Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 380-399)


8 MAY 2007

  Q380  Peter Viggers: Mr Barber, do you feel there should be representation or that there should be one or more members who have particular knowledge of one particular aspect; for instance, trade union affairs?

  Mr Barber: No, I broadly agree with Richard's description. You need a balance of experience reflected but more than anything you need people with the capacity to cope with the wealth of data that needs to be analysed and assessed each month and the confidence to play an active part in the work of the MPC. It is a body that cannot carry passengers: every member is directly accountable for their own vote month-by-month and you need people with the expertise and the confidence to play that role.

  Q381  Peter Viggers: Do you think the current three-year term, re-appointable, is the right system or would you recommend a different period of time?

  Mr Lambert: Perhaps I may describe the argument for and against. The argument for having a longer period, non re-appointable is that the person then would build up experience, be able to make a substantial contribution, because it takes a little bit of time to get the hang of what is going on there—and then non re-appointability, as it were, would underwrite the independence of the Committee. Against that, I think there have been some very talented and important external members of the Committee who simply would not have come if it had been for more than three years; for example, if they were distinguished academics who could manage their life to take a big chunk of three years out to do that but to do four years would be harder. So I am afraid I do not have a clear view on that.

  Mr Barber: Richard, again, has described a mix of considerations. On balance, I am content that the current arrangement is about as well balanced as you could make it.

  Q382  Peter Viggers: The appointments process itself has been described as opaque. We were taking evidence earlier this morning, which you may have heard, from the Court of the Bank of England, in which they pointed out that they regard the Treasury as being the body that makes the appointment. Are you content with that or do you think there should be changes?

  Mr Barber: The reality is that it is the Chancellor who makes the appointment. The Act specifies that very clearly. I share the frustration that has been articulated by quite a few people during the course of this inquiry, that the arrangements on which those decisions are made are extremely opaque. There is no transparent process through which candidates can apply, can signal an interest. The decisions appear like a puff of smoke, without any awareness of what the range of candidates might have been and so on. I think a greater transparency and openness would be highly desirable.

  Q383  Peter Viggers: And timeliness is relevant too, of course.

  Mr Barber: Yes. The same point: there have been instances where the membership has been incomplete for a period and so on, so I do not think the processes have worked desperately well. In terms of managing the balance of experience within the membership of the MPC, it is notable that, apart from Kate Barker at the moment, the external members are all of relatively short experience and trying to manage the appointments process over time to produce a blend of greater experience along with the newer members within the external members, seems to me to be an important consideration that ought to be factored in too.

  Mr Lambert: I would add a slight gloss on that. I certainly agree with Brendan that time limits are extremely important but it should be noted that last year was a bit unusual. There was the tragic death of David Walton, my unexpected departure and Steve Nickell clearly was going to move on after doing two terms. Last year was a bit special in that sense.

  Q384  Peter Viggers: Have you given thought to how some greater level of transparency could be introduced? Would it be through the Court, for instance? Does the Treasury Select Committee have a part to play? Does the trade union movement have a contribution to make?

  Mr Lambert: My own feelings are that there needs to be a degree of discretion for the Chancellor and, indeed, for the Governor in settling on the line-up of the team. I think the Treasury Select Committee has an important part to play in testing the robustness of the appointments and the integrity of the appointments and that is what you do do, so I think that works well. I would have thought it would be a good idea, one way or another, to collate a bench of relevant experts who might be available, so that when an appointment needed to be made it would be possible to choose from a pool of people who were sort of up and willing. To have some kind of pooling arrangement of that kind would be better than to leave it, as sometimes seems to happens, until the last minute and move in that way.

  Mr Barber: I agree with that, and having an appointments process that was more comparable to the kind of procedures that are used in other major public appointments, with a degree of openness about the application process and with a selection panel, potentially, which could include a wider range of expertise. If the ultimate decision remained with the Chancellor, so be it, but I think one could build into the processes leading up to the final decision on the appointment a wider range of expertise and so on that would just build greater confidence in the process overall.

  Q385  Mr Newmark: I have a couple of questions to do with what Ian was talking about earlier, to do with systemic risk. We have the inflation rate pretty close to its 16-year high. Interest rates keep moving up and up and we see personal debt at trillions of pounds at the moment. Ian, you said that we are not at a tipping point (that is, a point of systemic risk) on personal debt. At what point do you see that happening? How much do interest rates really have to go up to start changing people's behaviour?

  Mr McCafferty: Perhaps I could put some context before I answer the question itself. Yes, inflation has risen quite sharply over the course of the past 12 months to the peak of 3.1% on the CPI, triggering the letter, but it is clear that that measure and the RPI measure for inflation, certainly RPIX, will be coming down quite substantially over the course of this year as the changes in energy prices, which were one of the key factors driving inflation up over the course of 2006 and early 2007, start to fall out of the equation. I think it is generally expected that we will be coming back close to the target of 2% at some stage close to the end of this year. It is difficult to be specific in terms of months. This concern that somehow inflation is ratcheting up and will continue up almost ad infinitum is perhaps slightly misplaced. The Bank's own work on debt sensitivity suggests that for what I have already termed as the "problems for individuals", which one should not underestimate, to become so widespread as to become of systemic risk to either the banking system or the broader economy would require interest rates well north of 7% or 8%. Against that inflation background that we expect and I think is fairly consistent amongst those who study these issues, that is—

  Q386  Mr Newmark: Before we can start changing people's behaviour, you think we still have a long way to go.

  Mr McCafferty: That is a slightly different question. You asked me what it would require for debt to become a systemic risk. You are now suggesting that we somehow need to use interest rates in order to change people's behaviour.

  Q387  Mr Newmark: If you want to keep the lid on inflation, other than energy prices, to which you have correctly alluded, there is the whole consumer boom at the moment.

  Mr McCafferty: The consumer boom at the moment is not being driven by debt. Other than the debt being taken out in the mortgage market to purchase houses, the consumer debt growth has slowed very dramatically over the course of the last six months or so. Unsecured debt has been growing now much more slowly than it has for the past five years or so. The reason that consumer spending has started to accelerate slightly, relative to the very slow growth that persisted through 2005, and which has since grown a little faster over the course of 2006 and then into 2007, is changes in the rate of growth in real disposable incomes, which are expanding slightly faster as inflation has headed off the peak and is expected to continue do so.

  Q388  Mr Newmark: We have seen a huge wave of mergers and acquisitions going on. We have seen companies take on more and more debt to fuel these acquisitions. Do you see a tipping point coming up? If interest rates keep moving up, suddenly there will be, to use Brendan's phrase, a "shock to the system". Something will suddenly happen. One of these big acquisitions will not be able to service its debt, which may lead to a problem, or are you not concerned about that?

  Mr Lambert: If you look at corporate balance sheets as a whole over the last five or 10 years, I think I am right in saying that you will see a steep rise in corporate debt in the period up to about 2004. In the period of rising profitability and rising cash flows, overall debt levels were contained and then reduced, so balance sheets strengthened for the couple of years after that when taken as a whole. In the last months, there has been, as you say, a surge in acquisitions, some but not all financed by cash. The FSA has done work on this and published it and concluded this does not pose a systemic risk. It is always possible that some large company will take on too much debt and will run into trouble but I do not think there is any reason to fear that that would have broader consequences for macroeconomic performance, particularly at a time when bank balance sheets look pretty robust.

  Mr Barber: I think this question from Mr Newmark is perhaps anticipating another inquiry the Committee has in hand on the role of private equity. I do have some concern that the level of debt involved in some of the takeovers that we have seen recently and, indeed, some of the transactions in prospect, are now reaching a level where there has to be some concern that along with that debt comes a greater risk to the viability of the business and a greater vulnerability should pressures arise in the economy with an increase in interest rates, for example. I know that concern is shared by a number of independent commentators too. I would not want to sound alarmist that I see this in a sense threatening financial stability more widely, but I do think it raises question marks.

  Q389  Mr Newmark: It was more to do with the systemic risk and by how much interest rates have to go up.

  Mr Lambert: Sure.

  Q390  Mr Newmark: My final question is to Tim and it is to do with Ian's attitude about RPI and CPI. For ordinary people out there, it seems that RPI and CPI have no bearing on their lives whatsoever. All of us have pensioners in our constituencies and their inflation rate would seem around 9% or more. I am curious about the thinking. What goes on when trying to feed that sort of input in when discussing which index, when one is looking at RPI and CPI, and whether these have any relevance whatsoever? You talked about having housing costs as another input in there.

  Mr Page: Sure. The trade unions would want to see levels and measures of inflation that reflect the real pressures that their members face. We make the point about RPI as opposed to CPI because housing is such an important part of the spending of most families within any one month. We would say that the measure of inflation needs to reflect the pressures that people face. I do not know about figures like 8% or 9% but—

  Q391  Mr Newmark: Would you have things like council tax thrown in?

  Mr Page: Council tax would be included in RPI but would not be included in CPI. I do not have a list of things that should go in or not go in. Most people looking at their outgoings each month and looking at an inflation rate of 3.1% would find some divergence between those two phenomena. Brendan made the point about public sector workers: an increase of 1.9%, when they would see the costs that they face being so much higher. I do think these points need to be borne in mind.

  Mr Newmark: When you are having these discussions, what is the reaction from the other members? What is the response to saying that the index has no reflection on your members and what they are seeing out there?

  Q392  Chairman: I think that should be addressed to Richard because you are the only person here who has been on the MPC.

  Mr Lambert: There would be two responses. One would be something which the Governor always says, that everyone can make their own personal inflation index depending on their lifestyle and life choices. You have to arrive at some kind of median that represents broad things. I do think, however, that if the inflation measures which are used for policy making do not bear on people's lives then there is a risk to credibility going forward. So I think it is not a trivial matter.

  Q393  Mr Todd: If membership of the MPC is not representative and you have argued very strongly that it should not be particularly so, it makes it all the more important that there are mechanisms to speak to the real world outside rather than being driven by a set of data provided. To what extent are you satisfied with that engagement and the ability to communicate with the real world about, for example, the matter you have just been discussing?

  Mr Lambert: The Bank has, as you know, representative offices around the country and executives whose task it is to communicate as widely as possible with business and economic actors in their region and to funnel that back to the Bank. That works really well. Another thing that works well is that members of the Committee spend a lot of time going round the country, again talking to lots of individuals, lots of companies and so on, trying to get a sense of what is going on in the air out there, and you can learn things from that obviously that you never pick up in the data. Where it is possible, as I suggested earlier, that more could be done is when on a regional tour you might speak to 10 companies and just to the local newspaper, you could get a wider audience for your views if you really focused on a broader audience than perhaps happens now. That is the only point I was making.

  Mr Barber: I think it works pretty well. Richard has referred to the work of the regional agents. They do have a very wide range of business contacts, including colleagues in the trade union world, and keep in regular touch and so are able to get a feel for what is going on across the economy pretty broadly, I would say. My impression has always been that the members of the MPC are very open to talking to different interests around the economy. They will accept invitations, come and meet with trade union colleagues. We certainly had a number of exchanges of that sort. They certainly would not want to be thought of as sitting in an ivory tower, simply looking at the numbers every month and reaching their decisions. I think there is a sense that they want to be closely in touch with a lot of people around the economy and bring that feel into their deliberations too.

  Q394  Mr Todd: Just extending what Richard said, there is an external communication function as well. Not everyone is blessed with strong communication skills to explain the role of the MPC, explain the information that has been gathered and how that information is weighed to produce an appropriate decision. Do you think that skill set is adequately represented within the MPC, or do you think it should be more sought in an appointment process?

  Mr Lambert: They all strike me as being a very articulate lot who have no hesitation about expressing their views. I think that is fine, actually. I do not think there are any at the moment but there probably ought to be some giant brains who can hardly speak they are so clever but they can just get on with cracking things, provided there is the right balance of other more jolly types around. I think that works quite well, actually.

  Q395  John Thurso: Following on the theme of what and how the MPC should communicate, perhaps I could ask you, Mr Lambert, would it be useful for business, especially with regard to future planning, if the MPC were to provide more information on the future path of interest rates as they saw it?

  Mr Lambert: I think that is a great and difficult question. Obviously some central banks in the world do that, but the ones which do it specifically do not, any of them, as far as I am aware, have Committees of independent people producing them. For a Committee of nine individuals to produce an agreed forecast of the outlook for interest rates over the next couple of years would be a very, very difficult process and you could imagine them coming up with nine different forecasts, which might be more confusing than helpful. The Governor, as I understand it, has said he thinks the Bank could and perhaps should be doing more work to explain the risks in the fan charts that they publish in the quarterly inflation report. That would be great, if they could find a way of doing that, but I do think that interest rate projections, if it is not simply being done by one or a couple of personalities, would lead to endless debate and endless compromises, unless you were going to have more than one—and if you have more than one I think you would be in trouble probably.

  Q396  John Thurso: Broadly, the down side far outweighs the up side.

  Mr Lambert: I think that is the case. Step one is to try to think of more ways of explaining the risks that the Committee sees in their central projections, going forward.

  Q397  John Thurso: Going on from that, do you think more should be done to allow individual members of the MPC to communicate their views and have opportunities to express things to the public—and particularly the interested public, the markets and so on?

  Mr Lambert: They do have opportunities, as they choose to take them, in making speeches—which they are encouraged to do. I must say I find myself in growing sympathy with the comments that Steve Nickell made in his submissions to you that there would be an argument for allowing individual members of the Committee to have a little paragraph at the end of the minutes expressing where they were coming from. The reason I think that is: a vote is just a vote. It is either yes or no. I have been at meetings where it has been clear that some people are very close to changing their minds but just have not changed their minds. That is not caught in a yes or no vote.

  Q398  John Thurso: There has been an idea mooted, for example, that they could kind of rotate coming here to the Treasury Committee, if we gave them a slot to face questioning and express their views. Do you think that would be useful or would that be going over the top?

  Mr Lambert: That happens.

  Q399  John Thurso: Yes, it happens now as part of the general reporting with the Governor but I was thinking of something where, in turn, individual members would come, so that it would be their show rather than the team show.

  Mr Lambert: Now I am off the Committee I will say it is a very good idea.

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