Examination of Witnesses (Questions 200-219)|
24 APRIL 2007
Q200 Angela Eagle: I would hope that
members of the MPC would be able to analyse the difference between
the different methods of measuring but I am thinking in a wider
context as well.
Dr Sentance: There is no doubt,
viewed in that wider context, that one would hope now for a stable
inflation target going forward because our job would inevitably
be made more difficult by the extent to which the target is moved
around, either in terms of the way it is measured or in terms
of the target itself. So I would say that looking forward I am
hoping that there will be stability which will make it more straightforward
for the Monetary Policy Committee to do its job of reaching that
target. As for the specific episode, it was anticipated, as I
understood, and there was a certain amount of analysis done to
smooth the transition, so I am sure that was helpful to members
of the Committee at the time knowing it was coming and being able
to take the necessary steps to make a smooth transition but, as
I say, only one of our number knows what it was like to experience
such a transition.
Ms Barker: Because we knew it
was coming and the nature of the gap between the two measures
at the time, there was not any great difficulty in smoothing the
transition between one or the other, but I take it that to some
extent your question is about whether in the public mind the CPI
commands much attention now. In some sense of course I would argue,
as a lot of economists would, that the CPI is a better measure
of inflation and the way in which it allows for substitution between
goods as their relative prices change makes it a better measure
of inflation in that sense. It also covers some products that
the RPI did not cover. Nevertheless of course it does not include
housing costs which are very significant and there are questions
around that, and that means that when people are coming to the
wage bargaining, which of course is important to us, they will
look at other
Q201 Angela Eagle: They use RPI,
do they not?
Ms Barker: They always start off
with using RPI.
Q202 Angela Eagle: They use the highest.
Ms Barker: But if you look at
what has been happening to settlements recently, they have not
increased anything like as much as RPI or indeed as RPIX have
increased, so the idea that that feeds through mechanically is
not right. What it does mean of course is that we have to pay
Q203 Angela Eagle: I was not saying
it might feed through mechanically. I was saying is it causing
confusion? There is no evidence yet that wage bargaining is pushing
inflation because RPI is higher than CPI, but is it causing confusion
and perhaps should there be a shift in wage bargaining to CPI
measures rather than RPI measures?
Professor Blanchflower: In some
sense we are not seeing pay automatically linked to these measures
so much as we have in the past. In some sense the settlements
themselves are coming out related to what inflation is, I guess,
in the longer term, so I do not think there is evidence that lots
of pay settlements over time are directly linked to those measures
or that because the trend has been up (because I think the trend
is generally downwards) there are direct links to those measures.
I take the point that Kate made that probably there is more confusion
in the public's mind with this multitude of measures and the various
ways of calculating your own inflation.
Q204 Angela Eagle: There is an older
person's inflation rate now, is there not, there is a whole burgeoning
of inflation rates. You seem to be able to pick your own these
Professor Blanchflower: You can
literally, can you not, because you can go to the web sites and
do so, so there is some confusion.
Ms Barker: Can I come back on
this question of wage bargaining because in some senses in the
long run what you think of as determining wage growth in the economy
is of course productivity, not how inflation is measured, and
so moving from measuring inflation one particular way to another
you would not expect to have had a big impact on wage bargaining.
I hate to refer to yet another speech by Steve Nickell but he
did give a very good speech setting this out and explaining what
you might expect the impact on wage bargaining in the long run
to be. I do not think it is particularly important that wage bargainers
change their habits but I think it is helpful if, like us, they
look at the different measures of inflation and have some understanding
of the differences between them.
Q205 Angela Eagle: Can I ask as independent
members is there a tension between the people with business experience
and the academic theoreticians?
Professor Blanchflower: I would
object to the term "theoreticians".
Q206 Angela Eagle: The modellers,
Professor Blanchflower: No, I
will not accept that characterisation but I am happy to answer
the question. I think the great strength of this Committee is
having a diversity of views and experiences. I think the externals
bring that. We each have different backgrounds and experiences.
I do not see them as a contradiction. What is the famous phrase
"You put six economists together and you get nine opinions".
We have put nine economists together
Q207 Angela Eagle: At least.
Professor Blanchflower: So I do
not think there is a tension. It is a discussion amongst nine
people. I value the discussion. Personally I do not find it a
tension, I find it is something I have been used to over the years
and there are many different ways to skin a cat. I personally
do not see it as a tension. I cannot tell you what the others
say but I find their contributions valuable.
Q208 Angela Eagle: What do the business
Dr Sentance: Kate has more experience
than me but what I have observed on the Committee is that differences
of judgment that emerge are not so much associated with pigeonholing
someone into a category, whether it is academic versus business
or internal versus external
Q209 Angela Eagle: I was going
to ask about that next.
Dr Sentance: But more differences
of judgement in looking at the whole experience that people have
had in their careers. I agree with the general observation that
it is good to have a diverse range of experience. I do think that
people with a business background bring something to the Committee
in terms of both understanding how businesses are reacting to
things and also looking at some of the survey indicators that
are actually quite important in tracking the economy.
Q210 Angela Eagle: Is there an obvious
difference between internal and external appointments? I will
ask them too so that we get an asymmetrical or symmetrical view.
Professor Besley: At some level
that has already been brought out. There is as much diversity
of opinion about where things have been going in the recent past
on this panelas you would find on any similar panel. If
you look at the debates that we have and the discussions and the
different positions people take, I do not think they correlate
at all well at the moment with internal and external.
Q211 Angela Eagle: Kate Barker, you
have probably been the longest serving of the people before us
at the moment, how long do you think it takes the external members
to get institutionalised by the process? Is it in danger of happening
Ms Barker: I wondered when you
asked that question whether you were going to ask how long it
took people to get up to speed because a different comment I would
make is that when you start on the Committee there is a great
deal to think about and, as it were, to catch up on. There is
an acquis in Bank thinking which people need to know about and
perhaps this comes back to the question of how much time people
should spend on Committee work. I am pretty confident I have not
become institutionalised. I do not feel like a long-term Bank
employee. I continue to do some things outside the Bank. I am
at the moment a board member of the Housing Corporation for example
and I hope that enables me to continue to bring something into
the Bank. I think all of us as a Committee try quite hard to fight
against institutionalisation more generally. We have in fact over
the last few months been doing some thinking about how we could
improve the way in which we tackle the forecast process. That
is absolutely vital. It is true that when you get new people on
they help you to think about that because they say, "Why
are you doing this?" A level of turnover on the Committee
alongside some continuity is very useful. I am not sure anybody
is particularly institutionalised, even the Bank people.
Q212 Angela Eagle: The system has
worked very well to date in terms of its outcomes. Do any of you
think it needs to be changed at all or are you pretty happy with
the way that it is panning out in practice?
Professor Blanchflower: We have
pondered long and hard on a number of possible alternatives. I
suppose my response would be that I think we have done pretty
well. The system ain't broke and there is probably not much fixing
to be done, except perhaps at the edges and we can think about
a number of issues, but in general I think the framework is a
very good one. If change is going to come it may come at the edges,
but fundamentally I think it has been very successful. That is
my view but I would be interested to hear what others have to
Q213 Angela Eagle: So that is a tweak
rather than anything radical. Is that the general view, perhaps
a bit of tweaking at the edges but nothing radical.
Dr Sentance: The thing that has
struck me on regional visits that I have done as an MPC member
and through the process of joining the Committee is that there
is a lot of credibility around the Committee in terms of the inflation
performance being achieved, and if you go out and meet business
people generally they are satisfied that the arrangements put
in place have worked reasonably well. I think that should create
a predisposition against changing unless real changes are seen
to be needed. We are not necessarily the best people to judge
but you are hearing a range of evidence from different people
and I do not think the Committee should rule out recommending
changes. In a sense we have to work with the existing arrangements
because they are in place and we adapt to them and from my point
of view they are quite workable.
Professor Besley: A couple of
comments on this, one is I think the process has been a dynamically
evolving process from the start. I do not think it would be fair
to call it a static process. We hear as members of the Committee
and I am sure you have heard of the variety of changes that have
already been implemented over the life of the Committee. It may
now have reached a steady state. Right now we are re-thinking
the forecast process because we wonder whether that needs a new
lease of life, so the Committee does have a natural dynamic within
it. The other thing I would mention of course where I get a sense
of most public disquiet is around the appointments process. It
is clear that that is something which by popular acclamation in
a way has been raised as an issue that people are concerned about.
Obviously if there is one issue that comes out of what we hear
it is that there is a concern about that issue.
Q214 Mr Fallon: Kate Barker, there
was a lot of advance spin about the letter writing that this should
not be seen as any kind of admission of failure but rather as
more of a routine event that is bound to happen from time to time.
If the letter writing is routine what is the point of it?
Ms Barker: I think the point of
letter writingand of course in a sense it is a question
for the Treasury who devised the systemis that obviously
when inflation has moved quite a long way away from target there
must be a question that comes up in people's mind about credibility
and about whether or not the Committee has been behaving in an
appropriate way. The letter writing offers an opportunity for
the Committee (and although the letters are written by the Governor
as we have already said the whole Committee talks about them)
to set out on the day that the inflation rate comes out, and we
would repeat it if the inflation rate stayed away from target
for a period, exactly what the rationale is for the decisions
it has taken, the way in which perhaps things have not evolved
quite as expected when those decisions were taken and in some
general sense how we would propose to tackle it. That then affords
the Treasury an opportunity to write back and of course in that
sense it could raise any concerns. It is quite right if there
were going to be any concerns raised they should be raised in
a public way rather than privately. That I think is the function.
It is to ensure that there is some sort of public accountability
to the population that when things have moved away from target
we discuss them openly.
Q215 Mr Fallon: So it is an attempt
to restore credibility that has somehow been damaged?
Ms Barker: I do not think it is
an attempt to restore credibility. I would not think if you look
at the way in which inflation expectations have been developing
over the past year or so that there has been any great change
in credibility and I think the reason for that, as I set out in
one of the earlier answers, is that of course one of the key reasons
behind the upward move of inflation is the rise in energy prices.
If you look back at the remit and the reason that this was discussed
in advance, and I think rightly discussed in advance to try and
give it some context, it is very clear from the remit of the Committee
that one of the things the Treasury is worried about is that if
you stuck too hard to keeping inflation at target at all times
and you had a shock such as the energy price shock and very rapid
rises in inflation rates, to cut out the first round effects of
that would have caused unnecessary output volatility, and of course
the letter is the opportunity to set that kind of argument out.
Q216 Mr Fallon: You are suggesting
you have been too good at meeting the target over the last 10
years; is that right?
Ms Barker: No, I am suggesting
that over the last 10 years we were perhaps fortunate in that
we did not have an external shock of the size that led us to have
to think actively about that kind of trade-off, and as everybody
generally has said in commenting on the letter, given the experience
of the previous 10 years, frankly that has been somewhat of a
Q217 Mr Fallon: You said in your
first answer that it was an opportunity for the Chancellor to
comment on your explanation. However, Ed Balls in his Oxford lecture
in June 2001 said the open letter system allowed the approach
to be explained by the MPC and "allows the Chancellor publicly
to endorse it". That is not quite what you said, is it?
Ms Barker: No it is not, but I
would have to say the Chancellor did indeed endorse it. However,
I would stick to the point I made that it would also allow him
the opportunity to say something slightly different if he felt
it was appropriate.
Q218 Mr Fallon: Because the obvious
question is what would have happened if the Chancellor in his
reply had disagreed with the MPC's assessment?
Ms Barker: You are raising here
a very hypothetical question. I would hope that the Chancellor
would never have occasion to disagree with the assessments that
we have made, but we are always conscious that we are accountable
to you in terms of our decisions and we are accountable to government
and if it was thought appropriate for the Chancellor to make a
comment perhaps he would do that.
Q219 Mr Fallon: I am just trying
to confirm the purpose of a letter writing exercise where you
expect the Chancellor simply to agree with you.
Ms Barker: I think that is why
I have suggested it would not necessarily strike me as the case
that he would on all occasions agree. I think the purpose of the
letter writing exercise should not just be seen as something that
happens between us and the Treasury, it is also part of our public
accountability, so our accountability to you and as I say to the