Examination of Witnesses (Questions 260-279)
MR MERVYN
KING, MS
RACHEL LOMAX,
SIR JOHN
GIEVE, MR
CHARLES BEAN
AND MR
PAUL TUCKER
24 APRIL 2007
Q260 Angela Eagle: Governor, you
have a lot of contact with other central bank organisations, all
of whom have their own way of doing these things. Is there anything
that happens elsewhere that you think could sensibly be imported
into our current system, or again are you reasonably happy that
the institutionalisation danger is avoided?
Mr King: I am happy that we do
not have the risk of institutionalisation. I do not see a strong
case for making changes in the legislative framework, but that
is not to say that we cannot learn from other central banks about
how they carry out their research or how to think about certain
questions that come up. It is much more trying to ensure that
there is continuous, to use a rather pompous phrase, intellectual
cross-fertilisation. We are always trying to learn from other
central banks and talking to them. That is one of the benefits
that external members can bring because, by being partly outside
the Bank they can bring new thinking regularly inside the Bank.
We try to do that too through talking to our peers overseas—there
are a lot of regular meetings—and indeed to non-central
bankers outside the Bank of England as well to make sure that
we are continually refreshing our thinking. When I went to the
Bank I said to the staff: "whatever you are working on, one
of your jobs is to know the five people in the world who are really
experts in the area that you are responsible for; phone them up
and talk to them, get to know them." That way we bring ideas
into the Bank. In terms of ensuring that we are always open to
ideas and to new thinking, that is crucial. I do not think that
requires a change in the legislative framework within which the
Bank works.
Q261 Mr Fallon: Governor, can we
come back to this art of letter-writing. There was plenty of advance
spin—some of it from you—that this should not be seen,
once it happened, as any kind of admission of failure that the
plane missed the runway, that this should simply be seen as a
routine event. If it is routine, what is the point of the correspondence?
Mr King: It is not routine in
the sense that it happens every month, but nor is it something
that you should expect to be associated with what you might call
a failure of policy. A one percentage point deviation from the
target is actually very small relative to the movements in the
past until we got to the last decade. I think it is still pretty
small relative to what it would be reasonable to expect in the
future. I think it is put in there as part of the accountability
of the framework. It is not something that we put into the framework;
it is part of our accountability so that we have to explain to
you and to others why we think inflation has reached this level
and you can then judge whether you think we have a good explanation
for it or a bad explanation; whether you think the course of action
we propose to take is sensible or not. It gives you a chance and
it gives the Chancellor an opportunity to comment on what we have
done. It is part of the accountability framework. I am not quite
sure what you mean by "advance spin"—that is a
term of political art, not central banking art—but over
10 years we have given speeches about the role of the letter and
saying in what circumstances we would expect to write it and what
the purpose of the letter was. That is the explanation.
Q262 Mr Fallon: It was you in your
letter two years ago who said it should not be seen as an admission
of failure.
Mr King: I said that 10 years
ago as well.
Q263 Mr Fallon: Can you tell us about
the Treasury reply. Do you show your draft letter to the Treasury?
Mr King: No.
Q264 Mr Fallon: Ed Balls, in June
2001, said, "The openness of the system allows the approach
to be explained by the MPC and allows the Chancellor publicly
to endorse it". That is not what you said to me a moment
ago. You said it allows the Chancellor to comment on it. What
would happen if he did not endorse it?
Mr King: It is certainly open
to the Chancellor at any point to effectively change the target.
That is something which he has the ability to do at any point
but he must do it openly in front of you and in front of Parliament.
If he wishes to give us different instructions then that of course
is an opportunity that he has.
Q265 Mr Fallon: What would happen
if he did not endorse your explanation, which is what I think
you described the letter as?
Mr King: I do not think it is
a question of endorsing an explanation; it is more a question
of endorsing the action that we propose to take.
Q266 Mr Fallon: What would happen
if you did not?
Mr King: To give you an example,
it is conceivable, although it is not relevant in the present
circumstances, that we would say, for example, there had been
a very substantial increase in oil prices that no-one had anticipated,
that pushed inflation more than one percentage point above the
target. There were reasons—I cannot imagine what they are
but there might be reasons—for supposing that we would expect
inflation to remain above target for a year or so and that we
would bring it back to target, not within the normal 18 months
to two year horizon, but over two and a half to three years. That
would be the plan that underlay our proposal for a path of interest
rates. He might write back and say no, that is not good enough
and I want you to get inflation back much faster. The remit that
we are given says that we should not try to bring inflation back
to target next month or within two or three months because that
might induce undesirable volatility in output. If we said that
our judgment was that we were proposing to bring inflation back
to target over a somewhat longer horizon than normal to avoid
undesirable volatility in output, it would be open to him to write
back to us and say no, you had better bring it back faster than
that. That, it seems to me, would be one of the options that he
has. It would have to be a very clear and explicit statement.
It could not be something that would just be done in a private
meeting.
Q267 Mr Fallon: I understand that.
Governor, could I turn to the appointments process on which Steve
Nickell gave evidence to us and has described as "opaque".
Could I put to you four practical suggestions for improving it
and ask you whether you agree with them: firstly, the pool of
candidates, whilst being kept confidential, should be advertised
for and that the search should be more rigorous and thorough?
Mr King: I have no strong feelings
either way on that. I do not think this is a process which would
throw up candidates that we had not already thought of, but I
certainly have no objection to the idea that people can put their
name forward and there is a process which would look at names,
confidentially of course, as you said, and form a judgment as
to which ones were competent to serve on the MPC. I would have
no objection to that at all.
Q268 Mr Fallon: But through an open
Treasury advertisement?
Mr King: Indeed, I would have
no objection to an open advertisement.
Q269 Mr Fallon: Secondly, that when
an appointment is made that you yourself should be involved and
given the opportunity to give your views on that appointment before
it is made.
Mr King: I think it would be sensible
for the Governor to have a conversation with the Chancellor about
the appointment. That, of course, does take place now, but whether
that needs to be formalised, I do not know. Again, I think it
is important for the Governor, as I am sure is true in most cases
around the world, to be able to express a private view about the
merits or otherwise of respective candidates.
Q270 Mr Fallon: You said that happens
now. Has that changed?
Mr King: No, as far as I know
there has always been some consultation between the Chancellor
and Governor during the appointments process.
Q271 Mr Fallon: Thirdly, I think
you have agreed with us previously that there should be some presumptive
time limit for making appointments, obviously taking into account
appointments that have to be made when you are not expecting them,
such as following the death of David Walton and so on.
Mr King: It is a matter of good
process that they are taken in a timely fashion. When Steve Nickell
says that the process is opaque, I do not think that it is so
much opaque as it has been left very much to the last minute.
Trying to find a way of putting some constraints on preventing
that would be welcome.
Q272 Mr Fallon: You would agree that
they should be made within a presumptive time limit of, say, within
two months or whatever would be useful?
Mr King: Yes.
Q273 Mr Fallon: Finally, in order
to encourage a timely appointment would you see any merit in recommending
that members of the MPC, once appointed, should not vote until
they have been confirmed by this Committee?
Mr King: That is a trickier one.
It all depends on what can be achieved in practice. Let us suppose
there was a sudden vacancy that arose just after you had risen
for the summer recess.
Q274 Mr Fallon: I said "normally"
in order to encourage the appointment itself to be timely; in
other words, there would be an onus on the Treasury to get on
with it.
Mr King: I do think it would be
a good idea if the outcome of whatever process we had was one
in which the names were clearly put forward, you then had time
to carry out the informal confirmation hearing and then members
joined the Committee. I know that normally your wish is for members
to come here for a confirmation hearing before they start their
work and that would be the sensible time at which to do it. What
the world would look like with timely appointments would indeed
be one in which you would have a chance to carry out the hearing
before the individual joined the Committee.
Q275 Peter Viggers: A 10 year review
gives us chance to look at the MPC in fairly fundamental terms.
Is nine the right number with a balance of five internal and four
externals? Is that, in your view, the correct balance?
Mr King: I think you could argue
until the cows come home about precisely the right number. I do
think that more than nine would run the risk of making the process
much less effective because a conversation among the nine is a
key part of it and to have many more people would run the risk,
as I think happens in somewhat larger councils that set policy,
that some people have more say than others; there may be inner
deliberations that take place because a very large body is simply
too big to have a sensible discussion. I am comfortable with nine
as an upper limit. Whether it should be seven, eight or nine I
think you can argue about. I do think the current balance is right.
It is a Bank of England committee and it should be a majority
of Bank of England staff on it. I think the system works pretty
well. If you were to say to me, looking back, what are the things
that have worked and not worked, they are all really to do with
the informal interaction, not to do with the actual formal processes.
I would stick where we are. It is easy just to make changes. Suppose
you were to change the numbers by one. I do not think it would
achieve very much but there would be all kinds of commentary about
whether a decision was a result of having one fewer person. Once
you have a system that works, stick with it and make sure the
right people are appointed.
Q276 Peter Viggers: Can I ask the
five internal members of the Committee the same question as I
put to the external members: would you value an opportunity of
having a method of input where you could indicate the kind of
skills that you thought would be useful of a new external candidate?
Mr Bean: I suppose I do have an
input insofar as I can discuss informally with the Governor about
what sorts of people we might usefully have on the Committee.
It is not something I have ever felt impelled to raise with him
but that channel does exist.
Q277 Peter Viggers: Do you think
it is important that there should be one or more external members
who understand the Treasury model and who are conversant with
this field of activity?
Mr Bean: No. I know this was an
issue that Simon Wren-Lewis raised with you but it is in some
respects a misconception of the way that the Committee works.
What we should not do is get dragged into the mechanics and detail
of the model. The model is a crutch that helps us have discussions
in a quantitative framework, but it is not sensible to drag all
nine members into discussing technicalities of the model. As far
as possible when we have discussions, particularly in the forecast
round, they work better when we try to avoid that happening. I
do not think that it is essential to have somebody on the Committee
who is familiar with the entrails of the model and in fact it
might actually work against the Committee functioning well if
the consequence was to keep on pulling us into peripheral details.
Q278 Peter Viggers: Two of you—Charles
Bean and Paul Tucker—are effectively ex officio;
you hold your positions through your positions within the Bank.
From the Bank's point of view, and from the point of view of the
individual committee member, is there a relationship between your
appointment within the Bank and your membership of the Committee?
Are these valuable and necessary?
Mr Bean: It certainly is in my
case because, as Chief Economist, I have the responsibility for
running the economics in the Monetary Analysis area of the Bank
which supports the MPC and it supports the MPC as a whole, not
just the Bank members or anything like that. I have a particular
role acting as the conduit between the Committee and the staff
in making sure that the staff are doing the right sort of work
to support the MPC's deliberations.
Mr Tucker: I think it is on the
other side too. One of the things that comes up in our deliberations,
and indeed in front of this Committee, is whether policy is credible,
how will financial markets react to this?, if there is a disturbance
in capital markets around the world what on earth are we to make
of it? Having somebody on the Committee who runs the part of the
Bank that will give the briefing to the Committee and be tuned
in to where the Committee's questions are focused is valuable.
In both cases I think I should say that both for me, and for Charlie,
once we are in the Committee we are not speaking to those briefs
then. We are just members with one vote covering the whole waterfront.
We are going to go back to our desks and run our particular bits
of the Bank. There is indeed synergy in terms of bringing inputs
to the Committee.
Q279 Peter Viggers: As members of
the Treasury Select Committee we come to this table from completely
different backgrounds. Is there any way you think that the Treasury
Select Committee can be more effective in promoting the objectivity
and the work of the Monetary Policy Committee?
Mr King: One of the real advances
over the last 10 years has been that these sessions are conducted
in a very different spirit than they were 10 years ago. Ten years
ago, when the Governor and representatives of the Bank came to
the Treasury Committee the sole purpose of these sessions—as
far as I could see from accompanying the Governor then—was
very often that members of the Treasury Committee would be looking
for quotes, or inadvertent slips of the tongue, which could be
put to the Chancellor the next day to make a political point;
in other words, it was not a dialogue on substance. I think that
what has happened in the last 10 years is that we have a genuine
and evolving dialogue on the state of the economy and on whether
monetary policy is being conducted in an appropriate way. You
are representing the public in holding us accountable. I think
you could perhaps do a little more by way of asking us individually
to explain why we had voted the way we had in a sequence of recent
months, but by and large I think the debate that we have is a
genuine discussion about the state of the UK economy and the outlook
for inflation. It is not a vehicle for you and others to score
political points and I think that is a big step forward as an
observer of this for over 15 years now.
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