Examination of Witnesses (Questions 360-379)|
8 MAY 2007
Q360 Mr Gauke: Do you think the change
to CPI itself was in some respects regrettable?
Mr Lambert: No, I do not. I think
the CPI is a good index for the purposes that it serves, but I
would think it would be very regrettable were the index to be
changed again, simply because it would confuse the public. As
far as wage bargaining under the RPI is concerned, it is for the
market to decide. That is for individual employers and employees
to decide what is appropriate for them, but the Monetary Policy
Committee in its deliberations obviously spends a lot of time
thinking about trends in earnings and trying to project that forward
and drawing conclusions about the likely impact on inflation and
that bears through on their decisions about interest rates. So
the fact that bargainers may or may not use the CPI for their
settlements does not have any implications on the MPC's judgments
about the path of inflation going forward.
Q361 Mr Gauke: Do you think there
are any dangers in house price inflation not being included in
Mr Lambert: I think ideally that
you would find a way of getting house price inflation into the
index because obviously it is a very important part of everybody's
budget. It turns out to be a very difficult thing to do. As I
understand it, it is not in the HICP and continental Europe either;
no-one has completely cracked that one, have they, Ian?
Mr McCafferty: That is right.
It is not in the current HICP for the ECB or for any of the individual
countries. There is, however, a good deal of work going on centrally
in order to try to include house prices in the HICP as followed
by the ECB, and that work would also lend itself possibly to include
house prices into the UK defined CPI as well. As Richard Lambert
says, because of the differences in ways in which you can do this,
it is not an easy calculation as to how you include house price
valuations in this instance.
Q362 Mr Gauke: Mr Page, would you
be sympathetic to house price valuations being included within
the inflation target?
Mr Page: I would be very sympathetic
to that because house prices are such a large part of any working
person's monthly outgoings, so an inflation rate that does not
reflect house prices is a less than perfect inflation rate from
that point of view.
Q363 Mr Gauke: Looking at the last
10 years, it has clearly been a good time for the MPC both about
benign conditions and, as the Governor has pointed out, there
is no guarantee that the next 10 years will be as successful.
Can I ask Mr Barber: in the event that circumstances are not as
strong in the next 10 years and that we see interest rates having
to rise because of perhaps inflationary pressures and so on, how
strong is the support for the MPC within the trade union movement
and, in the event of higher interest rates and higher unemployment,
to what extent do you think that the trade union movement would
be much more critical of the MPC?
Mr Barber: I think in the trade
union movement there has certainly been a real appreciation of
the degree of economic stability that has been achieved over the
last 10 years. I certainly remember earlier periods when wage
bargainers were chasing inflation rates at ever higher levels
and not being able to deliver real improvement in living standards
in those periods. The benign circumstances you describe that we
have enjoyed over the last 10 years I think have been appreciated
by the trade union movement as a very important component in providing
a platform on which we can really see people's living standards
progressively improved. Against that background, I think there
has been real appreciation for the role that an independent Bank
of England has played and that the MPC has played by taking some
of the politics out of short-term decisions on interest rates
and helping to create a climate in which there are widespread
expectations that the low inflation environment that has been
created can be sustained.
Q364 Mr Gauke: The MPC has had a
fairly fair wind behind it in the sense that globalisation has
meant that the prices of a lot of goods have come down and so
on. The next 10 years might not be the same. There might be more
international shocks than we have seen in the last 10 years. How
resilient do you think that consensus that we have in the CBI
and the TUC at the moment, under the current structure, is in
the event of waters becoming choppier?
Mr Barber: As the Governor has
pointed out, the problem with shocks is that they come as a surprise!
We cannot anticipate what those shocks might be and where they
might come from and of course, in circumstances where there has
been a major shock to the economy, that potentially throws up
all sorts of pressures and concerns. I have a concern at the moment,
for example, just about the extent to which unemployment has been
creeping up over the recent period, but a major shock to the system
puts all sorts of pressures on our arrangements, but I think the
MPC has established itself very solidly over the last 10 years.
It has acquired a lot of respect for the way in which its decisions
are made, the evidence on which its decisions are based and the
objectivity the members of the MPC bring to their deliberations,
and that provides a very solid basis for coping with shocks that
Q365 Mr Gauke: Mr Lambert, do you
think more could be done for the MPC or whoever to educate the
public as to the role of the MPC in the event that times prove
a little bit more difficult in the future?
Mr Lambert: It is worth remembering
that there have been some very big shocks over the last 10 years,
ranging from the Russian defaults and the quadrupling of energy
prices, and they have been absorbed but you are right to raise
the question for the future. I think the MPC could probably do
more to educate the public on its role and its mission. It is
very good indeed at communicating with financial markets and economic
analysts about what it does and why it does it. It might well
be in its interests to think aboutand I know it is thinking
abouthow to inform and educate a broader public about its
mission because, as you suggest, when times get tougher its role
will be more controversial and it would be a good thing, ahead
of that, if more people knew why what it did was important and
why its decisions, properly made, are to the benefit of the whole
Q366 Mr Gauke: One point that has
been raised with us is the relationship between monetary policy
and fiscal policy. Mr McCafferty, to what extent do you think
fiscal policy is important as far as inflation is concerned, that
the MPC has to take into account fiscal policy? For example, the
argument has been put that fiscal loosening in 2002 has resulted
in slightly higher interest rates than would have been the case.
Do you agree with that?
Mr McCafferty: Clearly, fiscal
policy is important to take into account when considering the
inflation outlook because, of course, fiscal policy affects demand
in the economy and that clearly has a knock-on effect into potential
inflation. To that extent the Bank does have to pay close attention
to the fiscal conditions and their impact on total gross domestic
product or the growth therein. I think there is an argument to
say that we have not yet achieved the optimal balance between
fiscal and monetary policy and that fiscal policy has been somewhat
loose over the course of recent years, with very rapid rates of
public expenditure and a rising budget deficit, and this has led
to interest rates being slightly higher than would have been the
case. That suggests that there is room for further discussions
between the two bodies in order to try to achieve that optimum
balance between the two sets of policies.
Q367 Mr Gauke: Do you think the Bank
should say more publicly if it has concerns about fiscal policy
or is that straying into areas best left alone?
Mr McCafferty: I think I would
start by discussing it more privately and if there are concerns
in the Bank about this balance they should perhaps express these
to the Treasury individually, but there is finally a role for
public comment if that is required.
Q368 Mr Gauke: Mr Lambert, you have
worn various hats with regard to this issue. Would you agree with
Mr Lambert: Yes. Obviously the
Bank, in making its central projections, incorporates the Treasury
view of public spending going forward and it deduces from that
the inflationary effect in the way that Ian said. I think the
Bank should be strongly advised to steer out of politics and not
get involved in political debate. Its job is to get involved in
monetary conditions. If, however, it thought fiscal policy was
seriously and adversely affecting monetary policy it should say
so. It would come out in the minutes in the first instance.
Q369 Mr Gauke: Mr Barber, again the
TUC evidence has said that "a monetary policy framework that
recognises the need to support industry as well as to keep inflation
low would be welcomed by trade unionists." How
do you think the MPC might go about doing that? How, indeed, could
the Government change the structure to enable it to do so?
Mr Barber: Within the constraint
of a body that has a decision to make each month on interest rates,
it is clearly not possible to target one particular sector of
the economy. The point we were making is a broader point, in a
sense, that, in weighing up the pressures within the economy,
the pressures on the manufacturing sector are an important part
of the mix that need to be considered by the Monetary Policy Committee,
but clearly it cannot make a decision month-on-month specifically
targeted to the needs of one sector of the economy alone.
Q370 Mr Gauke: When you say that
the need to support industry as well as to keep inflation low
should be recognised within the monetary policy framework, are
you, in saying that, suggesting that perhaps the target should
be widened or that there is a higher inflation target? What should
be the response to that?
Mr Barber: I think we are saying
that the remit to the MPC is a remit relating to monetary stability
but taking account of the implications for growth in the economy
more generally. As an element of that slightly wider description
of the remit, the needs of the manufacturing sector and the pressures
on the manufacturing sector need to be taken into account.
Q371 Mr Gauke: Do you not think that
would weaken the counter-inflationary credibility of the MPC?
Mr Barber: No, I think the real
needs of the economy are to maintain a viable economy going forward,
including a vibrant manufacturing sector, maintaining high levels
of employment to reduce pressures on the public finances. These
are all part of the mix.
Q372 Mr Gauke: Mr Lambert, do you
think that the MPC could give greater weight, say, to the manufacturing
industry when determining monetary policy?
Mr Lambert: I think the Monetary
Policy Committee has a single instrument, which is interest rates,
and that it has a single target, which is a symmetrical targetwhich
is really important. Within that, it is very difficultand
I do not think it would be advised to be trying, as it werefor
it to deconstruct the economy and aim at particular sectors of
it within its forecasting work. Obviously it takes into account
its projections of the output of the manufacturing sector and
the services sector but it also has to think about the likely
implications for the exchange rate acting in a particular sector's
Q373 Mr Gauke: You state it is important
that it is a symmetrical target. Some evidence to us has suggested
that there is an anti-inflationary bias, or perhaps there has
been in the earlier years, to establish credibility. Do you detect
that at all?
Mr Lambert: I was on the Committee
when we were one basis point above having to write a letter for
being on the down side. I can tell you we were nervous about that
and we took that very seriously.
Q374 Mr Gauke: Mr Barber, do you
detect an anti-inflationary bias?
Mr Barber: During that period
that Richard describes, when for a long period we were coming
out well below the target, I think there was a concern in the
trade union movement that there appeared to be a bias, if you
like, on the down side. We have now seen a period when it has
gone the other way, of course.
Q375 Mr Love: I would like to go
back to a comment made by Mr Barber earlier on about inflationary
expectations. Earlier this year there was some notable concern,
most notably by the Monetary Policy Committee itself, that there
may well be in this wage round inflationary awards given. That
has not turned out to be the case and I would be interested to
get both your views about why that is. Is that a one-off, or has
there been a change in the signalling mechanism between the Monetary
Policy Committee and the wage bargaining process; in other words,
a longer term improvement?
Mr Barber: As you say, there were
some signals of a degree of apprehension that wage bargaining
might lead to settlements that put up-side pressure on inflation
but I do not think that has been the evidence of what has occurred
in recent months. I think that has been acknowledged by the Bank
in its own inflation report. Why that is the case, I am not sure.
In the public sector at the moment we have a very tight squeeze
on pay settlements, to a level that I do not think is justifiable,
with the limit seeking to be imposed by the Chancellor coming
in under the 2% inflation target, when inflation, of course, as
measured by RPI, is running currently at 4.8%. That is applying
major, major pressures on the living standards of public service
workers in a way that I do not think is advisable. We are still
in a period where wage bargainers have not been fazed by the rise
that we have seen in inflation and still regard that as a short-term
change and a short-term pressure rather than signalling a major
change in the inflation environment and I think that led to settlement
levels at a level that have not contributed to inflationary pressures.
Mr Lambert: I think there has
been a long-term change in the outcome of wage bargaining over
the last 10 or 15 years, which is that inflationary expectations
have been well anchored around the target and people broadly trust
the idea that, over time, the target will be met. That has changed
the behaviour of bargainers on both sides of the table and that
is a really important gain. Going around the country I see quite
different stories coming out of different sectors of the economy.
In some areas there are real bottlenecks and, as you would expect,
wage awards are going up in those areas, but, taken overall, it
is clear so far, at any rate, that the wage round appears not
to have had the inflationary implications that might have been
a concern at the beginning of the year.
Q376 Mr Love: I am going to assume
that both of you think the Monetary Policy Committee, by anchoring
those inflation expectations, has been a major contributor towards
that. If we look back in history, we have often had one year,
perhaps even two years when things were relatively turbulent and
wage awards have been subdued, only to find them racing forward
again. What confidence do either of you have that if we have further
turbulence, further increases in inflation as a consequence, that
will not lead inevitably to the sort of wage rounds we have seen
in the past?
Mr Lambert: Because if you look
back over history and see the changes that happened around the
early/mid 1990sthe process started before independencethere
has been a clear and marked change in inflationary expectations
which has been sustained now for 12, 13, 14 years. Somebody like
me, who can remember the seventies and eighties very well, finds
it absolutely amazing that this should have happened but it is
a clear and I think sustainable change, going forward, in the
way people think about inflation. That is a very important success
that must be sustained.
Q377 Mr Love: I would expect you
to be a little more cynical than that, Mr Barber, and discussing
it with your trade union members you may find there is some considerable
concern. I noted your concern about the public sector norm. How
concerned are you that the Monetary Policy Committee and, indeed,
everyone has to realise that inflationary times will inevitably
lead to a greater demand in the wage bargaining round?
Mr Barber: Of course people at
work want to see their living standard maintained and improved.
I agree with Richard. Essentially, we are in a period where there
is widespread acceptance of the low inflation environment being
the environment in which we all operate, but I am concerned that,
in particular in the public sector, we are in danger of creating
again, to use a phrase, a "boom and bust" approach.
We have had a period of reasonable increases in earnings for public
sector workers in recent years but to be faced with pay awards
coming in at less than half the level of inflation and for the
Government to seek to impose those in the way they are looking
to do at present, is in danger of creating a backlash, and I do
not think that is in the interests of the services concerned or
the economy more widely.
Q378 Peter Viggers: To focus on appointments
to the Monetary Policy Committee, specifically appointments of
external members of the Monetary Policy Committee, Mr Lambert,
what criteria should be used in selecting external members of
the Monetary Policy Committee?
Mr Lambert: The criteria should
be that the appointments should sustain and enhance the credibility
of the Committee.
Q379 Peter Viggers: Should it be
balanced? Are there particular skills you would wish to see on
the Monetary Policy Committee; for instance, business experience?
Mr Lambert: No, I do not think
the Monetary Policy Committee should be representative in that
sense. In other words, I do not think there should be somebody
there who is there because they are a business person or because
they are a trade union representative. I think you need around
the table a group of people focused on a single goal, articulate
enough to express their views on that goal, andyou would
expect me to say thisthe notion that they do not all come
from exactly the same background adds to the quality of the decision-making.
If everybody had a PhD in a particular line of economic research,
it might not lead to as lively a debate as if there were a few
people with different experiences sitting around the table.
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