debate. It is important that MPC members give speeches regularly,
it may be that there should be more encouragement for that to
lay out not just the overall Committee's view but any issues which
they themselves think are important. You could otherwise end up
wasting two hours going around the whole committee.
Q89 Mr Todd: Could they present an
annual report of their work on the MPC which alluded to more than
just how they voted and why they voted; it might set ut for example
what they particularly focused on, which visits they have taken
part in and so on.
Mr Sanders: That is an interesting
concept. Most of us are subject to annual reviews and therefore
since these people occupy such an important role in public life,
my personal view is that it would be useful to ask each MPC member
to provide an overview of what has been achieved over the past
12 months and their views on the UK economic management over the
next 12 months or two years, according to their tenure of office.
That is a good idea.
Q90 Mr Todd: As consumers of the
MPC's decisions do you think the decision is communicated adequately
to you? Is there more information that should be given at the
time the decision is made so that you have better information
on which to base your own activities?
Professor Chadha: At the time
of the decision we know there is a vote but we do not know the
outcome of the vote, we have to wait until the minutes are published.
We could give serious thought to publication of the vote split
at the time of the notification of the interest rate decision,
along with a mandatory short statement of the sort that is issued
by other central banks.
Q91 Mr Todd: Would you support a
bias statement which said we are inclined one way or the other
if they voted to keep interest rates stable?
Professor Chadha: Yes, outlining
the issues. We know that there has been a pre-MPC the previous
Friday, we know that the issues have been raised in previous inflation
reports, so we have a sense of what the issues are but it would
be good to know at the time of the interest rate announcement
whether there was dissent and what were the crucial factors that
determined the decision. If I could very briefly say, in January
for example with the surprise hike in interest rates there was
a two-week period where the market was not sure in terms of what
the resolve of the MPC was for future rate hikes that led market
interest rates to be priced higher than they would otherwise and
appreciation in the exchange rate that came off when the information
that there had been a 5:4 split was published two weeks later.
Q92 Mr Todd: That is a very good
example of the point you are making. Would you support a bias
statement as appears in the US system of saying which one is leaning
towards to give some steer in the marketplace?
Mr Sanders: My personal view is
I am strongly in favour of this. We did have a serious problem
in January that there may be people on the Bank of England who
feel that a 1% movement in the exchange rate over 24 hours is
immaterial; I would not agree, and there are many businesses which
operate on very fine margins indeed. When you get this sudden
unexpected shift in the exchange rate, this can have an effect
on quite a few business-people; the Bank of England's job is to
promote financial stability and certainly there have been two
occasions when it is doubtful whether they have achieved that
Q93 Mr Todd: Engagement with yourselves
as City economists, Professor Chadha remarked that this could
Professor Chadha: There are two
specific areas where we could improve engagement. The first is
the Bank's model which we discussed in the previous evidence session.
It is published in book formand I have an example of it
herebut as far as I know, no one has been able to replicate
the model and run it outside of the Bank. In terms of scientific
understanding of what the Bank has done and understanding the
decisions it makes, the Bank model should be something that could
be run outside the Bank by economists or indeed students so that
we could understand better the relationships the Bank has in place.
That would require a full simulation suite and database support,
but it would be an important improvement in transparency as we
try to understand the Bank of England. The second area isand
this feeds into your previous question about the MPC members writing
an annual reportI sometimes think that the fora for discussing
MPC decisions with professional economists is limited. The Bank
of England economists take part in research conferences of an
academic nature but do not necessarily always have direct fora
where they discuss recent policy decisions and future policy risks
regularly with professional economists. That would be an addition
to transparency that would only help the formulation of policy.
Q94 Mr Todd: Would the two of you
broadly endorse that?
Mr Sanders: I would certainly
broadly endorse that, but I would emphasise that it is not just
City economists but obviously academic and other economists as
Professor Chadha: I did not mean
to imply that it should be only City economists.
Mr Sanders: Of course not.
Q95 Mr Todd: That includes the availability
of the model presumably.
Mr Saunders: That model would
be a nice thing to have. The MPC and the Bank in general are quite
good at getting opinions from outside economists; I would appreciate
it if they themselves would speak more.
Q96 Chairman: Finally, just on the
point that Mark was making in terms of individual views and corporate
views, obviously the corporate views are very important, but where
should that balance lie between the individual and the corporate
view, and if individual members of the MPC came out with statements
how as City economists would that help you? What deeper insight
would you have in that area that you do not have just with the
Mr Sanders: Given the experience
of August and January when there did appear to be a problem with
communication, there is clearly scope for improvement in that.
I believe that MPC members probably should make more speeches
and should communicate more freely to avoid those situations occurring
again. The way in which they do this should be left to an individual
MPC member; I suspect that when the MPC members testified before
you they probably emphasised the importance of the independence
of their role and it is a question of independent members deciding
what is the best way. I believe there is significant scope for
MPC members to communicate their views much more frequently. Certainly
from a City economist viewpoint and certainly my experience of
business and people in the public sector is that most people would
welcome the opportunity to hear the MPC members' views.
Mr Saunders: I agree with that.
Q97 Chairman: Laurence, you said
it was important for an MPC member to listen. As a Committee we
have listened very carefully this morning for two hours, particularly
to yourselves for the past hour. It has been very valuable to
us, so can I thank you for your attendance here this morning and
we look forward to further sessions in this very important inquiry.
Thank you very much.
Mr Sanders: Thank you, Chairman;
thank you, Committee members.
8 Ev 66-68 Back