Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 260-279)


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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