Examination of Witnesses (Questions 180-199)|
24 APRIL 2007
Q180 Chairman: In terms of your review
of housing I think one former civil servant mentioned that these
were what you would call "celebrity" reviews by the
Chancellor. First of all, would you agree with that comment and,
secondly, how useful has it been given that you have undertaken
one of those reviews for the Chancellor?
Ms Barker: Useful for the Committee
do you mean, or useful more generally? I was rather startled to
hear myself described as a celebrity, which I would have thought
was rather unlikely. The reason for having independent reviews,
a little bit like the reason I suppose for drawing in management
consultants, is that you want to have somebody in sometimes when
there is disagreement between different people in government or
when you want to bring someone in to take a good, hard look at
the evidence. One of the things I think that is important when
you are doing independent reviews is the interim report stage
when you lay a lot of evidence out for public debate, and in some
sense because you are independent that can be done very openly.
It is a little bit more difficult sometimes for government, who
after all has been involved in setting the policy that is concerned,
to lay it out in such an open and honest way. I think that is
the contribution that external reviewers of a subject can make.
They come to it with genuinely fresh eyes.
Q181 Chairman: Good but like management
consultants you do not want too many, do you?
Ms Barker: When you are working
in a company you certainly do not want too many. The Treasury
has of course run a number of reviews. They are running rather
fewer at the moment. Last year of course the reviews that were
run were on related topics. It made quite a lot of sense to run
my review alongside the Eddington, Leitch and indeed Lyons Reviews.
Personally I think the four independent reviews there added up
to a big body of work. I look forward to the Government taking
Q182 Chairman: Good. As we know,
the Governor wrote a letter to the Chancellor last week because
inflation is above 3%. This session is nothing to do with that.
We do that business in the Inflation Report when the Governor
and the rest of the MPC Committee come before us. Maybe one question
that arises from that is the issue of low inflation and the need
to cement low inflation. Does the Bank have more to do to convince
people about low inflation and the fact that it is non-negotiable?
Professor Besley: Obviously when
you say there is more to do it is an on-going challenge for us,
particularly at this time when CPI inflation is running at 3.1%
and RPI inflation at 4.8%. I think a very central part of the
success of the monetary regime we have had is the way it has anchored
inflation expectations around the target. If we were in danger
of losing that anchoring that would of course be deeply problematic.
I do not believe at this point that we are and I think it is going
to be critical in the May Inflation Report for us to lay out our
thinking about inflation going forward over the medium term and
to see through what seems to be short-term level of volatility.
I do not think personally think that there is more that we need
to do beyond what we would be doing anyway, which is to convey
our views clearly.
Professor Blanchflower: I agree
with that. I think it is very important that we communicate our
views to the general public and make it clear that we are going
to contain inflation. Clearly there has been some degree of volatility
recently and I think that is some of the story that Tim has talked
about. Going forward we obviously need to communicate what our
strategy is and that we will do everything we can to keep the
inflation rate down.
Q183 Chairman: Kate, you have made
Ms Barker: In terms of doing more
to convince the public, one of the things that I have looked at
over the time I have been on the Committee is the responses to
the Bank's survey in terms of people's knowledge about who sets
interest rates and how the whole process works. It is perhaps
a little bit disappointing that we have not seen a greater growth
of knowledge from the public. Those percentages have not risen
very much during the time that the MPC has been around, so the
work that the Bank has been doing is important, particularly with
young people. We of course run a schools competition, we have
also prepared quite a lot of material for schools, so certainly
at the younger end of the audience we are doing quite a lot to
communicate, but obviously that leaves a lot of people we do not
get to. One thing I would say about the Bank's agentsand
we often talk about the work they do in the business community
bringing information back to ussomething we talk about
a bit less is the amount of time they will spend talking to different
groups such as Women's Institutes and other groups of people who
meet who look for speakers. The Bank's agents are good speakers
on our behalf and they are very good about helping to spread the
message more widely. But I am concerned we still have more to
Dr Sentance: In my view the most
important thing for anchoring expectations is people's experience
of inflation. I think the fact that since 1992 we have had a long
period of low inflation has been a great benefit in the current
framework. I think the longer that inflation remains above the
target the more there is the risk that that does begin to affect
people's expectations, so I think, as the Governor's letter indicated,
the expectation that inflation returns to target quite quickly
is quite important in this context.
Q184 Chairman: On the issue of the
Governor's letter how are you as external members involved in
the letter writing process and do you feel your views were adequately
Professor Besley: Yes.
Professor Blanchflower: Yes.
Dr Sentance: We participated fully
in the drafting process.
Q185 Chairman: And you had adequate
discussion? Did you have a meeting on it?
Dr Sentance: Obviously there was
a limited time available, but, yes, we met together as a Committee
and had an opportunity to give a further round of comments.
Professor Blanchflower: We have
met in the past to talk about what would happen if this occurred,
so we have planned it and prepared for such an eventuality and
talked about it in the past as well.
Q186 Chairman: We did question some
former members of the MPC and they felt it would have been good
if they had been involved in the letter writing process so it
must have been quite good for you, was it not?
Ms Barker: Yes.
Q187 Kerry McCarthy: Can I ask about
the housing market. One of the banks that gave written evidence
to us said that they felt the MPC's decision to downplay the role
of the housing market has gone too far. Do you agree with that
or would you agree with the analysis in the first place that the
MPC has made that decision?
Dr Sentance: I am not conscious
that we have made that decision. We are following the housing
market because experience has taught us that housing market developments,
while they do not necessarily cause broader demand conditions
to change in the economy, are often associated with changes in
demand conditions. Factors like income expectations and interest
rates affect both the housing market and broader consumption decisions
which is the biggest element of demand. So I think if you look
at the Inflation Report and the communications in the minutes,
you will see there is still a considerable amount of discussion
about housing market developments. I think the sense in which
we are maybe down-playing it is we are not reacting to every minor
movement in the housing market by changing interest rates. Certainly
to my mind, looking at the demand conditions that we have seen
changing in the UK economy over the last year, the fact that the
housing market picked up strongly has been a very important signal
that demand had picked up.
Ms Barker: It is true that we
had a discussion a little while ago, I cannot remember exactly
when it was, when house prices were rising very strongly, about
the relationship in the model between house prices and consumption.
Of course it is a matter of some dispute whether or not rising
house prices really add to consumption directly or whether they
only do so through their role in terms of giving people more collateral
to borrow against. The conclusion we drew then was that if you
looked back at the historical tie between house price and consumption,
a lot of that had been driven by the fact that previous periods
of strong house prices were linked with strong periods of rising
income expectations and that that was what had led consumption
to rise more strongly in those previous periods. The rise in house
prices that we have seen over the few years has not been so strongly
linked with rising long-term income expectations, it has been
linked rather more with the big fall that we have seen in long-term
real interest rates, and to some extent with the restrictions
of supply in the housing market relative to demand. In those circumstances,
it seemed to us more likely that the link between house prices
and consumption would not be so strong so we took the decision
to reduce that a little bit in our thinking. Subsequent experience
with continued rising house prices and continued growth of consumption
has not led us to need to go back and retake that judgment, so
I feel that that was the right judgment. I do not feel we are
downplaying it relative to what empirically seems to be going
Q188 Kerry McCarthy: Would you say
that the rise in household debt is the other side of the same
coin as the rise in house prices, which are both linked to the
low level of interest rates? Is that something that you would
take in tandem when you are making decisions?
Ms Barker: The rise in long-term
debt clearly is linked to the rise in house prices. The Bank published
a study on this, again around the same time, pointing out that
as house prices rose you would of course expect, as different
cohorts moved into the mortgage market, rising long-term debt,
and I think that is added to by increasing evidence that parents
of course are borrowing against their houses in order to fund
their children's mortgages, so both those things you would expect
to be linked to a rising level of secured debt, and to the extent
house prices prove to be sustainable in the long run I do not
think that is a matter for concern. The concern on debt has always
been much more the rise in unsecured debt, where we are awareand
I do not think it is a big concern to monetary policy but it is
certainly a big concern more generallythat there are a
number of households which have unsustainably high levels of unsecured
debt and that of course has led to the difficulties we have seen.
However, it has not led to difficulties in monetary policy and
the consumer has obviously gone on spending, because although
this is personally very difficult for those individuals there
are not so many of them that it has actually so far sent the economy
Q189 Kerry McCarthy: We are here
to look at 10 years of the Committee. On a historical level, the
perception now that investing in property is the safe bet and
the increased number of people that are entering the buy-to-let
mortgage market and building property portfolios; is that a major
factor or is it a small, fairly insignificant factor in terms
of looking at both people taking on more debt by borrowing to
buy these properties but also the impact on house prices?
Ms Barker: It is not surprising
in a period where you have got falling long real rates to see
asset prices rise because of course that changes the fundamental
valuation of those asset prices, a point that has been made particularly
in speeches by Steve Nickell and I have also made that point in
speeches I have given. To some extent of course, this creates
difficulties for the housing market but it is not necessarily
a concern for monetary policy. There is a real question about
how influential the role of buy-to-let has been in pushing up
prices. It obviously has pushed them up a little bit. Whether
or not this is a bad thing this is not the place to discuss and
whether or not this is a bad thing for the market as a whole is
difficult it say. It has, after all, opened up a lot of private
rental opportunities. We used to argue in the UK that not having
a good private rental market was a bad thing because it reduced
labour mobility so there are good sides to that coin as well.
Q190 Kerry McCarthy: In terms of
setting rates you have already talked about the rise in personal
debt. How big a factor is that and is that something that has
increased over the various periods on the Committee?
Dr Sentance: It is difficult for
me to comment on the period of the Committee as a short-serving
member, but I think
Q191 Kerry McCarthy: I suppose I
am interested in how do you decide which factors become more important
over given periods?
Dr Sentance: One of the key things
at the moment particularly has been tracking the change in demand
conditions in the economy over the last year. It is quite clear
that demand conditions did change from the end of 2005 when demand
appeared to be much weaker. Consumer spending is the biggest element
of demand and these factors like household debt all can have a
bearing on consumer spending, so we are interested in building
upcertainly I am interested in building up-a-picture of
what is happening to the consumer as one of the big drivers in
demand. That is the sense in which we look at it, as something
that feeds into demand pressures in the UK economy, or certainly
in my case.
Kerry McCarthy: Thank you.
Q192 Mr Gauke: Can I turn to the
question of monetary aggregates. Dr Sentance and Miss Barker have
previously given evidence to this Committee specifically on that
point but can I ask Professors Besley and Blanchflower how much
weight you place on monetary aggregates?
Professor Besley: Personally I
regard the growth in monetary aggregates that we have seen since
2004 as potentially creating an upside risk to inflation going
forward, but I would class that as a risk because there is a variety
of things that have been going on in terms of where money balances
have been accumulated and the extent to which they will ultimately
or could ultimately spill over into demand side pressures in the
economy and therefore lead to a different nominal path which leads
to higher inflation. I think that is something that we do not
understand particularly well empirically. The Bank is engaged
in a significant and I think excellent project to really get to
the bottom of what is going on as an empirical matter, but to
my mind it is something that we as a Committee cannot simply ignore,
and if you look at our minutes, at least in the period I have
been a member of the Committee, it is a factor that we cite regularly
as imposing upside risk. Let me make clear that one has to join
it up with what is going on in credit and in asset markets more
generally. I think it would be a mistake to simply view this as
a phenomenon that is entirely about some simplistic story of if
you have an elevated money stock that implies you are going to
have higher inflation down the line. I think we have to see it
in the context of the portfolios that people are holding and choosing
to hold money alongside other assets, asset prices have changed
to reflect that, so I think one has to have a joined-up view of
all of this. I do not want my views to be misrepresented as saying
that somehow there is an inevitable monetarist logic to this because
I do not think that is true, but it is a cause of concern to me
Professor Blanchflower: I think
I would say the same thing that it is a cause of concern. Perhaps
I am rather more sanguine than Tim is about what the growth in
monetary aggregates actually means.
Q193 Mr Gauke: You are described
as "disdainful" of monetary aggregates.
Professor Blanchflower: I have
no idea where that came from. Nobody actually interviewed me about
it. I did not actually say such a thing. I am not disdainful at
all. I have perhaps less of an upside concern than Tim does. Certainly
it seems to me if you look at some of the household balances,
that has not changed to the degree that the overall aggregate
has, and the velocity of circulation appears to have come down
as well. The holdings by other financial corporations are a concern.
I take Tim's view that it is a concern but I certainly would not
take the view that I was disdainful. I think if you look back
in history the relationship between these money aggregates and
other macro phenomena have been somewhat variable over time so
I am an empiricist. I share Tim's view that there is an upside
risk but in my view the jury is still out on what the relationships
are. I would certainly not say that I was disdainful. I have somewhat
less of a concern than Tim has but it is a reasonable argument.
Q194 Mr Gauke: Would it be fair to
say that the more concerned about monetary aggregates an individual
MPC member is at this precise moment the more likely that member
is to be hawkish? Is that a fair comment? Dr Sentance and Professor
Besley have both been relatively hawkish of late. Professor Blanchflower,
you are seen as somewhat of a dove. Is that a fair characterisation?
Dr Sentance: I was going to come
in as someone you might be referring to as being hawkish. In my
mind I see it very much as Tim has said, there is a risk there,
and you put that risk into the mix with all the other factors.
The other factors that are weighing heavily with me have been
that we saw quite a change around demand conditions and previous
experience has shown that when demand begins to pick up sometimes
all the statistics do not properly reflect that. We saw in the
late 1980s and the late 1990s that when the conventional National
Accounts Statistics were underplaying the growth in demand in
the economy then we did have rapid monetary growth as well, and
so it might have been telling us something about the strength
and durability of that demand. The other issue that I have been
looking very closely at is the business surveys, which have generally
been very positive, and particularly business surveys of price
expectations. Given that our prime objective is to control inflation,
the signal that that has provided about the pricing climate and
linking that to other demand pressures is one of the big worries
that I have had over the last six months or so.
Q195 Mr Gauke: Ms Barker, you will
be aware of the criticism reported today from Professor Charles
Goodhart, Tim Congdon and Gordon Pepper of the MPC of not placing
sufficient weight on monetary aggregates. Do you feel that a failure
to do that in 2005 may be one of the reasons why inflation is
now at a relatively high level?
Ms Barker: I think it is always
very difficult, when you are in the middle of something, to disentangle
exactly what has driven it, but I am not sure that I would draw
that conclusion. If you think back to the factors that have been
driving inflation up, we of course know that one of the main things
that has driven inflation so far away from target in the short
term is the move upwards in energy prices which I do not think
was very much related to monetary aggregates. However I think
it is quite right to say that beyond that demand growth has turned
out to be rather stronger than we anticipated. Whether that is
due to the influence of the monetary aggregates or whether it
is due to other thingsthe greater buoyancy of employment
and migration in the economyis pretty difficult to disentangle,
but the main point I would make is that stripping out the energy
prices, the move of inflation away from target at the moment is
not quite so impressive.
Q196 Mr Gauke: Can I just move on
very briefly to the relationship between monetary policy and fiscal
policy. How important is that relationship and how important is
the Government's fiscal policy in determining the level of interest
rate that you need to set?
Dr Sentance: We are helped by
the fact that the Government has some medium-term fiscal rules,
and I think we noted in the submission that the Bank of England
put in as written evidence to this Committee
that that helps to provide a more stable background. I am not
conscious that fiscal policy has been a major factor swinging
around demand over the recent few months. In terms of feeding
it into our forecasts, I think probably the main thing we have
been trying to factor in is some of the restraint that the Government
is now putting on the expenditure side in its spending plans.
There has been some upward drift in the effective tax rate. We
try and take into account, as I have observed it, the outlook
for fiscal policy, but I would not say it has been a major swing
factor causing us to change judgments over the period that I have
been on the Committee.
Q197 Mr Gauke: Ms Barker, obviously you
have been there longer. Did the fiscal loosening from 2002 onwards
have much of an impact on monetary policy?
Ms Barker: Of course, we take
into account in our decisions the demand impacts of the change
in fiscal policy and you will know from previous evidence sessions
that we have done some work on how we interpret government spending,
and how government use of resources feeds into the economy and
adds to demand pressure. So to that extent of course it was an
influence in the decisions we took because it influenced the demand
relative to supply, and that is the way in which you would expect
us to take it into account. The other way in which you might take
fiscal policy into account is if you had a wider concern about
sustainabilityand of course that concern has not arisen.
Q198 Mr Gauke: Would you agree with
the NIESR that interest rates were higher than they would otherwise
have been because of that fiscal loosening in 2002?
Ms Barker: It is always very difficult
to go back and say what would have happened because of course
if we had not had the growth of government spending and the change
in fiscal policy in that sense the pattern of growth elsewhere
in the economy might have been a little bit different. It is possible
that if we had not had the fiscal loosening that interest rates
would have been different but of course that would not necessarily
mean that growth would have been any different. Interest rates
would have been lower precisely because growth was a little bit
lower and the balance of demand in the economy would have been
different. That of course is a matter, I think rightly, for the
Chancellor to decide.
Q199 Angela Eagle: We have a symmetric
inflation target but in the period in which the MPC has been in
existence we have shifted the definition of inflation from RPI
to CPI. Has it caused confusion that the definition of the inflation
target has shifted?
Professor Besley: Only one of
our number was on the Committee at the time so it becomes slightly
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