Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 220-239)


24 APRIL 2007

  Q220  Mr Fallon: I understand that. Can I turn to something that I think was forced on you by statute and that is the number of meetings you have each year. You meet more often than the Federal Reserve and it has been suggested by Rachel Lomax in a discussion with this Committee that that can make your Committee rather fidgety in setting interest rates. Looking back at it over the longer period—and I know there is the issue of the monthly data and so on—do you think there is a case for meeting less frequently? I am asking you, Kate, first.

  Ms Barker: I have certainly considered that. There is of course the argument about the monthly data cycle. I think a natural alternative—and you are quite right it is forced on us by statute—would be to have the quarterly meetings around the Inflation Report and only one meeting in between. Occasionally, of course, events could move faster than that and then you might want to meet in short order, as indeed we did in September 2001, so I do not—

  Q221  Mr Fallon: Sorry to interrupt but that is provided for anyway in the statute.

  Ms Barker: That is provided for anyway, so personally I would have thought it would be possible to move to eight times a year. You commented on the fact that it makes us fidgety. There is of course the opposite danger that, as it were, news can creep up on you because you look at it month by month, so we always have to be very careful when we are meeting not just to say what has happened over the last month but what has happened over the whole period since we last moved interest rates. I do not, I have to say, have a terribly strong view on this. Meeting every month I have found absolutely fine. It has enabled good thorough analysis of every month's data but if you were to ask me would it be much worse or much better if we were to meet eight times a year, I have to say I do not have a terribly strong view either way.

  Q222  Mr Fallon: Do any of the other three actually have a strong view on this?

  Dr Sentance: I have a very strong view in favour of the status quo. I think from the point of view of the public having confidence in the Bank of England's arrangements, the notion that we meet every month at the beginning of the month and they can see the pattern of meetings, they can see the interest rate decisions come out on a regular monthly cycle does help to build confidence. I have found the monthly cycle quite workable. It does head off the demand for emergency meetings because we are meeting with that frequency, as laid down in the Bank of England Act, so I find it difficult from my personal point of view to mount an argument which says we should meet less often. I would rather go to the public and say we are meeting every month to reassure them that we are on the case, we are reviewing the evidence as it comes up on the monthly cycle, and we will change interest rates or not as the case may be on that period.

  Professor Blanchflower: I have the same view. I think the concern would be if we went to eight times a year the potential would be that something would come along and we would have to start to call emergency meetings, and that probably would not be good, so I think the benefit of having meetings every month are we are seen to be watching what is going on. We do not want to be seen to be asleep at the wheel so I take the view, as Andrew has done, that we are probably all right as we are.

  Q223  Peter Viggers: For such a carefully planned and structured body the appointments procedure seems to be rather unprofessional, opaque and patchy. Are you as external members consulted about the appointment of other external members?

  Professor Blanchflower: No.

  Ms Barker: No.

  Q224  Peter Viggers: Do you as a group either as four external members or perhaps as an MPC consider the balance of skills and experience on the MPC and do you have a view individually or collectively as to the kind of person who might be suitable for further appointment.

  Professor Blanchflower: I take the view that diversity on that Committee is a good thing and that we would like to have people with different views from different walks of life. I think the one thing you would certainly want to see though is somebody with good experience and background in economics, not necessarily a PhD, but it is an economics intensive activity so I think good, solid training in economics, either from business or from academia, is a fundamental thing. You need diverse experience but you need to be able to understand the economic data.

  Q225  Peter Viggers: Because you are the people who do the job, I wonder whether if you have either individually or collectively formed a view as to the kind of person who should be invited to fill a particular gap or do you just receive who is appointed?

  Dr Sentance: Just observing the pattern over the last 10 years, there has been a mix of business, academic and financial experience brought onto the Committee and I think that is probably right, to try and keep that mix to those three elements. The extent to which you have individual backgrounds depends, I guess, on the availability of individuals. I think it should also depend on what might help to complement the internal members. We are not privy to the processes that the Chancellor goes through in selecting the members but my opinion would be keeping that balance on the externals between business, academic and financial experience would be a good thing.

  Q226  Peter Viggers: Do you think that as external members you have anything to bring to the table, as it were, in terms of suggestions as to who might be suitable? Would you feel that it would be helpful for you to be able to express a view? Is there a mechanism for you to express a view about appointments?

  Professor Besley: I would tend to take quite a strong view that as an independent external member I would not want to be involved in appointing other members to the Committee. Part of being independent as an external is being away from the process and being able to just focus on the job in hand which is trying to make the right policy decision. That is not to say I do not endorse the general views about what would make a good composition of the Committee but in particular as an external I think it would be inappropriate to be intimately involved in the appointments procedure.

  Professor Blanchflower: I agree.

  Q227  Peter Viggers: On the period of appointment, Ms Barker you have been reappointed but it is with effect from the end of next month so it is really quite short-term activity. Has there been any difficulty caused by a failure to make appointments when there have been shortfalls in appointments?

  Ms Barker: I think the time at which people have expressed concern clearly relates to last year where of course there were two things that happened in quick succession. One of which was that Richard Lambert left the Committee unexpectedly and at quite short notice and secondly, of course, David Walton died tragically, and in those circumstances it was inevitable that there was going to be some kind of gap. I would make a wider point however. People often talk about the need to appoint people in advance, but of course one of the difficulties here—and we were discussing this—is that people come in from very different backgrounds. Academics, for example, might prefer quite a long period of notice before they join the Committee because they will have teaching commitments signed up and it is more difficult for them to move in short order. If you are appointing somebody from the financial sector however they will often have to move out of their job very quickly and it would suit them to have the appointment made much nearer. I think people from the business community would probably occupy an intermediate position. So the idea that there should be some timetable for appointments is theoretically attractive, but in practice it is actually quite difficult to see how it would work.

  Q228  Peter Viggers: Do you individually think that the three-year renewable term is the correct one or would you support those commentators who have said that a rather longer term would be helpful?

  Professor Blanchflower: For an academic it would be very difficult to accept a longer term. My university gave me three years' leave. That is the first time anybody has been given a three-year leave and I think the chances of getting leave from a tenured job would be nil for a longer time period, so for an academic that would be a problem in that you would have to give up your endowed tenured chair so a longer time period for me would have been an issue.

  Professor Besley: I am rather in favour of Steve Nickell's suggestion of having a six-year appointment with a possible minimum of three where the option is on the side of the appointee, so that you could take the longer view that you were going to do it for six years but you could decide at the end of three whether in terms of your career it was the right decision to carry on or not. I think that was what Steve said in his written submission said and I thought that was a rather good idea.

  Q229  Peter Viggers: Ms Barker, you would have an individual view on this?

  Ms Barker: To some extent I would share the view that Tim has just expressed, that one of the difficulties again of fixed-term periods is that it is very difficult to find a period that does suit people from different backgrounds. David has set out very clearly why for an academic it is difficult to take on a long-term period. However, Andrew and I, both had to give up all our private sector work when we came to join the MPC, might well have found something that promised us longer than three years of job security rather more attractive because we do not automatically have positions to go back to in the way that academics do. So something where you had a minimum period that you agreed to do but the possibility of staying on for longer, provided of course you had not fallen foul of some of the provisions in the Act for the removal of members, seems to me more attractive. Something with some flexibility to meet a range of circumstances I think could be quite important. I said we saw last year some surprising circumstances and against that background I think some flexibility would be helpful.

  Q230  Peter Viggers: Or would a full-time option also be attractive?

  Ms Barker: For people who have had to give up the rest of their work, to some extent a full-time option is attractive. However, I have to say when I started doing this job I was doing it on a four-day a week basis. I hinted in an earlier answer that particularly at the beginning it is quite helpful to have more time to spend on it. As you move on with the job three days a week is certainly an adequate time to do it but then that does raise the question, given the limitations on what other activities MPC members can do, how they should pass the rest of that time.

  Q231  Peter Viggers: Professor Blanchflower, I suppose I should give you the opportunity of responding to the suggestion that there has been diminished engagement by external members?

  Professor Blanchflower: I have been fully engaged. I have made numerous regional visits. I think I will have done eight by the end of the year and numerous speeches. I have been fully engaged. I guess if you want to take it up you can speak to the Governor about it, but I have been fully engaged.

  Q232  Peter Viggers: Can I ask please how you interrelate with the Court of the Bank of England? Do you have much contact with them? Do you find this productive? Have you any suggestions as to any structural changes that might be helpful in your relationship with the Court of the Bank?

  Professor Besley: In the period I have been doing this I have attended two Court meetings, one Court lunch, a Court away day and a dinner to meet with the Court informally and I have also met Sir John Parker one-on-one, so it seems to me that the Court is at this point taking very seriously its job of settling in a new MPC member as I was, and checking that there are no issues that need to be dealt with. I have no complaint. I do not know about the other members.

  Dr Sentance: Generally my experience is that this relationship works well. There is not a lot of interaction but the Court are clearly conscious of their responsibility in terms of the MPC processes and do make sure that they talk to us on a regular basis. We recently had a lunch where all the externals were invited and we had an opportunity to talk more informally about how things were going.

  Q233  Chairman: Kate, you mentioned earlier that you were thinking about the forecasting round. Are there any key issues that need to be addressed, that need changing?

  Ms Barker: The conversation is to some extent an internal one. Actually I should say in the time that I have been on the Committee the forecasting round has been altered in the number of meetings and the way we have tackled those meetings, and the key thing that we are trying to achieve this time around is to try and maximise the opportunity for the members of the Committee to have as much conversation as possible about the economics of the issue rather than to have longer presentations from the staff. We are anxious to try and ensure that we are able to fully explore all the issues in the meetings and there are some rather tedious questions about the way in which we arrange the room to make sure that we get that high level of interaction.

  Q234  Chairman: For the other members it might be a good question. How well have you been introduced to the economic modelling undertaken by the Bank? Is there greater scope for the Bank to release more information on the modelling process and the Inflation Report?

  Dr Sentance: Certainly we are provided with an introduction to the model. I think, however, the job of producing an inflation forecast is not the same as the job of using the model. In my experience, a model is a tool and a forecast is a product of trying to bring all the available information to bear. I notice some of the comments from Professor Wren-Lewis who seemed to lay a greater emphasis on expertise in modelling with the external members. I am not sure that is quite right. I think some familiarity with forecasting, which I have in my background and I know Kate has, is helpful among the external members but I do not think we should get hung up on the model as being the sole source of everything. We have to produce a forecast and anyone who is practically involved with forecasting knows that that involves bringing in a wide range of information and judgments as well as modelling.

  Professor Besley: That is exactly the direction in which we are trying to take the forecast process now, in the sense that we are trying to achieve a better balance between cranking the handle and getting out of the model something that is helpful in looking at the medium-term prospects for inflation, but the need to understand the economic forces that are going to shape that going forward. That is a back and forth process and it is getting that balance right. I think that is just echoing what they are saying.

  Q235  Chairman: The Treasury model is used and maintained outside the Treasury. Should the same apply to the Bank?

  Dr Sentance: Actually I did not know that, I confess my ignorance about the Treasury. I am not sure. I think there are some sensitivities about the actual detail of the model given the purpose for which it is used. I think the Bank should be free to use the tools that it needs to do the job that it has to do, and the job that it has, as laid down in the Act, is to produce an inflation report, an inflation forecast, and I think one of the difficulties I could see of that approach is it would perhaps put too much emphasis on the model as against the way in which the model is used to produce a forecast, so I am not sure I would want to necessarily go in that direction.

  Q236  Chairman: Is there any opposing view to that?

  Professor Besley: I agree with that.

  Q237  Chairman: So you all feel the same? Okay. For most of you here your time at the Bank has been short. Notwithstanding that, what impression have you gained from the Bank and if there was one thing that you want to leave us with in this Committee for the next 10 years, one thing that should be changed, let us know now. Kate, since you have been on longer, is there one thing you want changed, and then the rest of you?

  Ms Barker: Are you asking me a question about the way the Bank conducts itself or the Act?

  Q238  Chairman: Anything. You are privy to things that we are not. A lot of things go on behind closed doors so give us a shaft of light on it.

  Ms Barker: Somebody said earlier that they did not think there were big things that needed changing, they are in the tweaks. I have indicated that in terms of thinking about how we work internally we try ourselves very actively to think about the ways in which we could improve it. I very much hope that we will continue to do that. Frankly, I am not sure that there is anything that I would change about the framework of the Act. There are always things that you think as a team perhaps you could do a little bit better, in particular one of the things that sometimes causes concerns is the way in which differences of opinion are communicated clearly in the minutes. That is something that we are paying more attention to, so I think it is always right looking at the way in which we perform and the way in which we could behave better. You have raised some questions about the appointments process. I raised some points about the fact I thought setting out a very clear process was not necessarily going to be possible given the different backgrounds that people come from, but I do think that advertising positions on the MPC in order to draw up a full list of potential candidates might be something that was worth pursuing.

  Q239  Chairman: Professor Blanchflower?

  Professor Blanchflower: I do not have an obvious thing to recommend. On the point I made earlier, which is the system seems to be operating very well, at the edges there may be things we would need to change a little bit, perhaps on the appointments process, but in general I think many of the changes we can make we have tried to do internally so the framework allows us to make changes as we go and, as colleagues have said, we are making changes particularly about how the Inflation Report is done. There are other issues about how we communicate and that is obviously something we need to keep thinking about.

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