Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 120-139)


20 MARCH 2007

  Q120  Mr Newmark: But from the point of view of the public, earnings in real terms are declining.

  Lord George: They have been rising consistently over many years and if there is a setback this year on certain measures that is the price we pay for keeping the thing moving ahead as it has been doing up until now.

  Q121  Mr Newmark: Interest rates are a powerful but blunt and untargeted tool. Is there more that the bank could do either to influence fiscal policy or request additional powers from the Government to provide a more nuanced response to changing economic circumstances?

  Lord George: I certainly would not want to put the bank in the position of managing fiscal policy as well because the considerations go way beyond economics. They have to balance social as well as economic concerns and that is the job of elected politicians. It is not a technical job like that of the Bank of England, so one must have much more input into that. There was another dimension to your question which has escaped me.

  Q122  Mr Newmark: I am just reflecting Professor Wren-Lewis's written evidence to us that perhaps there is room for manoeuvre for some sort of fiscal inputs into decision-making rather than a focus on monetary policy.

  Lord George: I have absolutely no doubt that tomorrow they will be listening to the Budget and studying the implications over the next period. The Monetary Policy Committee and monetary analysts and other permanent staff at the bank will be taking as much account of all those things as they can. It is not as if we are operating in ignorance of what is happening in the rest of the economy; quite the reverse.

  Q123  Mr Newmark: As a related question, do you think that the bank must remain on guard against changes in fiscal policy that may be detrimental to the smooth functioning of monetary policy?

  Lord George: If that sort of thing was happening in a significant way I am quite sure that the bank would draw it to the attention of the Treasury and Chancellor. The reality is that there are many things going on in the world that the bank cannot and does not expect to be able to influence or cause to be different. What the bank must do is take account of all those things that are happening, for example in the United States, China and India.

  Q124  Mr Newmark: But there is a difference between taking account of something and trying to have influence over it. Is there any thinking as to the bank or MPC having some influence over fiscal policy if needed?

  Lord George: It can express its views to the Treasury.

  Q125  Mr Newmark: It is merely a matter of expressing a view rather than getting hands on any levers with respect to fiscal policy?

  Lord George: I certainly would not want the bank to have levers over decisions about fiscal policy. They go much broader than purely the monetary policy objective, but I think that the kind of advice the bank would give would be, "If you do this it will cause that to happen and interest rates will rocket. Is that really what you want?" But it should certainly not be able to veto decisions or insist that politicians behave in a certain way. I should like to point out that we live in a democracy.

  Chairman: Professor Wren-Lewis mentioned that in exceptional circumstances the bank should take responsibility for some fiscal policies. We questioned him and asked whether it would include VAT and whatever else. I think I can speak for Members here in saying that the argument was to some extent demolished. We entirely agree with you, Lord George.

  Q126  Mr Love: Perhaps I may take you back to the earlier discussion about the role of the bank in terms of asset prices and possible bubbles. To go back to your time at the bank, your opposite number in the US, Alan Greenspan, talked openly about irrational exuberance. We did not say much on this side of the pond in relation to that. What are the limitations on the bank in commenting on what is going on in the marketplace at any time? If you do comment does it make any difference?

  Lord George: I do not believe there are any constraints on bank officials and members of the MPC expressing concerns about what is happening in financial markets and questioning whether that is justified in terms of the underlying situation. As I have already said, the bank takes account of what is happening because those things can have a powerful influence on demand and inflation. I think that anybody who claims to know with great confidence what is happening in the economy, let alone in financial markets, and what the explanation for that is does not understand the questions. It is an incredibly difficult thing. I would be quite surprised to find somebody saying that the exchange rate against one or other currency is much too high or low. Frankly, it can be said that it raises a question that is being determined by financial markets, but to be able to do anything about what is happening in financial markets is not realistic.

  Q127  Mr Love: It just so happens that one of the current external members of the bank seems very sure that there is a bubble in terms of house prices. What he cannot comment on is when that bubble is likely to burst, but that is a different issue.

  Lord George: When I was still in my day job a lot of people forecast a collapse in house prices over the next six to eight months. We are still waiting for it. One must be very cautious about that kind of projection.

  Q128  Mr Love: That probably answers my next question. The odd comment on what is happening in the marketplace will probably not make any difference. Should the bank take a specific view and should all its members comment regularly on matters in order to try to influence markets more than they are doing at the present time?

  Lord George: On the whole, I think they do comment fairly regularly on what is happening in financial markets. The side of the bank concerned with financial stability, not the MPC, produces six-monthly assessments of the risks to financial stability which is a different concern, although they are related and interconnected. Like love and marriage, you cannot have one without the other. I am not conscious of any need to do more than they do in terms of commenting on developments in financial markets.

  Q129  Mr Love: One of the expert witnesses suggested that monetary policy might have been overly-restrictive especially in the early days but that that might have been a temporary phenomenon as the bank was building up its reputation. Do you think there was an element of conscious bias in those early days to establish the reputation of the bank?

  Lord George: No, I do not. I was very conscious of the fact that it was a symmetrical target. That is terribly important because if it is lopsided it does not reflect the original intention. It is not the broader objective of balancing demand with underlying supply. That it is symmetrical is something that we all understood perfectly well from the beginning. But when we were undershooting fairly consistently and achieved 1.5% when the target was 2½% we might have written a letter of explanation to the Chancellor. I rather wished I had done so because it would have relieved the pressure on my successor. We did not have to do that, but fairly consistently we were on the down side. The reason for that I impliedly explained earlier. That arose in the period of weak external demand when business investment was weak because of global recession, so we had to stimulate household demand. That was the role that we could play in it. We knew that this was not a sustainable situation, so we were being very careful not to do more than we felt we absolutely had to in order to keep the economy moving forward, which we succeeded in doing. It was that which caused us to be careful on the "stimulus" side; it was not that we wanted to convince people that we would always undershoot the inflation target, because that was not what we were trying to do looking at it over the longer term. Symmetry was accepted by the MPC from the beginning and was a fundamental characteristic.

  Q130  Mr Love: You think that is a critical part of it?

  Lord George: I do.

  Q131  Mr Love: Who should set the inflation target? At the moment, clearly the Chancellor sets it. Should it be set every year or on a different timescale?

  Lord George: My understanding is that he has changed it only once and that was when he changed the index. If the Chancellor tried to set it every year people would wonder what was going on. I am sure I can imagine a set of circumstances—I cannot think of any immediately—in which it is felt justifiable to say that even 2% inflation is too high given what is happening in the world as a whole and therefore the target will be lowered, or that if we try to deliver the 2% inflation target we will face great weakness and therefore tolerate for a period a higher rate of inflation. I think that would be immensely dangerous and highly exceptional. An elected politician should have the right to take that decision but he would have a hell of a job explaining why he was doing it unless the argument was fairly convincing.

  Q132  Mr Love: That would be particularly the case if he wanted to raise it rather than lower it. Should there be some form of consultation before he made a change of that nature?

  Lord George: I am sure that he would consult with all sorts of people because it would be a very big decision. Although the Chancellor sets the inflation target I believe that is justifiable because there is still a perception that there is a short-run trade-off between growth and inflation. I am dubious about whether that is true, but I believe that is the perception, so in that sense it is a political decision. I think that if the MPC set the inflation target it would draw the bank into a political process. We are very happy to be outside that political process.

  Q133  Mr Love: There has been surprise about the lack of real discussion about what the inflation target is. The Chancellor set it 10 years ago and he changed it only once in relation to the change in the index. There has been very little comment. Does that surprise you? Should there be more comment? Should politicians in Parliament and commentators be talking about whether the 2% symmetrical target is the appropriate measure?

  Lord George: No. I believe that it reflects what I said right at the beginning that there was a broad consensus on what we were trying to do, namely to keep underlying demand growing consistently in line with the supply capacity of the economy. Over the past 15 years we have grown consistently quarter by quarter and I do not think that has ever happened before in recorded history. In those circumstances I believe that the view of the public and across the political spectrum—this is what I mean by "broad consensus"—is that this is a sensible way of carrying on these matters. But that must be low inflation and it must be symmetrical; otherwise, it would just be a doddle. If it was x% or lower one would always guarantee it by driving the economy into the ground which is not a sensible approach and is not consistent with the consensus that has been fundamental to what we have done.

  Q134  Mr Gauke: I want to ask about the transparency of the MPC. Do you think more should be done to allow the positions of individual MPC members to be made public?

  Lord George: It depends on what you mean. Some people have said that in the minutes of the meetings the statements of individual MPC members in the debate should be attributed. I would be very sceptical about that, because when I was there the characteristic of the discussion, particularly on Wednesday afternoon before the policy-making session on Thursday morning, was on the one hand and on the other; that is, lots of individual members would say that on the one hand a particular series of data could be interpreted in one way but on the other hand they could mean something else. If one really attributed individual comments it would be on the one hand and on the other and one would get the impression that they did not know what they were doing. I certainly do not go as far as to say that the minutes should be verbatim because it would change the character of the debate, which I thought was fantastic. People could be open-minded. That is the nature of it. If somebody thinks he knows for certain what the answer is frankly he does not understand the question because it is an art, not a science. Beyond a certain point you know where you are making judgments rather than speaking with certainty.

  Q135  Mr Gauke: One idea that has been suggested is that individual MPC members should write their own personal reports to this Committee. Is that something for which you would have sympathy?

  Lord George: They all participate in the discussion and the draft of the minutes is seen by the MPC. There is a meeting to discuss the draft of the minutes. MPC members are quite free to express their view.

  Q136  Mr Gauke: But would you be sympathetic to the idea of members putting something in their own name as a formal part of the structure?

  Lord George: They can come here and you can ask them questions and they can answer on their own behalf. There is no constraint on that. They can make public speeches and lectures. I believe that it would alter the character of the meetings if one had attributed minutes or nine different sections where individuals wrote their own thing and it was not a discussion of the meeting and interaction but a discussion of the individual point of view. I do not believe that would be helpful.

  Q137  Mr Gauke: What about the idea of the votes on a particular interest rate decision being revealed immediately as opposed to a month later? Would you be sympathetic to that, or do you see difficulties?

  Lord George: That would be great for the newspapers and sensationalism: a hawk voted this way and somebody else voted another way. I do not believe that that would convey very much. I believe that to do it in the context of the minutes is much more informative.

  Q138  Mr Gauke: To return to the appointments process, to paraphrase your evidence you said that you were broadly satisfied with how it worked in your time, but certainly some indication has come from the Bank of England about more recent concerns in that regard. Do you believe that as far as your relationship with Gordon Brown was concerned there was a spirit of openness throughout your time as governor?

  Lord George: Yes. It took time for it to build up, and it began before he became Chancellor. I used to have meeting with him. Ken Clarke encouraged me to do that and I thought it was terribly sensible. We discussed the question of the MPC before the decision was announced. It was important because one needed to develop a rapport and understanding. I had to persuade him that I could be trusted. I believe that that kind of relationship is terribly important, and I would encourage both sides to continue it. As far as I know, they do so.

  Q139  Mr Gauke: This morning we see reports from Lord Turnbull, for example, that Gordon Brown has played denial of information as an instrument of power. Was that ever your experience as Governor of the Bank of England? For example, in relation to the FSA, not specifically the MPC, was that ever your experience of working with the Chancellor?

  Lord George: I accepted that he had certain decisions to take, but he always gave me the opportunity to express my opinion. The FSA was different. I was very surprised; I thought we were going to talk about it, but it was introduced very soon after the MPC for reasons that you will have to ask him about.

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