Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 80-97)

MR LAURENCE SANDERS, MR MICHAEL SAUNDERS AND PROFESSOR JAGJIT CHADHA

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 to add?

  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 worried about?

  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 etc.

  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 that.

  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. [8]

  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 in practice.

  Q93  Mr Todd: Engagement with yourselves as City economists, Professor Chadha remarked that this could be improved.

  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 form—and I have an example of it here—but 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 is—and this feeds into your previous question about the MPC members writing an annual report—I 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 well, yes.

  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 corporate view?

  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.





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